Life Time Fitness' CEO Discusses Q4 2010 Results - Earnings Call Transcript

Feb.17.11 | About: Life Time (LTM)

Life Time Fitness (NYSE:LTM)

Q4 2010 Earnings Call

February 17, 2011 10:00 am ET

Executives

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

Michael Robinson - Chief Financial Officer and Executive Vice President

John Heller - Senior Director of Investment Relation and Treasurer

Analysts

Michael Lasser - Barclays Capital

Sharon Zackfia - William Blair & Company L.L.C.

Brent Rystrom - Feltl and Company, Inc.

Gregory McKinley - Dougherty & Company LLC

Christian Buss - ThinkEquity LLC

Brian Nagel - Oppenheimer & Co. Inc.

Operator

Good day, ladies and gentlemen, and welcome to the Q4 and Final Year 2010 Life Time Fitness Earnings Conference Call. My name is Jasmine, and I'll be your operator for today. [Operator Instructions] I would now like to turn the conference over to your host to Mr. John Heller, Senior Director, Investor Relations and Treasurer. Please proceed.

John Heller

Thanks,Jasmine. Good morning, and thank you for joining us on today's conference call to discuss the fourth quarter and full year 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 fourth quarter results, we have filed a Form 8-K with the SEC, which also includes the press release. On today's call, Bahram Akradi, our Chairman, President and CEO will discuss key highlights from our fourth quarter and our operations. Following that, Mike Robinson, our CFO, will review our financial highlights and provide our financial guidance for 2011. 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, Jasmine will provide instructions on how to ask a question. I will close with a tentative date of our first quarter 2011 earnings call. Finally, a replay of this teleconference will be available on our website at approximately 1:00 p.m. Eastern time today.

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

Bahram Akradi

Thanks, John. I am pleased to be here to share my thoughts and perspective on our 2010 results and our big picture objectives for 2011. I want to start by reviewing the goals we set last year for 2010. We wanted to achieve positive same-store sales in our mature centers in the second half of the year, with a stretch goal of getting there in the second quarter. Also, we set a goal for approximately 38% attrition, with a stretch goal of 36%. Mature same-store sales turned positive in the second quarter of 2010, one quarter ahead of our normal plan, and remained positive in both the third and fourth quarters, finishing the full year at a positive 2.3%. Our attrition rate for the year dropped dramatically from 40.6% a year ago to 36.3% for 2010, strongly beating our plan of 38% and just short of our stretch goal. We will continue our intense effort to meet and sustain attrition at our long-term goal of 36% or better.

Almost all of our financial and business metrics showed meaningful improvement this year. We grew our memberships, square footage, average revenue per membership, operating margins and cash flow from operations. The strongest area of growth in the company came from our in-center businesses, which grew over 14% versus 2009. Our management team is very proud of these achievements. One year ago, on this call, we gave you our outlook for 2010. The high end of our guidance at that time was $895 million of revenue, $79 million of net income and a $1.95 of earning per share. We exceeded all three. We delivered $913 million of revenue, $18 million above the $895 million we established at the beginning of the year. Excluding the effect of the non-cash compensation expense, we achieved $84.1 million of net income. We also achieved $2.08 of earning per share, including the non-cash compensation expense versus the $1.95. We took this non-cash charge because we now feel it's likely we will meet or exceed the first 50% EPS hurdle in the performance-based restricted stock incentive compensation plan granted by the board in June of 2009. This grant was designed deliberately to be possible but very challenging to achieve. I'm extremely proud of our team and their relentless effort to get us to the point where now we feel achieving this metric is likely. We believe these positive results are directly related to the hard work of our team members and the strategies we deployed over the past two years.

We have repositioned the company to succeed in what we think will continue to be fundamentally different consumer environment than what we have enjoyed since the mid-90s. Instead of retreating, we have gone on the offensive. We have added value to our offerings rather than lowering our dues and cutting services. We have continued to invest in our buildings and equipment to keep them in like-new conditions. We have invested heavily in our programming and events to make them the best in class rather than offer the same things year after year.

