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Life Time Fitness Inc. (NYSE:LTM)

Q3 2010 Earnings Call

October 21, 2010 10:00 am ET

Executives

John Heller - Senior Director of Investment Relation and Treasurer

Bahram Akradi - Chairman, President and CEO

Mike Robinson - CFO

Analysts

Scott Hamann - Keybanc Capital Markets

Michael Lasser - Barclays Capital

Tony Gikas - Piper Jaffray

Ed Aaron - RBC Capital Markets

Greg Mckinley - Dougherty & Company

Sharon Zackfia - William Blair & Company

Brent Rystrom - Feltl & Company

Operator

Good day, ladies and gentlemen. Welcome to the Q3 2010 Life Time Fitness earnings conference call. My name is Jeremy and I will be your operator for today. 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 the host for today, John Heller, Senior Director of Investment Relations and Treasurer. Please proceed, sir.

John Heller

Thanks Jeremy. Good morning and thank you for joining us on today’s conference call to discuss the third 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 at our website which is www.lifetimefitness.com. Concurrent with the issuance of our third 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 third 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 am Eastern time. At that point in the call, Jeremy will provide instructions on how to ask questions. I will enclose with the tentative date of our fourth quarter of 2010 earnings call. Finally, a replay of this teleconference will be available on our website at approximately 1:00 pm Eastern time today.

Today’s conference call contains forward looking statements and future results could differ materially from those statements made. Actual results 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 on 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 released 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 am excited to provide you with my thoughts and perspective on our third quarter of 2010. Late last year, the company put in place a number of strategies to allow us to win in this challenging environment. A year later we can say that those strategies are working. Our same-store sales, operating margins, revenue per member, and efficient rate all improved for the quarter and year-to-date compared to 2009. We believe this is direct results of the efforts of our team and the effectiveness of the substantial investments we have made in the business. We are determined to demonstrate our value proposition and connect with our members in the best way imaginable.

Attrition for the quarter was down 100 basis point versus a year ago bringing our trailing 12 month rate to 37.1%. This is down from 40.6% at the same time last year. We are pleased with the results as we relentlessly drive towards our goal of 36%.

That said, with the continuing economic headwinds we have never had to work harder to attract and retain members. To accomplish this we have been proactive on many fronts. We have invested heavily in our value proposition with enhanced program and service offerings and mind-blowing value pricing in cafes spas and member activities. We have invested in member engagement and connectivity ensuring that new members get involved and stay connected to the club in ways that matters to them. In fact, we have brought over 500 people from across the company to Minneapolis today and tomorrow for what we call our company’s inside expo which allows a key center leadership to gain first hand reinforcement of many initiatives and the businesses we have available to our membership to drive the value and engagement we believe is so critical for successes. While this is a significant cost we firmly believe is the right thing to do in this environment. In summary, our value proposition and engagement initiatives are progressing well.

On the other hand we continue to see persistent difficulties in attracting and retaining new members without substantial effort. We have had to keep enrolment fees low to attract new members and invest heavily in programming to see improvement in retention. As we have said all year we do not expect this to change any time soon, however, over the last two years we have run our business with the expectation of headwinds and we believe our results demonstrate that we are winning and we also firmly believe we can continue to win.

Our revenues for the quarter were strong throwing over 10% above a year ago. This growth is coming primarily from our in-center businesses. This performance is driven by our value pricing and engagement initiatives centered around children activities which peak during the summer months. While these revenues come at low emergent than our dues, we believe that an increase use of our services is key in keeping memberships connected engaged, which is reflected in our improved retention rate.

We are pleased with our revenue growth, which was over 8% top line year-to-date. We consider mid-to-high single digit growth reasonable rate through 2011. As we about our growth beyond that our expectations are unchanged from last year. Long-term our goal is to grow at top line at least low double digits per year and leverage that growth with higher net income and EPS growth. We expect this growth to come not only from new club offerings, but also from the investments we are making in our businesses.

In conclusion, while I am not bullish on the consumer environment, I have never felt better about the company and our management team. Since the economic downturn we have executed on almost every aspect of our plan. Attrition has improved and we have been strengthening our balance sheet and we have brought the company to a free cash flow of positive while continuing to grow the businesses. We will continue to examine every aspect of our business to find better, more creative, and less capital intensive ways to grow our business and drive member involvement.

