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Life Time Fitness, Inc. (LTM)

Q2 2010 Earnings Call Transcript

July 22, 2010 10:00 am ET

Executives

Ken Cooper – VP, Finance

Bahram Akradi – Chairman, President and CEO

Mike Robinson – EVP and CFO

Analysts

Ed Aaron – RBC Capital Markets

Jaison Blair – Rochdale Securities

Scott Hamann – KeyBanc Capital

Tony Gikas – Piper Jaffray

Brent Rystrom – Feltl

Bakley Smith – Jefferies & Company

Paul Swensen [ph] – Morningstar, Inc.

Greg McKinley – Dougherty & Company

Operator

Good day ladies and gentlemen and welcome to the second quarter 2010 Life Time earnings conference call. My name is Kiano and I’ll be your operator for today’s call. At this time, all participants are in a listen only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) I would now like to turn the conference over to your host for today, Mr. Ken Cooper, Vice President of Finance. You may proceed.

Ken Cooper

Thanks Kiano. Good morning and thank you for joining us on today’s conference call to discuss the second quarter 2010 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 lifetimefitness.com. Concurrent with the issuance of our second 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 and CEO will discuss key highlights from our second quarter and our operations. Following that, Mike Robinson, our CFO will review our financial highlights. Once we have completed our prepared remarks, we will answer your questions until 11:00 a.m. Eastern Time.

At that point in the call, Kiano will provide instructions on how to ask a question. I will close with a tentative date of our third quarter 2010 earnings call. Finally, a replay of this teleconference will be available on our website at approximately 01:00 PM Eastern Time today.

Today’s conference call contains forward-looking statements and future results could differ materially from those statements made. Actual results maybe affected by many factors, including the risks and uncertainties identified in our SEC filings.

Certain information in our earnings release and information disclosed on this call constitute non-GAAP financial measures, including EBITDA and free cash flow. We’ve 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 turn the call over to Bahram Akradi. Bahram?

Bahram Akradi

Thanks, Ken. As I said at the beginning of the year, our company stands poised to win in the challenging environment and as way through the year we are winning. At the beginning of the year, we set a stretch goal of getting our mature clubs to positive comps by end of the second quarter. And we were able to accomplish this significant milestone. This was a quarter earlier than our normal projection and a great sign that our membership base is reacting favorably to our initiatives.

We also saw another great quarter on retention improvement. Improving these – this metric is a still the single most important initiative we have in place today. Our entire company continues to rally around keeping our current members engaged and active. There are ways to go until we achieve our 36% trailing twelve month attrition rate goal, but we are working relentlessly to accomplish specific task.

The same-store sales and retention metrics were good, despite continued headwinds. A strong parameter of headwinds for our business is the ability or lack there off to raise our enrollment fee. Through the past six months and consistent with last year, we have maneuvered hut with our enrollment fee in order to gain the membership accounts necessary to achieve our results.

Lack of ability to increase our enrollment fee is a clear indication of continued headwinds for our business. We believe there is a strong correlation to where our enrollment fees are and the health of consumer. As the consumer environment gets better and/or we continue to get more traction from our initiatives, we will gain the ability to increase our enrollment fees at that time. We’ve forecast a slow recovery for our average enrollment fee over the next several years.

As it relates to the next few years, I would like to provide you with an update on our growth expectation. Life Time Fitness is a healthy way of life growth company. Although, we slowed down our expansion over the last two years because of the economy and the tight cancel [ph] markets, we have still grown at a reasonable rate, in fact over 8% top-line growth in 2009 and again this quarter. We have achieved this growth, while simultaneously repositioning the company to win in a longer term challenging economic environment. This postioning continues today, as we optimize our balance sheet and continue to get operating re metrics back to normalized level.

Our growth ambition can be broken down into long-term beyond 18 months and short-term over the next 12 to 18 months. Our long-term goal is to grow our top-line at least low double-digits per year and leverage that growth with higher net income and EPS growth.

We expect this growth will come from all aspects of our healthy way of life businesses and the strong brand equity. What we have done over the past few months is a good example of our approach. We have recently expanded the number of our athletic events, including notably the largest Triathlon United States, the Chicago Triathlon.

We have added athlon yoga, a yoga certification training program to our yoga offerings. And we completed a process of 50,000 square feet health club in Kingwood, Texas, which is near our Lake Houston Location.

These small opportunistic moves help in our growth to us building last time as a healthy way of life company.

While we emphasize growth, we also intend to maintain a strong balance sheet. In essence, we would like to be thought of, as an investment grade except for size with a target debt to EBITDA ratio of approximately 2 to 1. We anticipate we will continue to grow cash and pay down debt for the three or four more – for three or four more quarters to move this ratio closer to our target ratio. Given this objective, we will target short-term growth at high single-digit for the next 12 to 18 months and move this objective strategically beyond that.

In closing, I would like to mention two things. I am very happy with our same-store sales and retention performance, since it has been such a strong focus for the company. These will remain strong focus for rest of 2010 and beyond.

I’m very pleased with the cohesiveness and alignment, energy and focus of our entire team towards building a multi billion dollar healthy way of life company.

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

Mike Robinson

Thanks, Bahram. As Bahram indicated, we continued to show solid improvement in several key operating and financial metrics in a tough consumer environment.