And most importantly, we have focused intensely on engaging our members to identify their area of interest within the club, and then connecting them to our offerings in those areas. We believe so strongly in this that we have aligned our daily operating processes and our team members' objectives around this initiative. It is a combination of these things and many more that makes Life Time a category-defining, Healthy Way of Life company.

As we look ahead, we won't stop driving for excellence. We have a winning business model, whether if it's basic fitness, personal training, spa or cafe services or a fun day at of the pool, we will continue with concentrated and dramatic focus to provide the very best in what people have come to expect from us.

Now, let's talk about the future. For 2011, we have four major area of focus. In no particular order: One, achieve and maintain an investment grade-like balance sheet and credit profile. We are primarily focused on the ratio of debt to EBITDA being at 2:1. At the end of 2008, we implemented initiatives to drive to this in 2011 and we are well on our way to accomplishing this, hopefully by the middle of the year. Two, $1 billion in revenue for 2011 is just outside of the high end of our guidance. As you saw in our press release earlier this morning, the high end of our revenue guidance is $990 million. This is a very challenging goal. To drive to this number, we had to push everything as far as we could, while still maintaining an achievable plan. After it was all said and done, staring at a $990 million number, all we could think is that we had to set up a stretch goal to achieve the $1 billion revenue milestone in 2011. While it is by no means our revenue guidance, we will do all within our power to achieve this $1 billion milestone this year. Three, the external manifestation of Life Time as a Healthy Way of Life company, which internally we have been working on tirelessly for the last 3 1/2 years. As a Healthy Way of Life company, we help people achieve their health and fitness goals and objectives by doing whatever they are really passionate about: from yoga to weight loss, from triathlon running and cycling events to wellness programs for corporations, from nutritional foods to full services spas, from life clinic to ultimate hoops, which is our basketball entity; you can do all at Life Time, the Healthy Way of Life company. Four, re-establish a higher growth rate. As I have mentioned to you on the past calls, we have never stopped seeing ourselves as anything other than a growth company. As we reflect on the future, 2012 and beyond, as a Healthy Way of Life company, we believe we have many opportunities to grow Life Time at a double-digit rate on all fronts: Revenue, EBITDA and net income. With that, I now turn it to Mike Robinson, our Chief Financial Officer. Mike?

Michael Robinson

Thanks, Bahram. As Bahram indicated, we had a good year, and I'd like to provide you with some additional details on that performance and our financial results. Let me talk first about the non-cash performance share-based compensation expense we took in the fourth quarter. As we discussed in the last few calls, in June of 2009, a compensation committee of our board directors approved a grant of a long-term performance-based restricted stock to serve as an incentive to our senior management team to achieve certain EPS targets in 2011 and 2012. These EPS targets were intended to be aggressive goals in excess of the baseline expectations.

In the fourth quarter, the company determined that the 2011 EPS performance criteria required for vesting of 50% of the stock, or approximately 450,000 restricted shares was probable. As a result, we recognized a cumulative non-cash performance share-based compensation expense of $5.6 million in the quarter, related to these performance shares. This cumulative expense represents the pro rata portion of the total estimated share-based compensation expense from the date of grant.

We also anticipate recognizing the remaining portion of the non-cash performance share-based compensation expense of approximately $4 million or approximately $1 million per quarter in 2011. We currently believe achieving the remaining 50% target in 2011 or 2012 is not probable. Therefore, we did not take compensation expense related to the remaining 50% of this performance-based restricted stock grant.