With that I will turn the call to Mike Robinson, our chief financial officer. Mike?

Mike Robinson

Thanks Bahram. As Bahram indicated we continue to show solid improvement in several key operating and financial metrics. Let me start with some additional details on attrition and retention. For the quarter our attrition rate was 9.6% as compared to 10.6% last year. This includes approximately 40 basis points of improvement related to our change in methodology that went into effect April 1. That is we no longer count those potential members that like to cancel during the 14-day trial as members or attritions. We continue to shoot for internal goal of 36% or better total year attrition over the next several quarters and continue the momentum we established in the first nine months of this year. We expect this improvement to get more challenging as we go against more difficult retention comparisons.

What is inherent not guidance which I will talk about in a few moments is about a 50 to 60 basis point improvement over last year’s 10.8% fourth quarter result. This includes approximately 30 basis points for our methodology change. Early experience shows that the Q4 retention improvement would be more challenging due in part to the lagging attrition from the typical land of summer pool season and the beginning of the school membership movements.

Our improvement in attrition let us to be slightly ahead of our net membership growth expectations in the quarter. We finished the quarter with 622,698 memberships. This is a 5.4% increase from the third quarter of 2009. While down approximately 9,000 memberships since Q2, it is much better than the 17,500 membership loss from Q2 to Q3 2009.

For the third quarter, we grew the net balance of flex memberships by approximately 9,000 units to approximately 63,000 total units. Our membership activity led the total revenue of $238.3 million for the quarter, which is up 11.2% from last third quarter.

Our main revenue drivers include growth of our in-center revenues stemming primarily from our mind-blowing value pricing initiatives in spas, cafés, and kids activity programs and our ramp of the two large centers we've opened so far this year and the three large centers we opened in 2009.

The total number of open centers at September 30, 2010 was 89, compared with 84 at September 30, 2009. Of the 89 centers, 53 or 60%, are our large current model and 66 or 74% of all of our centers have been opened three years or more, which we classify as mature centers. We now offer 8.7 million square feet of health and fitness centers.

Membership dues grew by 7.2% for the quarter, which outpaced our membership growth of 5.4%. Our goal is to continue to have dues growth in excess of membership growth. We accomplished this by improving our average dues we are selling more memberships at higher price centers, providing more valued upgrade opportunities and upgrading more memberships to couples and families. We had very little price increase in the first nine months of 2010. Our powerful dues annuity stream accounts for 66% of our total revenue.

In-center revenue continues to perform well. In-center revenue grew by 17.5% in the quarter. The growth was across the board, including our kids programming, which peaks in the summer months. Personal training, which was up 16% and [life] spa, which was up 24% leading the way. Again, we are strategically driving this growth through lower price points on many services to drive volume and enhanced member connectivity and involvement and thus improved member retention.

Our revenue metrics continue to show improvement during the quarter. Third quarter same-store sales was 6.6%, the strongest growth since early 2007 and a 37-month mature same-store sales came in at 4%, both of these metrics as expected showed improvement sequentially driven by in-center revenues.

With respect to revenue per membership, we generated $374 per membership, which was up 4.4%. This was driven by a slight mix increase and our in-center business. In-center revenue per membership of $112 was up 11.9% in the quarter. For perspective, this comes off $112 second quarter, thus tying the 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 the new programs and changes in program pricing. Our members are reacting favorably to our mind-blowing value proposition, and our on board in connection through our affinity program called Life Time Bucks.

I'd like to move to some discussion on our cost structure. Overall, operating profit margin in Q3 improved 40 basis points to 19.1% from 18.7% in Q3 2009. Center operating costs were up about 140 basis points, due primarily to the same three drivers we've seen all year. First, we continue to incur higher membership acquisition cost as we use promotional enrollment and administrative fee pricing to stimulate new member demand.

Second, our strong in-center revenue growth comes at lower margins, and finally, we continue to make investments in our centers to enhance the member experience and improve retention. These investments range from the expanded hours of operations for various programs to more fitness class offerings to the reward and retention affinity programs like Life Time Bucks.