Let me start with some additional details on attrition and retention. For the quarter, our attrition rate was 8.4%, as compared to 9.5% last year. This includes approximately 30 basis points of improvement related to our change in methodology that we discussed in our last our call that went into effect April 1st. That is we no longer count those potential memberships, we like to cancel during our 14 day trial as members for attritions.

We are off to a nice start at the midpoint of the year. However, the second half of the year will be a true test of our connectivity initiatives, as this has historically been our toughest time to retain members. The main driver of this is the end of the outdoor pool season. We continue to shoot for an internal goal of 36% or better total year attrition over the next several quarters and continue the momentum we established in the first half of the year. What is inherent in our guidance, which I’ll talk about in a few moments is about 60 to 70 basis points of improvement over the last year’s 10.6% third quarter and 10.8% fourth quarter results. This includes approximately 30 basis points for our methodology change.

Our improvement in attrition led us to be slightly ahead of our net membership growth expectations in the quarter. We finished the quarter with 631,862 memberships. This is a 3.9% increase from the second quarter of 2009.

For the second quarter, we grew the net balance of flex memberships by approximately 2000 units to approximately 54,000 units.

Our membership activity led to totally revenue of $231.1 million for the quarter, which is up 8.7% from last second quarter. Our main revenue drivers included the ramp of our two large centers we’ve opened so far this year and the three large centers opened in 2009.

In addition, as Bahram mentioned, we acquired a smaller center in the Houston market late in the second quarter. The total number of opened centers at June 30, 2010 was 88, compared with 84 at June 30, 2009. Of the 88 centers, 53 or 60% are our large current model and 64 or 73% of all centers have been opened three years or more, which we classify as mature centers. We now operate 8.8 million square feet of health and fitness centers.

Membership dues grew by 7% for the quarter, which outpaced our membership growth of 3.9%. This is a good indicator. Our goal is to continue to have dues growth in excess of membership growth. We accomplish this by improving our average dues we are selling more memberships at higher price centers providing more value to upgrade opportunities and upgrading more memberships to couples and families. We had very little price increase in the first half of 2010. Our powerful dues annuity stream accounts for 66% of our revenue.

In-center revenue continues to perform well. Total in-center revenue grew by 13.6% in the quarter. The growth was across the board with personal training up 15% and LifeSpa 13% leading the way. Because of our – because you are a member mind blowing value pricing strategy that continues to be a primary driver.

We’re pleased that our revenue metric showed improvement during the quarter. Our second quarter same-store sales was 4.8% and a 37 month matured same-store sales made a deposit of territory earlier than expected. Our matured comps came in at 1.8% both of these metrics as expected showed improvement sequentially.

With respect to revenue per membership, we generated $371 per membership, which is up 5%. This was driven by a slight increase – slight mixed increase and our in-center businesses.

In-center revenue per membership of a $112 was up 9.9% in the quarter. For perspective, this comes off $111 first quarter in such a new record for the highest quarterly in-center revenue per membership in our history. We believe this is further evidence of our connectivity with our members, as well as new programs and changes in program pricing. Our members are reacting favorably to our mind blowing value proposition and our onboard in connection with our new members.

I like to move to some highlights on our cost structure. We continue to focus on maintaining a lean and efficient organization. Here are some discussion points from the second quarter. Center operating costs were up about 90 basis points, due primarily to our higher member acquisition costs and our continued reduced enrollment and administrative fee pricing to stimulate new member demand.

In addition, as mentioned earlier, we are performing well on an in center businesses, which are lower margin for us. And we continue to invest in our member experience with items such as increased family hours and fitness programming. Marketing adverting costs were down about 30 basis points, due to our controlled promotions more effective marketing and to help offset our planned use of lower enrollment fees, which result in higher net membership acquisition costs.

Center overhead costs and G&A were down about 60 basis points reflecting our continued focus on our overhead control and reduced severance costs over last year. We also saw a slight leverage in the combination of other operating and depreciation and amortization during the quarter. Our overall operating margin in the second quarter improved 60 basis points to 18.6% from 18% Q2 2009.

Next is a capital structure update. We’ve continued to de-lever our balance sheet in the second quarter of 2010. The key driver to this is a continued power of our cash flow from operations, which totaled $46.8 million for the quarter. And was $100.7 million year-to-date, up slightly from our 2009 year-to-date results. We also generated our six consecutive quarter of free cash flow. For the quarter, we generated 21.7 million of free cash flow and year-to-date we are at $52.5 million. This excludes the $9.4 million spent late in the quarter on the acquisitions Bahram mentioned earlier.

These small purchases which had very small revenue and net income impact on our results continue to broaden our strategic offerings as a healthy way of life company. We paid down approximately $6 million of debt in the second quarter. As of June 30, we have $375 million outstanding including letters of credit on our $470 million revolver. That lease over a $119 million of cash and revolver availability.

Our net debt to total capital came down over a 150 basis points from the first quarter to 43.5% at the end of the second quarter, which compares favorably to the 47% at the beginning of the year. Our covenant calculations for the quarter continue to show significant room versus our covenant limits and we remained well positioned for debt maturities near-term.

Our current focus remains on de-levering the balance sheet and although we have our finger on the pulse of various debt markets, our base line assumption is that we do not enter in any significant new financings in 2010. By the way, we now have 37 own facilities with an asset cost in our balance sheet in excess of $750 million with no mortgage financing.