Now, let me talk about attrition and retention. For the quarter, our attrition rate was 9.9% as compared to 10.8% 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 memberships who elect to cancel during their 14-day trial as members for attritions. For the year, our attrition rate fell from 40.6% to 36.3% this includes approximately 130 basis points of improvement related to the methodology change I just mentioned. With our attrition rate improvement, in the fourth quarter we increased the estimated average life of a membership from 30 to 33 months. We've stated that in our internal long-term goal for attrition is 36%. While we're pleased with what we accomplished in 2010, we expect improvement will get increasingly more challenging as we anniversary comparisons that are at more normalized levels. Our goal for 2011 is that we will see attrition improved by year end just slightly under 36%.

In Q1, we actually expect to see attrition increase slightly from last Q1, due to price increases we put in place in a few areas around the country. As you would expect, this is a normal response to price increase. We finished the year with 612,556 memberships. This was a 5.8% increase from the fourth quarter of 2009 or just under 34,000 net memberships added. Sequentially, we had a decline of approximately 10,000 memberships from Q3. Excluding new center openings and ramping centers, it's not unusual to see a slight loss of net memberships during this time, driven by the late cancels from the summer pool season. Although we certainly would have liked to see no decline, it was still a good improvement over the performance we saw a year earlier.

For the fourth quarter, we grew the net balance of Flex Memberships by approximately 7,000 units to approximately 70,000 units. Last year, we provided some additional insight about January. We told you that we had an incremental 18,000 memberships in January 2010 as compared to a 20,000 net add in 2009. For January 2011, we added approximately 21,000 net memberships. We're definitely pleased by this. A significant portion of this net membership growth came at discounted enrollment fees, and that tells us the consumer is still very discerning. Strategically, remember our main focus is to drive incremental dues revenue in the incentive revenue that follows. So a $50 to $100 reduction in enrollment fees, compared to about a $4,000 in average spend over the average life of a membership is a small concession.

Our membership activity led to total revenue of $223.7 million for the quarter, which is up 9.8% from last fourth quarter. For the year, we generated $912.8 million of revenue, which was a 9.1% increase from 2009.

Our main revenue drivers included the number of open centers at December 31, 2010, was 89 compared with 84 at December 31, 2009. Of the 89 centers, 54 or 61% are our large current model and 69 or 78% of all our centers have been over opened three years or more, which we classify as mature centers. We operate 8.8 million square feet of fitness facilities.

Our membership dues revenue grew 7.4% for the quarter, which outpaced our membership growth of 5.8%. Our goal is to have continued dues growth in excess of membership growth. We accomplished this by improving our average dues via selling more memberships at higher-priced centers, providing more value upgrade opportunities and upgrading more memberships to couples and families. We had very little price increase in 2010 and our powerful dues annuity stream counts for 66% of our revenue. The price increases I spoke of earlier that we put in place in early 2011, affected about 20% of our membership base and will have a net effect of an increase of just under 1% in average dues across our system.

In-center revenue grew by 16.3% in the quarter and 14.4% for the year. The growth was across the board, led by 20% year-over-year growth in LifeSpa and 18.4% growth in member activities. We're strategically driving this growth through lower price points in many services to drive volume and enhance the member connectivity and involvement, which we expect to improve member retention.

We are pleased that our revenue metric showed improvement during the quarter. Our fourth quarter same-store sales were 5.9% and our 37-month mature same-store sales were up 4%. For the total year, we experienced a 5% increase in same-store sales and a 2.3% increase in our 37-month mature same-store sales. With respect to revenue per membership, in the fourth quarter we generated $362 per membership, which is up 3.3%. For the year, we generated $1,475 of average revenue per membership, which is up 4.3%.

In-center revenue per membership of $104 was up 9.9% in the quarter. For perspective, in the fourth quarter of 2008 and 2009, we were at $93 and $95 respectively of in-center revenue per membership. We believe the improvement over both of the last two years is evidence of our connectivity with our members, as well as new programs and changes in our program pricing. For the year, we experienced a 10% in increase from $400 to $440 per membership.