Marketing and advertising costs were down 10 basis points due to our controlled promotions and more effective marketing. We kept these costs lower to help offset our planned use of lower enrollment fees, which result in the higher net membership acquisition costs. Center overhead cost and G&A were flat as a percent of the revenue at 4.5%. The dollar increase is reflection of some the limited investment in overhead structure to help drive the retention in connectivity initiatives at our centers as well as opportunities to grow other healthy way of life-related businesses.

G&A is 50 basis points lower year-to-date, reflecting our continued focus on efficiency. We also saw leverage in other operating expense as we had reduction in construction related expenses incurred last year that was partially offset by cost associated with acquired athletic events such as the Chicago Triathlon. We continue to see significant leverage in depreciation and amortization as we continue to grow revenue well ahead of square feet expansion.

Now, I'd like to move to a quick capital structure update. We continue to de-lever our balance sheet. The key driver to this is the continued power of cash flow from operations, which totaled $45.4 million for the quarter, up $5.1 million from Q3 2009. There was $146.1 million year-to-date up over $7 million from our 2009 year-to-date results.

We also generated our seventh consecutive quarter of free cash flow. For the quarter, we generated $7.5 million of free cash flow and year-to-date we are at $60 million. This excludes approximately $15 million in cash spent on acquisitions year-to-date.

The e small purchases in Q2 and Q3 include a small fitness center in Houston, two [Markey] events businesses the Chicago triathlon and associated races and the let go 100 mountain-bike race series and a yoga instruction training curriculum.

We had a very small revenue and net income impact on our results. These acquisitions continue to broaden our strategic offerings as a healthy way of life [component].

Debt is up $3.1 millions in the third quarter, however, we have been building our cash balance in anticipation of retiring approximately $70 million of mortgage debt at maturity next year. Our cash balance grew another $9 million in the quarter and is growing $27 million since December 31 last year to $33.5 million.

As of September 30, we have $382 million outstanding including letters of credit on our $470 million revolving, at least over $120 million in cash and revolver availability. Our net debt to total capital came down a 110 basis points from the second quarter to 42.4% 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 the debt maturities near-term.

Our focus remains on de-levering the balance sheet. We continue to monitor the various debt markets, however, our baseline assumption that we do not enter in to any significantly new financings in 2010. By the way we now have 37 owned facilities with an asset cost on our balance sheet well and excess of $750 million with no mortgage financing.

Regarding capital expenditures, we paid for approximately 38 million of CapEx in the third quarter and our year-to-date total is $86.1 million. This was comprised of approximately $60 million for growth and $26 million for maintenance and infrastructures support. Currently we have one center left to open this year. This large center is planned for December and we will be in Centennial, Colorado suburb of Denver.

For 2010, we expect to spend approximately $110 million to $130 million on capital expenditures for club growth and maintenance CapEx. This will be comprised of approximately $80 million to $95 million for growth CapEx and $30 million to $35 million for maintenance and infrastructure support. We have increased our CapEx expend expectation $10 million as we have moved up our construction timing on some of our planned 2011 and 2012 openings. This capital expenditure expectation excludes the acquisitions we completed so far this year.

Now, I would like to give you some other key P&L highlights. Interest expense net of interest income decreased slightly sequentially to $6.8 million from $6.9 million in the second quarter. Our tax rate for the quarter was 40% to 40.2%, which was higher than the 36.8% in Q3, 2009. As a reminder in 2009 our lower tax rate was due to reduction in tax accruals resulting from favorable outcome from the Federal Tax Audit.

We expect our effective tax rate in 2010 to be at or slightly above 40%. Our EBITDA margin decreased to 29.1%, as compared to 29.7% for Q3, 2009 due primarily to the increased [in center] operating expenses.

Our net income for the quarter was $23.4 million, which was 13.3% growth over Q3, 2009. Our net income margin increased 20 basis points to 9.8%. Weighted average fully diluted shares totaled 41.3 million shares for the third quarter; we expect our average diluted shares to increase slightly for the rest of the year.