Regarding capital expenditures, we paid for approximately 25.1 million of CapEx in the second quarter. This was comprised of approximately $15 million for growth and 10 million for maintenance and infrastructures support. We currently have two clubs left to open this year. We have our second Life Power test boutique slated to open in August in Minneapolis. And the last large centers planned for December and will be in Centennial, Colorado suburb of Denver.

For 2010, we maintain our expectation to spend approximately 100 to $120 million on capital expenditures for club growth and maintenance CapEx. This will be comprised of approximately 75 to 85 million of growth CapEx and 25 to 35 million for maintenance and infrastructure support. This capital expenditure expectation excludes the acquisitions we completed in the second quarter.

Now, I’d like to give you some other key P&L highlights. Interest expense net of interest income decreased sequentially to 6.9 million from 8.1 million in the first quarter. This was driven by costs associated with the partial repayment of the TIA mortgage debt that were in the first quarter and not repeated and reduced capitalized interest as well as by further debt paid down.

Our tax rate for the quarter was 39.7%, which was roughly inline with the 40.6% in Q2, 2009. We expect our effective tax rate in 2010 to be approximately 40%. Our EBITDA margin was flat at 28.8%, as compared to Q2, 2009.

Our net income for the quarter was $21.9 million, which is 19.8% growth over Q2, 2009. Our net income margin increased 90 basis points to 9.5%. Weighted average fully diluted shares totaled 41.2 million for the second quarter, we expect our weighted – our average diluted shares to remain near that amount for the rest of the year.

Overall, we achieved diluted EPS of $0.53 in the second quarter, compared to $0.46 in Q2, 2009. A couple of balance sheet variances to note included increase of approximately $6 million in other assets since the first quarter, due primarily to the small acquisitions we completed. We also had an increase of over $10 million in the construction accounts payable related to payable claiming. as well as current activity with the large club set to open in December and our clubs planned to open in 2011.

Before I move to our updated guidance, as a reminder in June of 2009, the compensation committee of our board of directors approved the senior management incentive plan for 2011 and 2012, which awarded 996,000 restricted shares. The 50 and 100% performance EPS hurdles to earn this incentive require significant performance improvement over the 2008 and 2009 results and must fully absorb up to the $20.4 million of compensation expense associated with the grant.

Since we believe these targets to be aggressive goals in an excess of our current baseline expectations, we have not recognized any compensation expense associated with grant – is grant nor as any share amount been included in our diluted shares. We reevaluate the probability of achieving these goals each quarter. Yes in the future, we consider either the 50% best or the 100% best EPS goals to be probable. There will be accumulative adjustment. Future compensation expense will increase and the number of restricted shares associated with the goal be included in our diluted share account.

Let me discuss our updated financial guidance for 2010, while we have had a good start to the year. It is important to note, but we still have two quarters of hard work ahead of us, including our two most challenging quarters, our member retention. In addition, we assume the strong consumer headwinds that we’ve been experienced to continue for at least the rest of the year. Therefore, we expect our revenue to grow to 890 to $905 million, up from 880 to 895 million. We bought both the bottom and the top end of our guidance up $10 million based on our current results.

We anticipate our net income will grow to approximately 79 to $81 million, that’s up from 76.5 to $79.5 million and we expect our diluted EPS will grow to a $1.92 to a $1.98, up from a $1.88 to a $1.96 per share. That concludes our prepared remarks regarding our second quarter 2010 financial results. Before I turn the call back to Ken and to Q&A, I want to mention one organizational change.

Over the next few months, Ken will be transitioning out of his VP of Finance and Investor Relations role. Bahram and I will clearly miss him on the Finance function, but we are thrilled that he is moving to an operating role at Life Time in an area of his passion, as Vice President of our Athletic Events business. John Heller, who is currently our Treasurer, will be taking over the IR role. John has some big chose to fill and he is nearly 13 years with the company, solid treasury experience and good knowledge of the business will service all well. Ken.

Ken Cooper

Thanks Mike. It seems like yesterday we celebrated our IPO in fact it has been just over six years. In that time, I have had the honor and privilege to be the key interface between Life Time and Wall Street. I’ve learned from every interaction I’ve had with you, our investor community. I have relished each opportunity to help prove how powerful the company we are and we’ll continue to be. The challenges, interactions and dialogue with you have helped me tell the story and helped our company become better. That is one of the closest parts of our being a public company in my opinion and for that, I’m grateful.

As Mike mentioned, I will be transitioning my IR role to John Heller between now and September 30th. However, continue to use me as your main point for anything you need, we will communicate when the transition is complete.

With that, we are pleased to take your questions now.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Ed Aaron of RBC Capital Markets. You may proceed.

Ed Aaron – RBC Capital Markets

Great, thanks. Good morning Ken congrats on the new gig.

Ken Cooper

Thank you.

Ed Aaron – RBC Capital Markets

So, I wanted to get back to something that Bahram you mentioned in your prepared remarks. I think you said you thought you’d stay at the high single-digit top-line growth levels for next 12 to 18 months before that can you get back to the double-digits. But when I’m puzzled on if you spend the next three to four quarters, de-leveraging the balance sheet wouldn’t it take a bit longer than 12 to 18 months to get to those new stores through the pipeline to get back to double-digit growth?

Bahram Akradi

It’s a great question. Obviously, we have been working the details of this plan and working on the strategies where we can start giving more leverage out of our operations and we’ll work on strategies that gets us into double-digit growth at that 18 months time point. I can’t get into the details of how we are going to accomplish that at this point, but we internally we’re working hard and we’re going to get there.