I'd like to move to some discussion on our cost structure. Overall profit margin in Q4 decreased 320 basis points to 15.5% from 18.7% in Q4 2009. Excluding the effect of the non-cash performance-based restricted stock compensation expense, operating profit for the quarter decreased 70 basis points to 18%. As expected, this margin reduction was driven primarily by increased pre-sale expenses, primarily marketing. For the Centennial center open in December and the Syosset, Long Island center opened in January. In addition, as you may recall, we absorbed costs related to the company's inside expo Bahram talked about on the third quarter call. We clearly feel this is a good investment as it brought over 500 of our employees together to focus on building a Healthy Way of Life growth initiatives that we are driving for the future.

For the year, operating margin decreased 20 basis points to 17.6% from 17.8%. Excluding the effect of the non-cash performance-based restricted stock compensation expense, operating profit margin for the year increased 40 basis points to 18.2%. In 2011, we expect operating margins to improve slightly, even as we absorb approximately $4 million of additional non-cash compensation expense.

Center operating costs were up about 50 basis points for the fourth quarter, including approximately 50 basis points or $1.2 million of non-cash compensation expense related to the performance-based restricted stock plan. Other center operating costs improved, driven primarily by cost in excess of enrollment fees which were more in line with the same costs in Q4 2009. Center operating costs were up about 100 basis points for the year, including approximately 10 basis points or $1.2 million of non-cash compensation expenses.

Other center operating costs were up due to three primary drivers: First, we continued to incur higher membership acquisition costs as we use lower promotional enrollment and administrative free pricing to stimulate new member demand. Total costs in excess of enrollment fees were $14.9 million in 2010, compared to $8.4 million in 2009. Second, our strong in-center revenue growth comes at lower margins. And finally, we continue to make investments in our centers to enhance the member experience and improve retention. These investments range from expanded hours of operation for various programs, to more fitness class offerings, to reward and retention infinity program like myLTBUCK$.

In 2011, we expect Center operating margins to improve slightly, as we anniversary some of our member engagement initiatives. We also don't expect as much margin pressure from the in-center revenue growth. Based on early 2011 results, we do expect continued pressure from costs in excess of enrollment fees, but are driving for them to be at least flat compared to last year.

Marketing and advertising costs were up 60 basis points for the quarter, due primarily to pre-sale marketing for the Centennial and Syosset centers. For the year, these costs were down 20 basis points. For the first three quarters, we kept these costs lower to help offset our planned use of lower enrollment fees. In 2011, we expect marketing costs to be up as we invest more in member retention initiatives including myLTBUCK$, as well as our in-center and corporate businesses.

G&A was up 210 basis points for the quarter as a percent of revenue at 6.9%. This includes approximately 200 basis points or $4.4 million of non-cash compensation expense related to the performance-based restricted stock grants. The other dollar increases in G&A are a reflection of some investment and overhead structure to help drive the retention and connectivity initiatives at our centers. Initiatives underway to grow our Healthy Way of Life-related businesses and the cost of the expo I mentioned earlier. G&A is 10 points higher for the total year, driven by approximately 50 basis points or of the $4.4 million for the non-cash compensation expense charge. In 2011, we expect G&A expenses to be up, driven primarily by the non-cash compensation expense I spoke about earlier.

Other operating expenses was up 90 basis points for the quarter, primarily as a result of costs associated with acquired businesses. For the year, these costs were flat as a percent of revenue. In 2011, we expect other operating expenses to increase as our corporate business initiatives, such as events and the total health continue to grow. We continue to see significant leverage in depreciation and amortization as we continue to grow revenue well ahead of square-foot expansions. These costs were down 80 basis points for the fourth quarter and 70 basis points for the year.

For 2011, we expect depreciation expense to represent a slightly lower percent of revenue as our age mix improves.

Interest expense net of interest income decreased to $6 million from $7.3 million last fourth quarter, and was down sequentially from $6.8 million for the third quarter of 2010. This decrease in interest expense reflects our continued debt reduction in the quarter and the benefit from low variable interest rates on our revolving line of credit. In 2011, we expect interest expense to be down slightly from total year 2010 as continued debt reduction is offset by some expected rate increases later in the year.