Overall, we achieved diluted EPS of $0.57 in the third quarter, compared to $0.51 in Q3, 2009. A few balance sheet variances to note included decrease of approximately $3 million in prepaid expenses and other current assets in the second quarter due primarily to a reduction in prepaid insurance and other prepaid accounts as we work through (inaudible). Deferred membership origination costs both short and long term as well as deferred revenue continue to decline due to the low raw material pricing and the resultant increase in member acquisition costs from the commissions and direct expenses in excess of enrolment fees which we expense in the period incurred.

Other assets increased about $5 million since Q2 due primarily to the small acquisitions we made in Q3. Current maturities of long term debt have increased to above $77 million as we reclassified the (inaudible) mortgage debt to current as it is due and payable July 1, 2011. As I stated earlier we plan to pay this mortgage debt off with cash and cash flow from operations. Accrued expenses have increased about $4 million in the quarter related primarily to increases accrued real estate taxes.

Before I move to our updated guidance, as a reminder, we have a senior management restrictive stock performance incentive plan in place of 2011 and 2012. The 50% of the 100% performance EPS hurdles to earn the incentive requires significant performance improvement over the 2008-2009 results and must fully absorb upto $20.6 million of compensation expense associated with the brand. Since we believe these targets to be aggressive goals in excess of our current baseline expectations we have not recognized any compensation expense associated with the brand nor has any share amount have been included in our total diluted shares. We reevaluate the probability of achieving these goals each quarter. We have not included any expense or additional share count in our guidance.

Let me discuss our updated financial guidance for 2010. While pleased with where we are at this far through the year it is important to note that we still have hard work ahead of us in this environment including a challenging quarter for member retention and induce growth. Therefore, we expect our revenue will grow $900 million to $910 million, up from $890 million to $905 million. We brought our guidance up $5 million to $10 million based primarily on our incentive revenue results. We anticipate our net income will grow to approximately $81 million to $83.5 million up from previous guidance of $79 million to $81 million. We expect our diluted EPS will grow to $1.98 to $2.04 up from a $1.92 to $1.92 per share.

While we expect total year operating margin to show good improvement incorporated in this guidance is some operating margin decline in Q4 as we expect to increase presale expenses and marketing spend for our Q4 and early 2011 center openings. We will also continue to executing our value proposition and connectivity initiatives and the resultant investments we are making such as the export Ron mentioned earlier to differentiate Life Time Fitness to position us for further improvement in this environment.

As we look to 2011, we plan to give our usual next year guidance on our February fall. However, as we are currently in the planning here are some things we expect. We expect the same economic headwinds and must plan to sustain or potentially grow the programs and investments we are making to further differentiate Life Time Fitness. It's value proposition and the connectivity engagement and retention initiatives. We currently plan to open three large centers next year including Syosset on Long Island, New York in Q1.

We plan to continue our prudent balance sheet management targeting to de-lever to approximately 2:1 EBIDTA leverage ratios. We believe this will deliver mid to high single digit revenue growth and modest net income leverage. Most importantly it will continue to position our company very well for growth and margin expansion as we look to the future.

That concludes our prepared remarks regarding the third quarter 2010 financial results. We are pleased to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Scott Hamann from Keybanc Capital Markets.

Scott Hamann - Keybanc Capital Markets

Just a question on the membership dues spread. It seems like it kind of narrowed a little bit this quarter. Is there any flexibility you have in price increases or how should we think about that trend developing over the next several quarters?

Bahram Akradi

Okay, so this is Bahram. We have no intention of increasing any of our rack rate on any of our clubs. Think there might be one or two clubs that we will make adjustments. Other than that at large we are going to keep the rack the same. We might make some adjustments on the numbers that are paying substantially below the rack rate, but it’s going to be a very, very small adjustment in the number of people who would get that. The increase in the dues, in my opinion, is going to be primarily a function of members who are paying below the rack rate, attritioning out being replaced by the people coming in with a full rack rate, since we are not discounting for 26 and on there and some of the other stuff.

So, I do see an increase in our dues revenue still gapping the membership count in the, at least in the next several quarters. You should continue to see some of that. It’s not a surprise for it to narrow down since we have not been doing any rack increases, rack rate increases at all for almost a couple of years.