Mike Robinson

Ed I think from my perspective, a big part of it on the short-term as you’re starting to ramp up is the fact that we’re looking to continue to improve the capacity. The occupancy of our businesses and things like that and those things we think will be good contributors to the growth as we move out early on in this. And again, as we look at it, it isn’t all going to be. There are various ways that we can bring some of these new clubs online, including some leases and things like that that have a little bit faster turnaround.

Ed Aaron – RBC Capital Markets

Okay, that’s helpful. Thanks and then my second question, I know we were there it’s just on the customer acquisition cost, I know you and you kind of referenced lower enrollment fees as an indication that there is still headwinds in the business. But, the advertising expenses have actually been turning lower and below what we’re looking for in the quarter. So, when you roll those two together it’s not really appear to me that the customer acquisition cost necessarily really going up anymore. So, I was just hoping you could maybe tie it up together for me?

Bahram Akradi

As you are very, very stood about connecting with us there. The way I have been managing that with the acquisition or retention team in the organization is, we adjust the marketing dollars either an outbound marketing or reduction of the enrollment fee and another more compensation for our membership engagement advisors. And so, basically we intended to have the fluctuations up and down with the enrollment fee throughout the year and as you guys know, when we collect enrollment fee at this less than the commissions we’re spending on a particular membership that will become direct expense. So, we basically try to have formula that balances these things with each other out.

So, the most important goal of mine are to grow dues line at every club and to make sure that we have twist our strong model that we have had to be powerful in this type of unemployment environment. And then, we really adjust that enrollment fees and the marketing to kind of offset each other as necessary be up the last piece is attrition. So, a lot of changes have been made over the last two years 18 months and we’re starting to see a cultural shift. We need to see in 500 to 600 membership advisors and their managers to think about retention and the way they sell memberships. So, we’re really, really happy, but your comment is accurate. We are keeping a overall perspective on those costs as a whole.

Ed Aaron – RBC Capital Markets

Great. Thanks for taking my questions.

Operator

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

Jaison Blair – Rochdale Securities

Hi, good morning and…

Bahram Akradi

Good morning, Jaison.

Jaison Blair – Rochdale Securities

Good morning. You guys have really been hassling, congratulations and obviously I wanted to tell Ken to congratulations as well. He has been terrific, one of the best. I wanted to ask you about membership growth. So, over the past three quarters your gross membership additions have just gone off the charge relative to the number of new clubs you’re opening. And is the – is this new LTM bucks promotion is that being offered to all new memberships?

Bahram Akradi

Well that’s a – that’s first of all thanks for noting this thing what we are doing with the membership accounts. The – again, as I mentioned with last question the key, the key thing for us to reduce the attrition and increase the connectivity of the membership. So, basically we look at most other operators in the health club space which we clearly hope not to see ourselves in that space on a broader healthy way of life company. However, most other health club operators are focused on a model that sell memberships and non-utilization of the customers. We have focused our company on getting the customers to use the club. So, not just the LT bucks, we are giving them a variety of different reasons to engage in variety of different programs, particularly in the areas that they are most passionate about. And again, this is not going to be a – I in case if you wanted things to happen much sooner, but if I look at it realistically it’s going to take a while and we’ve made some traction and I am happy about that and I believe there is still yet to come Jaison. We should get more connectivity more connections continue to reduce attrition and then most importantly grow the number of members per average club closer to the market the maximum capacity. So, an extra 2 or 3% membership closer to our membership capacity at the average club will dramatically have dramatic impact on our numbers.

Jaison Blair – Rochdale Securities

Yeah, you’re clearly doing a good job of growing membership and in-center revenues and dues. I guess, if I’m a membership and I’m my the cost of my membership or if I’m a member and the cost of that membership is about $1000 a year and I’m getting let’s say it’s $300 of free during the first year. Is there a risk that a year from now, I bark at renewing because in my mind my adjusted cost is really $700 and in theory you are raising that adjusted price by 50%?

Bahram Akradi

It’s not – it’s really does on worth that way at all Jaison. We are allowing the customers connect and get variety of different incentives to be connected to the areas of the passion the existing members also can earn LT bucks for various activities from referral programs to participation programs et cetera. So, it’s and it’s really, really early right now I mean again we are so close to it we think every member is getting this and utilizing it. But in fact, it’s just a relentless effort on our behalf to get more and more and more members engaged on a variety of different programs from member advantage to buy LT box right now. And we have a whole force of corporate team members were focused on getting these connections made and tracking them. And so, again so far so good, but we need to see more.

Jaison Blair – Rochdale Securities

And then if I could just follow-up with more and more comment, as you’ve laid out the cash flows, leverage ratio of the business and where they are trending they are pretty good that you’ll have the capacity to accelerate in-center growth which you talked about. Can you give us a little bit more detail on what you’ve got in the real estate pipeline now and what types of financing vehicles you’re looking at, what the opportunities are cost to capital and those types of things?

Bahram Akradi

Let me simplify a couple of things for you. We are looking at a number of deals simultaneously at all times and we do not have shortage of ways to grow the clubs, if we want to go from three large to four, five. There are some least facilities that we are looking at negotiating we haven’t signed anything for me to get – giving you guys an additional details, but we have number of opportunities. So, for us to ramp from three or four clubs to five or six or seven clubs end of next year or something does not at all concerns me how difficult that would be, it’s not difficult. Would we be able to go from three large club to 12 large clubs in 18 months. The answer is no, but we also have no plans to do that. Having said that, the second question of yours about financing, I’m going to turn over to Robinson and he can give you a lay of the land. Mike?