Our tax rate for the quarter was 39.1%, down from 40.9% last Q4. For the year, our effective tax rate was 39.8% for 2010 and 39.6% in 2009. We expect our effective tax in 2011 to be slightly above 40%, driven by increases in nondeductible expenses.

That brings us to net income for the quarter of $17.6 million, including a $3.4 million after-tax effect from the non-cash compensation expenses. Excluding that charge, net income from the quarter would have been $21 million, representing a 14.5% growth over last fourth quarter. For the year, net income totaled $80.7 million, including the non-cash compensation expense mentioned earlier. Excluding that charge, net income for the quarter is $84.1 million, up 16.2% over 2009.

Weighted average diluted shares for the fourth quarter totaled 40.6 million shares and 40.4 million shares for the year. At the end of the year, we determined that our diluted share count calculation for the first three quarters was too high. We updated this calculation as we closed out the year. The resulting slightly higher EPS in each earlier quarter, plus rounding accounts for the $0.02 difference in total year EPS from the sum of the EPS reported each quarter. We expect our average diluted share count to increase about 2% to 3% in 2011. Overall, we achieved diluted EPS of $0.43 in the fourth quarter, including $0.085 for the non-cash compensation expense. For the year, we achieved a $2 of diluted EPS including the non-cash compensation expense. Excluding these expenses, quarterly EPS was $0.52 and the total year was $2.08, nearly 15% growth over 2009.

Our next topic will be the capital structure. As in 2009, this was an area of success for our company in 2010 as we continued to de-lever the balance sheet. Our cash flow from operations totaled $46.1 million for the quarter, compared to $47.7 million last fourth quarter. Year-to-date, our total operating cash flow totaled $192.3 million, this is up $6 million from 2009's performance. We've now generated eight consecutive quarters of free cash flow. For the year, we generated $60.6 million of free cash flow, of which $600,000 came in the fourth quarter. This excludes approximately $16.7 million in cash spent on acquisitions this year.In the fourth quarter, we acquired a small events company in Colorado and a swim school curriculum to go along with the purchase of the fitness center in Huston, a Yoga Teacher Training business and two iconic events businesses we purchased earlier in the year. The $60.6 million of free cash flow is approximately $1.50 per share of free cash flow for the year.

We continue to focus heavily on our capital structure cash and debt availability. We paid down $19 million of debt in the fourth quarter and approximately $45 million in the year. We paid down approximately $100 million in debt over the last two years. As of December 31, we have $366 million outstanding, including letters of credit on our $470 million revolver. That leaves approximately $116 million in cash and revolver availability. Our net debt to total capital came down to 41.7% at the end of the quarter compared to 47% at the beginning of the year. Our covenant calculations for the quarter continued to show significant room versus our covenant limits, and we remain well-positioned for the debt maturities near-term.

As Bahram stated, our long-term strategy is to attain and hold investment rate-like leverage ratios and credit metrics. For 2011, we plan to continue to de-lever the balance sheet until we reach the debt-to-EBITDA ratio of approximately 2:1, sometime in the second half of the year. From there, we plan to become free cash flow neutral and channel our excess cash to growth. By the way, as of December 31, 2011, we have a 38 owned facilities, with an asset cost on our balance sheet in excess of $800 million.

Regarding capital expenditures, we paid for approximately $32 million [sic] of CapEx in 2010 to open three large centers and to maintain our portfolio of clubs. This was comprised of approximately $101 million for growth and $31 million for maintenance and infrastructure support.

In addition to the cash we spent on CapEx, our construction accounts payable balance increased approximately $14 million from year-end 2009, reflecting increased activity at the end of 2010.

We currently plan to open three large centers in 2011. For the centers we plan to open in 2011, we opened our Syosset, New York which is located just east of the city on Long Island. We opened that center in January. And this center is off to a very good start. Our other two centers located in Colorado Springs and Summerlin, Nevada will both open in May.