Mike Robinson

Especially given the environment. Obviously we watch, we meet, and Bahram and his team meet weekly, in fact in some cases daily looking at pricing and other variations. In this environment, from a rack rate perspective, we still don’t feel it is conducive to take rate up.

Scott Hamann - Keybanc Capital Markets

Okay. Then just a follow up on center ops, Mike can you talk about the, I mean the 150 basis point de-leverage that you saw, you talked about some of the bucket, can you kind of quantify what some of those buckets were and how they changed over the last couple of quarters like how much is mix really impacting, and how much is the spending really impacting it, and how do you expect those buckets to kind of change as we go over the next several quarters?

Mike Robinson

Sure, sure. I mentioned three elements to this. The first element is higher member acquisition cost that come from the fact that our commissions and other direct related selling expenses are in excess of our enrollment fees. That’s been high all year. We expect it to remain high in the next quarter. It hasn’t moved significantly, meaning it’s been high. Again it’s been the single largest factor in that operating, center operating margin degradation.

As we lap that and go into next year, I would expect it, that it’s going to get better just from a simple arithmetic perspective. Until it’s going to depend really economically to whether we actually see some improvement in that.

Bahram Akradi

We don’t see getting worse.

Mike Robinson

Yeah, yeah. The second area is the fact that our incentive revenues have grown at double digits rate, in fact 17.5% top line growth in the second quarter. That’s the highest growth rate in the three quarters we had this year. So, and those revenues are coming at a lower margin, significantly lower margin and reduced margin and with some of the pricing changes, the strategic pricing changes that we made in center to drive more of these engagement initiatives, that margin rate on those services has actually come down. So, over the three quarters, we’ve seen that as an increasing amount of that center operating expense dues degradation.

The third area, just all of the things that we are doing at the club level to improve the value and the member experience. Those things range from expanded hours in certain areas to more and more classes to the use of affinity programs. Those have grown from the first quarter to the second quarter to the third quarter. In this environment, we continue to expect it that we are going to invest in those types of value differentiators into the future.

Operator

Our next question comes from Michael Lasser from Barclays Capital.

Michael Lasser - Barclays Capital

On the increase in in-center revenue and in all the effort that is going on to boost spending, how are you able to decide the return on some of those initiatives, because theoretically as you worked in to as attrition peaked up and you worked in a more committed member, there in-center revenue spending is higher so you would have gotten some growth by virtue of that, so I am just trying to understand where the recent growth has come from and how you are getting return on those expenditures?

Bahram Akradi

First and most important thing is to offer the right product that matches our branding and positioning that we want to establish for Life Time for the customer. So the driving factor in the decision making is delivering the best possible product in each area of the interest of our customer. Next, we work on trying to make sure that comes at a mind blowing value and then we work on making sure we have some level of margin on that new revenue. So we are not continually adding revenue with no margin if it is an in-center, and the decisions are fairly easy because we are focusing on the customer and making sure we give them what they want.

While I am answering your question I am going to elaborate on a little more for everybody else. We keep talking about economy being tough, macro economics being tough it’s really a function of the heavy-heavy unemployment as you guys all know that is a headwind for membership type business. We have two choices, we can reduce dues, cut prices like every body else, and cute services and programs, or at Life Time as always we have chosen to do the right thing by customer. Instead, we have decided to add value not by cutting prices, but by adding programming just like Mike said adding more free time on the climbing walls that adds labor for us, adding more time in the pools for the families to be able to doing the pool areas that adds more labor around life guards, and people maintaining their facilities. So altogether we are more than satisfied with our strategy.

We like to continue on, we will continue on, on improving the programs for our members as long as we continue as always meet our internal budgets, internal goals, we feel like we are on track; we set goals, we achieve our goals, and those goals are both based on achieving our internal budgets and numbers, and two most importantly achieving the customer satisfaction we are looking for. So, if you are trying to comment this just from the number standpoint, what decision can we make to increase the margin? If it is not the right decision for the customer we are not going to make that decision here?

Michael Lasser - Barclays Capital

Can you reconcile some of the comments about three in-centers next year but also accelerating the longer run outlook for center growth and that’s why CapEx moving up for this year?