Mike Robinson

Yeah Jaison, as we look across that the financing fronts. There are continued to be several funds that are opened to us now if we had chosen to take and we just don’t think that the timing is right in the sense that we still want to continue to de-lever the balance sheet a little bit. So, those as we continue to look at the mortgage front, we continue to look at other debt financing private placement financing those types of things. And the pricing we’re seeing today is, I think it’s getting a little bit better and well within the business model needs that we would want to see.

Bahram Akradi

And If I may add to that Jaison. Ultimately what Mike and I are working on is to make sure, we get our balance sheet to a place that absolutely every option that is opened to large capable companies is open to our company. And then we just choose the one that is best for us.

Jaison Blair – Rochdale Securities

Thank you so much, again congratulations.

Bahram Akradi

Thanks.

Operator

Our next question comes from the line of Scott Hamann of KeyBanc Capital. You may proceed.

Scott Hamann – KeyBanc Capital

Hey good morning everyone and Ken congratulations and good luck as well. Bahram, if you think about attrition and what you’ve been seeing lately. How much of the improvement do you think is being driven by things that you are doing specifically versus a general improvement in the economy and if that’s the case. Then do you think that the 36% target that kind of predicated upon what you’re doing and could there be some upside in the midst of a better consumer environment or what are some thoughts there?

Bahram Akradi

Okay it’s – let me answer your question a little bit different way to provide some value for all of you. There are obviously first and foremost, the only change in the economy from 18 months ago, if you look at it purely for what affects our business, which is unemployment, is that as things are more stable yet still headwind. So, you don’t have the huge churn of people that the turmoil of people loosing their job just recently or more panic in stuff. But having said that, we still feel the headwind and as we told you beginning of last year, we iterated it beginning of this year, we set our mind on winning in an environment of headwind. We said, we assume that this unemployment is going to last for a long time and therefore, we’re going to build and tweak our model to make sure we can win in a headwind environment even if it’s five years.

So, we are doing literally 20 different efforts collectively together and relentlessly. So, I like to believe that the bulk of what we see is the function of the fact that we are connecting to our customers and our team members in a way we have never even thought of doing. I don’t – I can’t tell you that there is no impact from maybe just reduction in the panic level in the consumer versus fourth quarter of ’08 or the first quarter of ’09. But we still see customers coming in and stress for dollars or money or et cetera. So, that is really the other thing we did is we had a choice of like most other people reduce price and our dues, which is the key driver in our enrollment fees, as we have mentioned to you guys before really is a very small percentage of revenue.

Mike and I have been telling everyone that since we went public it’s really more of a parameter of the market. It has some impact maybe, if we could charge the enrollment fees we want versus the ones we are getting today could be swing of $0.08, $0.10, $0.12 a year on EPS that’s not the small amount, but it's not – it's not a significant amount its not going to sink the shift. Our main driver is the dues where it driving that, but we didn’t decide to lower our dues. We decided to increase the value. We decided to improve the experience and we said we stated at fast that Life Time is the only operator that is delivering the real value to the customer on a national basis and we have done that and results are speaking for themselves. We’re happy and we think that what we need to do is just keep on doing what we have been doing.

Scott Hamann – KeyBanc Capital

Okay. And then just a follow-up on membership additions and attrition throughout the quarter, did you see anything that kind of stood out or I guess in-center spending as well any fluctuations notable throughout the quarter?

Mike Robinson

Seasonally you see an increase in spend in in-center as you go into the summer months. So, if you would look at April spend compared to June spend seasonally we would expect to see more and we saw exactly that. And that’s coming from all of the activities that go on the summer activities that the camps, the summer camps and those types of things. From an attrition perspective, that goes up a little bit again you come from a very low Q1 that that’s really being driven by the fact that should we are always New Year’s resolutions in a high volume with new memberships coming in. And then as you proceed through the second quarter, it starts to rise a little bit. That’s why in some of our comments early on, we will really have to look hard to Q3, I mean that’s where the big challenges have been historically and being able to retain our membership base. And so, we’ve seen what we expect to see and our nose is sort of grindstone to make sure that we continue to improve.

Bahram Akradi

And we work on year-on-year, I mean if you look at it from a year-on-year perspective, there is improvements in every area and that’s the key element comparing the particular season to the same season a year ago.

Scott Hamann – KeyBanc Capital

Great. Thanks.

Operator

Our next question comes from the line of Tony Gikas of Piper Jaffray. You may proceed.

Tony Gikas – Piper Jaffray

Thanks. Good morning guys and Ken congrats on the move. I wanted to just ask a little bit about the Life Power boutiques that you are opening up. How many do you plan over the next couple of years and could you just remind us of the product offering and how do the memberships work there. Is it specific to the clubs or are they affordable?