We've also started construction on our first center in Canada, located in the Toronto market. We expect this center to open in the first half of 2012. For 2011, we expect to spend approximately $150 million to $175 million for CapEx to open our three large centers, commence construction of the 2012 centers and maintain our portfolio clubs. This will be comprised of approximately $110 million to $125 million for growth, and $40 million to $50 million for maintenance and infrastructure support. Just as we did in 2010, we continue to look for opportunistic acquisitions that will expand our Healthy Way of Life offerings.

A few balance sheet variances to note. Current maturities of long-term debt decreased $70 million from the third quarter. We re-classed this long-term debt as we intend to repay this by utilizing our revolver, which is classified as long-term debt. You will notice that we split out goodwill from other assets in the balance sheet. The approximately $9 million increase in goodwill comes from the acquisitions we made in 2010. And the $4.5 million increase in other assets is also driven by the acquisitions made in 2010.

With that, let me discuss our overall financial guidance for 2011. Different from prior years, we've incorporated stretch goals into our income guidance. As a management team, we've challenged our self to set stretch targets above our baseline plans and to work our tail off to meet or exceed them.

We expect our revenue will grow $970 million to $990 million or 6% to 8%. We anticipate our net income will grow approximately $91 million to $95 million or 13% to 18% growth. Excluding the impact of the non-cash compensation expense in 2010, we expect net income to be $93.5 million to $97.5 million. We expect our diluted EPS will grow to $2.19 to $2.29 per share. Excluding the impact of the non-cash compensation expense in 2011, we expect diluted EPS to be $2.25 to $2.35 per share. For the first quarter of 2011, we expect revenue growth consistent with the annual guidance range, and we expect net income growth to be consistent with guidance before taking into account the non-cash compensation expense of approximately $1 million in the quarter. That concludes our prepared remarks regarding the fourth quarter and full year 2010 financial results. We're pleased to take your questions now.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Michael Lasser with Barclays Capital.

Michael Lasser - Barclays Capital

So as you reflect on 2010, can you quantify how much of the revenue growth last year was driven by the improvement in the attrition rate? This will help us understand what the obstacle might be from that in 2011.

Bahram Akradi

The attrition rate directly impacts our dues revenue growth, obviously. It's just simple. You get more membership or you don't lose as many memberships. As dues are 66%, 67% of our revenue, you can imagine how much of the impact that is there. And again, increased memberships will impact your personal training and in-center revenues. So the bulk of the impact really could be staying directed to attrition. So I don't know how to break it up for you any more than that.

Michael Lasser - Barclays Capital

So the formula is going to be a little bit different in 2011. It’s going to be more about new membership growth, and what you're suggesting is that, given the results in January that, that looks promising along with price increases. Is that the right way to think about it?

Bahram Akradi

Let me talk about price increases. We, over the 2008, '09, early part of 2009, we introduced some memberships that were at a discounted rate to our basic rack rate, whether if it was a students, people under age 26 or people coming in from other health clubs that they shutdown with lower dues, we allowed them easier entry and then gradually raising their dues. In 2010, beginning of the year, we stopped doing any of those things and by end of 2010, we plan to increase these rates for 2011 to some level. Not all of these members are caught up to the normal rack rates but there were significant increases in some of, 20% and 30% increases on their dues from what they had come in initially for. So we don't have any intention of any sort of a mass scale dues increase on our rack rate. But we still see opportunities of correcting throughout the year. Some of those members who are paying below the normal rate and given them much closer to everybody else so that there is a full balance there. There is opportunities there. We can grow that. The memberships -- we intend to grow the membership. Now, here's the deal, at a 36% or better attrition rate and similar memberships sales that we had last year, we will actually net positive on the membership count. So in order for us to increase membership, we don't have to sell more memberships than last year on average per club. We just have to maintain the attrition rate at that 36% or better, and we will gain some memberships throughout the year. Does that explain that for you?