Mike Robinson

The reconciliation right now is we added about $10 million to our CapEx guidance for this year. That is just simply moving the opening dates for planned 2011 openings up a few months. What they does is accelerate some of the construction cost that will occur in 2010. That same comment reflects on A center that we looked at and have the ability to start the construction a little bit earlier for 2012, so there is some construction expense that will occur and we will absorb in the fourth quarter of this year for that.

Operator

Our next question comes from Tony Gikas from Piper Jaffray.

Tony Gikas - Piper Jaffray

Could you just comment a little bit on how you expect interest to expand to trend through the next year? Second, how quickly can you start to ramp new center openings and have you been working on new site selection that sort of thing? Third question, just the ad and marketing standing Q4 will that follow the continued trend to be downward a little bit?

Mike Robinson

I am going to take number one or number three, Tony, and let Bahram talk about the second one. The interest expense should it will trend a little bit lower as you move through 2011. Although, I don’t expect that levels to change too much here in the short term as we build our cash. So, in the short term I don’t expect that we’re going to trend too much low but once we pay off at midyear the [startwood] where we should see the trending would be a little bit lower.

Your question on marketing expend, like what I said in the prepared comments, we expect that to go up a little bit in the fourth quarter and the reason we expect that is we got pre-sale activity. We are hot and heavy in the pre-sale activity in Centennial and in Syosset which not pre-sale just opening. So, there will be quite a bit, especially in the market like in Long Island where we’ve got -- it’s really the first we got two in New Jersey but the first one in Long Island so we’re certainly spending some awareness dollars in that market. So, you should expect that to go up in the fourth quarter.

Bahram Akradi

Andy, will you still have the full team of people working on a whole laundry list of deals we’re working on. We have many deals chewed up. We could start an unplanned construction for a particular club that literally within months. So, we have the ability to ramp up as we see appropriate, Tony, with our managing of our total objectives, which includes the balance sheet, the refinancing and all of those things. We are in really, really good spot. As soon as we want to step up on the opening of clubs, we can do that.

Operator

The next question comes from Ed Aaron from RBC Capital Markets.

Ed Aaron - RBC Capital Markets

I just want to follow up on some comments made in your prepared remarks about your preliminary look at 2011. Did I hear right that you’re targeting mid to high single digit growth for next year? Is that a little bit different from what you handed that last quarter?

Bahram Akradi

Think we said in the high, not really, it’s not intended to.

Ed Aaron - RBC Capital Markets

I wanted to focus also just a little bit on the seasonal dynamics. Do you think that when you think about the drivers of you business from membership perspective of being in retention versus acquisition, it seems like a lot of your progress internally is within on the retention side whereas in the acquisition piece a lot tougher with the environment being what it is. As you look forward to the next couple of quarters, particularly at the Q1, would it be fair to say that the business becomes seasonally more dependent on the acquisition than retention and if so, how should we think about the level of further new term progress in that respect?

Bahram Akradi

I will take that. I don’t see a lot of change in the trends that you guys have seen. We have seen the last two or three years. Initially, we look at just the pure health club business when beautiful summer months exist in whatever type of the market or the months that people can be outside comfortably, you will see a little bit of a slow down in the traffic.

In our particular business model, we have a kind of a winter season which people come in and we have the summer season around their big pools that we get families joining, kids out of schools and some people just join for that 90 days. That’s the impact that increase impact that we see in our attrition at the end of the 3Q and beginning of the 4Q is really function of people deciding to join with their mind made that they’re going to join for four months or three months or something like that. So, I do not see any change in that pattern of membership in terms of what comes in or what goes out.

2010 has been, as we have mentioned numerous times, a very-very challenging year. We have a team of folks in here including myself we maneuver on enrolment fees, promotions for the sales people, release of some you know marketing material we can be agile with on literally weekly basis or sometimes even twice a week. Therefore we feel that with that same level of intensity and agility we can continue to perform as good as we have performed in 2010, in 2011. I do not expected to be radically different one way or the other unless we see robust change in employment going from you know 9.5% of whatever it is today to 7.5%. Then we will get some wings on our back.