Bahram Akradi

Great question. Let me, first of all, we don’t have any specific plans at all for Life Power yoga centers. It is just a complete opportunistic of test program both locations, Scottsdale and Minneapolis were tremendous, tremendous real estate opportunities, so good we couldn’t say no to. The model is really focused on delivering Life Power quality of yoga that we could do as a separate standalone boutique across all of our 80 some going to a 100 locations. So, really you need to think of Life Power yoga not in terms of just those two locations, you need to think about it across the system. So, in every category whether it’s a cycling, whether it is yoga, whether it’s weight loss, our challenge to our entire organization is we have to be good enough that we could be a standalone boutique if we even have the Halo of Life Time Fitness over it. And from time-to-time, you might see we even open up a LifeSpa that stands all alone. So, it just demonstrate that our Spa is good enough that could be standing alone without having the support of all the members and sometimes it just a branding effort. From the economic value, they are absolutely insignificant on our P&L at this point. So, we really don’t want to comment much more than that about those things.

Mike Robinson

I think just one other thing that clarify early this quarter, we added a training program, a yoga training program that goes exactly to what Bahram is talking about and that’s expanding that the certification training program that expands the ability and potentially the revenue potential across our entire system. With that came another site in the Phoenix market that we will brand Life Power yoga. There will be three of them right now.

Bahram Akradi

And that’s to Mike’s point, Yoga teacher training program is something we want have wanted to deliver across all of our platforms. So, we bought a beautiful little company that has had the most great cretalem [ph] program but they were only doing this in Arizona. So, we picked it up and we rolled it out across the whole country.

Tony Gikas – Piper Jaffray

How did the memberships work do I need to be a membership in seamless part for example or is that going to be a membership that’s specific to that location, are memberships affordable at any level?

Bahram Akradi

Yeah, we have basically divided our memberships with one last tweak this last two to three months just rolled in out. We are taking the memberships at $119 a month from Onyx signature name. So, it’s a little confusing to a diamond and then we have Onyx platinum, gold and bronze. The two centers that are opening in – we are moving that Life Power yoga for lot of this program out in Scottsdale to a diamond membership and we are – so, we have to have the $119 a month program to go in Scottsdale location and in Minneapolis up count we’re going to test the Onyx to $89 a month membership. So, if you have a platinum membership, you upgrade to an extra 10 and the other thing we will do in these two locations learning from those people who have been running yoga classes for a long time allow people to come in based on packages and passes, which is standard in yoga world in addition to the membership. Now, with those passes they only get access to right at that one place, I mean to use the club that particular location five or six times. They would literately for other amount of money they could have one of our top-line memberships. So, I think most people will choose to go the membership route with our system, but we are offering the standard options for them as well.

Tony Gikas – Piper Jaffray

Okay. Then couple other quick ones. Do you have a target attrition rate for next year and Mike maybe just a question for you the street seems to be materially ahead of your guidance. Do you see where that’s off relative to your expectations is it the revenue number or is it the Q4 revenue number for example?

Bahram Akradi

Let me take the attrition and then give the other question to Mike. We obviously are not going to be satisfied with just 36%. So, we, but I’m not going to give, I’m going to set out a number out there for you guys. First, we want to hit the 36% then beyond that we like to continue on to ship away at that attrition rate. Now, I’m going to turn it over to Robinson to answer your other question.

Mike Robinson

So, I’ve told people this time and time again that our approach to guidance is we are going to put out numbers that we have a high confidence of delivering that’s number one. And number two, I think if I had to point to anything in general it’s a difference I think it’s the consumer environment. Our view still is that this s a tough consumer environment and we are not going to get out of ahead of ourselves. We are going to continue to drive and push hard and make sure that we set up our business is going to win in this environment. We are not going to get ahead of ourselves and don’t see justification to do that, given what we see in the environment right now.

Tony Gikas – Piper Jaffray

Okay, so there is no one-time expenses coming in the back-half of the year that we may not have accounted for?

Mike Robinson

No, I think no. It’s – it is really just a focus and I think the difference in how we see the consumer environment right now.

Tony Gikas – Piper Jaffray

Okay, great job guys. Thank you.

Bahram Akradi

Thanks.

Operator

Our next question comes from the line of Brent Rystrom of Feltl. You may proceed.

Brent Rystrom – Feltl

Thanks. Now that Ken is leaving who is going to give me crap about the Green Bay Packers.

Bahram Akradi

We can all do that if you want.

Ken Cooper

And I can continue to do that.

Brent Rystrom – Feltl

I think we’ll just skip that, but Mike did you happen to mention a December opening, in your prepared comments earlier?

Mike Robinson

I did. Our third large opening of the year this year is in Centennial, Colorado, a Denver suburb.

Brent Rystrom – Feltl

Then that’s a December opening?

Bahram Akradi

That’s a December opening. That’s correct.

Brent Rystrom – Feltl

All right, just wanted to make sure I heard the right items a little bit earlier. From a center contribution perspective, I am assuming that that continues to be negative certainly into the third quarter, where I assume that that sort of flatten in the fourth quarter. Do you have any thoughts on that?

Bahram Akradi

I do and again if you go through the three contributing factors to the higher center operating margin. The biggest one continues to be the cost in excess of enrollment fees.

Brent Rystrom – Feltl

Clear and part of the…?

Mike Robinson

So, for new member acquisitions that one our forecast again today is that that continues to remain high because of the consumer environment. We haven’t seen any significant movement on that. The second piece of it is our investment the investment that we are making in the many things that Bahram talked about to continue to enhance the member experience. That’s a much smaller number, but that’s something that again will continue. So, I don’t see significant improvement year-over-year on that. And the third one is the wild card and that is the strength of the in-center businesses that the in-center businesses are coming in at a lower margin. They’re when they are strong there is going to that’s going to put some pressure on that operating margin. And I can’t predict that I can’t project that other than that it’s we’ve been certainly been pleased with how that’s been to-date. So, I am not expecting that to flip significantly over the next two quarters in this environment.

Brent Rystrom – Feltl

When you look at your long-term growth expectations that you discussed could you characterize for us for looking at low double-digits are we getting back to kind of the historical comps in the 7, 5,6,7 range and then the rest is coming from unit development. How would you characterize your feeling?

Mike Robinson

Yeah, I think it's going to – there is a timing play in this and that I would say that early on you are going to see, I think we have an opportunity to have comps that are certainly in that range and maybe even pointing in that to the higher end of that range. As we build occupancy and by comps I’m talking really about same-store comps in this case. As we focus on building that occupancy backup closer and closer to its capacity. Yes, can I take time, but it should be an early impact part of that. Over time, I think that gradually moderates down a little bit and you start to see more of it that’s coming from in-centre growth acceleration and things like that.

Brent Rystrom – Feltl

And final question then maybe a different way Bahram of answering the questions that’s been asked couple of times is, if attrition were to get down to 32, 33%. How would that translate into the urgency and the operations of the company?

Bahram Akradi

I think you have pretty much direct correlation to our performance. We – if I reflect back to earlier days where we were running at 32, 33% attrition rate across the system. We had a larger number of new club first year clubs versus and divided by the total number of clubs. So, that actually had a positive impact on our attrition rate. And so, I think our 35, 36% rate that we get to now maybe is a equivalent of what we were doing at the 32, 33, but if we can improve that to a lower number most and it should affect the clubs, we should be able to ramp membership in the clubs and as the membership gets closer to the capacity. We naturally would increase the enrollment fees and such. So, it all kind of snowballs the next 5, 6% occupancy in our clubs is going to have dramatic impact. But I – I just I want to reiterate to you guys that that’s our goal. That’s the ultimate be hag for us to get there and I emphasize the ultimate be hag. It is not necessarily something anybody should, including us, that’s why you don’t see it in our numbers just assume it’s going to happen. We are very pleased with our performance. I am thankful to our team for the focus they have demonstrated and the area and the results, but we also we just want to make sure we don’t get ahead of ourselves.

Brent Rystrom – Feltl

Thanks guys.

Operator

Our next question comes from the line of Bakley Smith of Jefferies & Company. Your may proceed.

Bakley Smith – Jefferies & Company

Hey, guys everyone. I just would also eco the fitness for Ken, thanks very much Ken for your work with us over the years here and best of luck. As you move into your new role and look forward to continue working with you guys. I wanted to ask and it’s actually kind of does over Ken where you’re getting into, but it will be directed to Bahram. As you look at the trivalence and some of that, so I just wanted to go a little bit more sort of a high level if you will. If you look out and you touched on trying to develop Life Time into sort of a in ways to, sort of, a broader brand and sort of a bigger and broader in ways that kind of sell that out. I mean, that’s I mean this both interesting obviously, but also tough to measure. I mean how do you think through why you get into how you measure the returns to investors and sort of business and how do you look at that umbrellas you get into, because you get into sponsoring different events and that kind of stuff, I mean would you look to get into some brands and get some consumer products. Would you do like a Life Time energy drink; I mean what kind of stuff do you look at?

Bahram Akradi

It’s a good question. So, let me give you as much information as I can give you. First of all, as it relates to calculating returns last I check that’s still a simple math and we’re going to stop utilizing the mathematics for calculating returns. We have a very, very professional organization team here and these guys do a great job going through analyzing every space that we get into and I feel confident that we are not going to get into a deal if it’s not going to have the appropriate returns for us, number one.

Number two, really we’re not going to get into any space that does not have strategic importance to our overall strategy of delivering the best-in-class for each passionate group. As we build Life Time here, we’re not thinking about health club at all, we’re thinking about the person who needs to lose weight. We’re thinking of a person who is focused on yoga. We’re thinking about a person who is crazy about cycling. We’re thinking about person who is passionate about running. And I can go on and on and on. And we take each category and we focus on being absolutely the best place, the best program with the best people, the best experience for those people. So, athletic events like triathlons, running events, cycling events are incredible opportunities for our members to set goals of participating in a particular event and the level of their engagement in their day-to-day exercise and nutrition getting coaching receiving personal training sessions or online coaching dramatically increases. So, we feel that this is inline strategically with the big umbrella of who Life Time is as a health way of life company. And we are going to take steps methodically and prudently in delivering more opportunities to Life Time Fitness members in the events they really want to get into and then give them the support and the opportunities to do those. We also intend to make money with them. We’re not doing this as a cost center we are doing these things with the idea that they will generate just as good of a rate of return to our business as our best clubs have.

Bakley Smith – Jefferies & Company

Okay. And then just a last one on that and I assume that the way you think this through also have to do with where you build out geographically I mean some of these things that we can kind of think about may as for a bigger sort of a broader national footprint, I mean how do you think that’s through is what I mean it sounds like what you want to do is build out where you – those are your relevants – your relevant customers then also have the clubs there to support that branding and that…

Bahram Akradi

That’s a good question, but let me give you a response in two ways. On a short-term strategic, obviously it’s easier for us to execute an event due to the volunteers and team member capabilities in a market where we have a number of clubs. Having said that, we view ourselves as a national company with a mindset that we will have facilities in every major MSA United States that make sense as times comes in. So, if particularly a particular athletic events leads the expansion of the club, then it would lead it but hopefully we’ll back it up sooner or later we’ll be there with the club. If we’d built it in the markets where we have clubs then it takes care of itself. But, we think of ourselves as a national company and we will have athelic events or health clubs in many different markets.