I am really-really happy with our team and our results based on this difficulty and in a sick way I almost liked this tough economy that exist out there because it is allowing us to sharpen our skills and get much tougher. As soon we have some tail wind, we will see some good results kind of pouring in. Until then we are just committed to winning in the environment that exist today without getting tired of this, last two more years so be it.

Operator

Our next question comes from Greg Mckinley from Dougherty.

Greg Mckinley - Dougherty & Company

I do not if you are able or want to clarify for us this morning, but you talked about the cost of membership acquisition exceeding enrolment fees. You have clarified that in your case in the past. Can you give us a sense for what that net P&L hit has been this year You recognize as a period of expense when you signup that member?

Mike Robinson

That is correct, Greg. Just to remind people what Greg is referring to is in the K in 2008, We had about $6 million worth of cost in excessive enrolment fees, in 2009 that number was in $8 million to $9 million range, and year to date this year it is in the $10 million to $12 million range.

Greg Mckinley - Dougherty & Company

Given your expectations for year-end membership would you expect that to migrate meaningfully higher yet here and as we go through the fourth quarter?

Mike Robinson

No, we expected to be in the same range that we have been seeing in the first three quarters.

Greg Mckinley - Dougherty & Company

Okay, but year today or 10 to 12.

Mike Robinson

That is correct, now on a year-over-year basis it is probably a little bit worse because we had little bit better performance last year.

Greg Mckinley - Dougherty & Company

Then it is just for context for that initial framework you provided us for 2011, are you making any assumption changes in that particular item?

Mike Robinson

The only assumption change we are making there is in effect we lap this comparison and it becomes quite fairly flat year-over-year. That makes sense too, meaning no increase or decrease on that cost in excess.

Bahram Akradi

Are we are going to see that we have to go lower on the enrolment fee, but we do not want to budget going higher on the enrolment fee.

Operator

Our next question comes from Sharon Zackfia from William Blair & Company.

Sharon Zackfia - William Blair & Company

Does it seem fair to assume in your guidance and plus the guidance for the fourth quarter or do you expect membership to decline again sequentially?

Mike Robinson

No, we do not expected to grow substantially but we do not expected to decline either.

Sharon Zackfia - William Blair & Company

Just on attrition, I follow the company for a while, usually the third quarter is seasonally the highest in terms of attrition and you back out while you are (inaudible) on a year-over-year basis. It implies attrition being up sequentially in the December quarter, so just is there something you have seen in the business of the seasonality for attrition is changing somewhat?

Bahram Akradi

Yes, Sharon, that is a good question and even myself I was under the impression. that last year's fourth quarter should have been lower than the third quarter, but in fact last year, fourth Q attrition was about 20 basis point higher than the 3Q last year, and it's really nothing more than a delayed reaction as Michael suggested on some of the people who wanted to drop out the month of September, they actually dropout their membership and they fall of on October 1, so they use the part of September, so that would help us favorably in September versus a higher expectation of attrition and unfavorably in October, but really it all evens itself out. I really wouldn't dwell so much on if it drops in one month or the other, we are more focused on trying to take the trailing 12 months or the annual attrition rate totally down just continue our improvement.

We can continue to improve on that 37.1% here in the fourth quarter albeit, it will be a small improvement, very small and then we are not done with ideas that we are still baking and trying to implement and continuing to improving our attrition until we, like we said earlier, we really want to hit that 36% bad, and we continue to work on that. we can that pretty positively.

Sharon Zackfia - William Blair & Company

Mike, I apologize, if you talked about this, but as we think about you kind of ramping up growth in 2012 and beyond, and some of that CapEx could be pulled forward. What is the (inaudible) versus going forward and as you expect a massive acceleration of CapEx in 2012, or will be more moderate?

Mike Robinson

I don't think you should expect a massive increase in CapEx, so, as I have been talking about to investors before, if we said at this table the next 20 years, it wouldn't surprise me if we'd be seeing a split that might even be closer to 50-50 on leased versus owned over that time period assuming we can find the right locations in the right demographics and the right [typographics] to be able to do that, so I would not be modeling in significant increases in CapEx.