Bakley Smith – Jefferies & Company

Okay. Thanks very much.

Bahram Akradi

Thanks, Bakley

Operator

Our next question comes from the line of Paul Swensen [ph] of Morningstar, Inc. You may proceed.

Paul Swensen – Morningstar, Inc.

Good morning and congratulations both to Ken and – on the quarter.

Bahram Akradi

Thanks Paul.

Mike Robinson

Thanks.

Paul Swensen – Morningstar, Inc.

A quick question back to follow up on return to growth and talked 18 months, do you see CapEx per square foot being lower than the past when you start those clubs especially since you’re already negotiating some of the sites?

Bahram Akradi

It all depends because we are getting more opportunities that we hadn’t seen before with some existing space. We’re working on other lot, but some. And as we end up getting into some existing space, the mathematics will be a little different with the – particularly with the leased facilities. However, if you look at it from the ROIC and you take the rent and divide it – multiply times accrual and denominator, it’s not going to be dramatically different at that point. So, I think if you – if overall you look at our expansion plan, I think our mindset is – it’s more important to be in the locations we want to be in, in the markets we want to be in and delivered the right products and get the right membership and make money, then be concerned about CapEx. I’ve probably could build a club in Montana cheaper than I can build in Long Island, but I think we’ll make more money in Long Islands. So, I can’t sit in here and give you a blanked answer if the CapEx dollars there going be lower or higher.

Mike Robinson

I know. I think that sitting that said were obviously going to take every opportunity we can from both size, location, cost, et cetera…

Bahram Akradi

Negotiation.

Mike Robinson

And negotiations and there are opportunities on those and absolutely we’re going drive to the best cost we possibly can.

Paul Swensen – Morningstar, Inc.

Okay. And then the mix of the centers in the sizes kind of similar to the past, some smaller, slightly smaller and urban markets but stick into the mostly large format?

Bahram Akradi

You’re going to – again, I think you’re going to see us to be very pragmatic on that and there will be locations where it makes sense to have a big one, in fact one of our three-storey centers. There are going to be locations where it makes sense because of the demographic and the densities and things like that to have our – yeah, something down in the 50,000 to 60,000 square foot range and to take advantage of some of the leased locations which may end up being smaller. So, I would say if I were to put my crystal ball on, I would see – you probably see a little bit more variations, but not significant.

Paul Swensen – Morningstar, Inc.

Okay. And then one housekeeping on that 20.4 million comp expense for restricted stock; I’m assuming that’s going to be non cash because it all run through the treasury – stock?

Mike Robinson

That’s correct. That’s a non – that would be non-cash. If we deem that probable at some point in the future or a part of that probable, that would be non-cash, that’s correct.

Paul Swensen – Morningstar, Inc.

Okay. Thank you.

Operator

Our next question comes from the line of Greg McKinley of Dougherty & Company. You may proceed.

Greg McKinley – Dougherty & Company

Thanks. I think most of the questions have been asked. But in terms of just getting back to center operating expenses briefly, this component that you attribute to being the largest contributor to higher expenses being membership acquisitions costs and excessive enrollment fees. And I think in your K last year you said those may be 8.4 or $8.5 million that hits as a period expense. Is there any thing last of (inaudible) to you on the cost side. I know you need to respond on the enrollment fees side depending on the market, but internally is there anything left for you of substance to further streamline those costs whether it’s compensation or internal expenses other than that?

Bahram Akradi

Certainly, Greg, we’re always looking at the cost side and I am very proud of this company and how it is as reacted on the cost side. But there are things that we’ve looked at and we say we got to invest and part of what we are doing is investing where it makes sense to help the experience and to drive the consumer and to drive the membership. So, right now I would say it is we are very strategically investing in those things. As the consumer gets better, as we start to see recovering again we’re not forecasting that right now, but that’s when we should overtime be able to help on the enrollment fees and in that we should be able to take some pressure of this line. But right now, it’s really we look at this piece of it as that as the primer to the annuity stream and we’ll invest in that where it makes sense to do that.

Greg McKinley – Dougherty & Company

And then again just in terms of order of magnitude this investment in member experience, I know as the smaller contributor to the center cost and membership acquisition. But could you give us a sense for its relative contribution of those expenses compared to the acquisition costs?

Bahram Akradi

It is significantly smaller than that.

Greg McKinley – Dougherty & Company

Okay.

Bahram Akradi

So, that’s up, all I’ll see.

Greg McKinley – Dougherty & Company

Okay. Thanks and good quarter.

Bahram Akradi

You bet. Thanks.

Operator

With no further questions, I will now like to turn the conference back over to Mr. Ken Cooper for final remarks.

Ken Cooper

Thank you for joining our call today. We look forward to reporting to you our third quarter 2010 results, which tentatively has been scheduled for Thursday October 21, 2010 at 10 a.m. Eastern until then we appreciate your continued interest in Life Time Fitness. Thank you and good bye.

Operator

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

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Source: Life Time Fitness, Inc. Q2 2010 Earnings Call Transcript
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