Operator

Our next question comes from Brent Rystrom.

Brent Rystrom - Feltl & Company

Just real quick, but from the perspective of the increased expenses while what's the customer enhancement and services and stuff. When do you feel that you will start to anniversary their uptick? I know it will probably persist high for a while as a percent of sales, but when do you feel you kind of anniversary that?

Bahram Akradi

Brent, this is a good question. at this point, we are in the process of innovation and testing and implementation of ideas, and we are still trying to build a program that it really, is whole different business than traditional health club business and that's the ultimate goal of this company, to build a truly different type of business, we call healthy way of life company. That requires us to think about our business from the point of view of our customer not the gym customer, but really a customer who is interested in running, a customer who is interested in yoga, a customer who is interested in weight loss and so on.

We are super excited about what we are doing. We are very, very comfortable with our strategy and the early indications of adoption by both team members and members who are discovering what we are doing in this space. Our goal, best way I can put it, is to achieve the guidance that we give you guys. Mike and I, since the day we have made a commitment to go public, we have had in mind to deliver what we promise to the street in terms of guidance. Then if we're trying to innovate new things, test things, test new things. We tried to do that in the context of making sure we still hit the numbers we guide for.

With that said, we are not 100% capable of estimating exactly you know we are going to invest more or we are going to stop investing. We are still trying to figure out what are the best ways to achieve that satisfaction for each group. Ultimately this will lead us to a company that is much more evolved than everybody thinks about it in terms of just the best gems in the United States or something like that.

All I can say to you is that it is not 100% possible to tell you we will lap that because it is not just an increase in adding a few hours for certain programs. We are actually building businesses that may have potentials outside of the four walls of our clubs as well. While we were making that early investment, we are just paying for it with the over performance in our day-to-day operation, not paying for it risking not hitting our numbers.

Brent Rystrom - Feltl & Company

Sounds like it will be dilutive from an expense prospective sometime as it become creative by the back half of next year?

Bahram Akradi

It seems to be dilutive if you are looking at it from a margin standpoint. We might find ways to ramp up revenue as we are building some new business model and new business opportunities in each of these categories. Like any new startup you do not expect to be immediately be profitable with some of those and some of them will be immediately profitable. Our goal is to grow our membership base, our customer base, and grow our revenue. Our goal is to hit the EPS that we guide you to and hopefully beat it but meanwhile we want to make sure we have the opportunity that latitude inside of our four walls of our corporate office to make decisions that for the ultimate good of the company and our customer.

Operator

Our next question comes from Ed Aaron, RBC Capital Markets.

Ed Aaron - RBC Capital Markets

Bahram, you mentioned earlier in the call when you are talking about the responses that you could have to the current environment that more on out that you can go with to reduce the dues and prices like everyone else what you said and just kind of prompted me to think of just from an industry perspective what you are really seeing on that front? Are you observing a lot of deep discounting by your peers right now?

Bahram Akradi

I do not want to speak for single club operators and/or small regional operators, but on a national basis the bulk of people in the health club or gym business are moving towards less programs and less services. Regardless of what their rack rate may be you can buy a membership between $15 and $20 a month a member. We have studied that market, we know that market, I had designed clubs two-three years ago, we could have executed in that space and opening boxes that would obviously do the same thing. We feel that we can build better, more attractive 15,000 to 20,000 square feet boxes than anybody else and have more cost effective ways. It is a space where there is no barrier to entry and you are ready of deviating from your culture of being you know a top notch customer service but then you have need to manage be able to a kind of cost managing company. That is not the culture we build here.

We chose very firmly we are not going to do what we see other people are doing and we see other players giving a four people a $60 month combined rate for a four people. We see people selling memberships for nearly two years for 300 bucks online and we really do not feel like that is the space that we are in and we do not need to kind of play the same set of rules.

Operator

Mr. Heller, there are no more questions at this time.

John Heller

Thank you for joining our call today. We look forward to reporting to you our fourth quarter 2010 results which tentatively has been scheduled for Thursday, February 17, 2011 at 10:00am Eastern. Until then we appreciate your continued interest in Life Time Fitness. Thank you and good bye.

Operator

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

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