Michael Lasser - Barclays Capital

It does. In the last question, what are you looking for in the environment to give you comfort that you will be able to then raise prices? And then when can we expect that to occur?

Bahram Akradi

It really is more -- our pricing is based on the demand for each club. So as we look at our facilities, some locations, we can see that they are just basically being overran with customers. We went into beach with Ohio last year way too conservatively. We priced it initially at $49 per month. And we had more memberships than we really should have gotten coming in. So early in the quarter last year, we changed the price to $59 a month. Looking in the rearview mirror, maybe we could have gone to $69 a month. So that allows us the opportunity, as an example, in that particular club to move the rack rates to a platinum membership $69 or $79, and gradually bring the existing members up to that. So I do not want to give you a answer about all of our clubs in the system, a generic answer, because I don't allow our team members to think about our company as a blanket. We think of every asset individually. We evaluate that asset. We decide what -- overall, I don't see anywhere in the country where we need to take the price down. And I see opportunities probably in a handful of clubs throughout the year, that we would transition them from one price membership to another one. Does that answer your question?

Michael Lasser - Barclays Capital

It does.

Operator

Your next question comes from the line of Paul Lyand [ph] with Morning Star.

Unidentified Analyst

I just wanted to ask about CapEx. And I think you mentioned $110 million to $125 million growth CapEx with three large clubs. Given the construction environment and commercial real estate environment, I guess I would have thought it would've been just a little bit lower. Is there something else going on in there, and can you comment going forward on whether what the average cost CapEx per club will be?

Michael Robinson

When you think about that growth CapEx, you've actually got to think about that over probably a two-year period, because we've got cost coming in from the completion of clubs that we have that we're opening in 2011, and the cost going into clubs that we are constructing for future periods. So it's not -- I think the first part of it, you just looked at that and you said, "Okay, $110 million to $125 million or so, $130 million of growth CapEx. I'm going to divide it by three and I'm getting an average number." I would caution you not to do that because we're really combining the spend over a couple of years. That said, from a CapEx perspective, if you go back to the time we slowed down CapEx in 2009 or so, we still had some clubs that were under construction. And so as we move through 2010 and actually into 2011, some of those clubs were just finishing off, some of those clubs that we actually started in 2008. So we've got a little bit less incremental CapEx going into those. So it's not just as easy as taking a snapshot on that. With that, I want to -- like Bahram talked about, what we're seeing for costs and end class and things like that.

Bahram Akradi

So we're seeing better opportunities. And first of all, in the markets that we are more eager to open clubs, particularly the East Coast region, we tried three years ago, four years ago, and there just was nothing available that would be applicable to our desires. Now we're seeing more opportunities. With the first goal in mind of maintaining that 2:1 debt to EBITDA ratio which I am comfortable we can maintain. We also can start deploying more capital after the middle of this year to enhance our growth. So we are not really having our foot on the brake at all. We're looking for all great opportunities. Having said that, strategically, we have determined at this point, we do not want to accept any properties that in our mind are not A+ performance opportunities. So we will spend more money in more expensive markets and putting really the A performance type of clubs. But we have no limit. If we find five deals now that we could get into a contract, we would be signing the five deals. So we're in really, really good place from a financial balance sheet. We're exactly where we want to be. We can maintain this investment grade-like credit and enhance our growth. But to Mike's point, those are going to be -- we might spend $15 million, $20 million on buying land that will not be an open club for two more years from now.

Unidentified Analyst

So it could be choppy as the way it comes in and out for the future.

Bahram Akradi

Exactly.

Unidentified Analyst

And then a quick question. I realize it's small and probably early but on the events, how are you thinking about that right now? Is that something where you might replicate in other markets or you think of it just as a marketing expense right now to drive membership or drive connectivity to the club? Or do you see that as a good return on capital business in and of itself?

Bahram Akradi

First of all, I think of this now as purely as if one of the many Healthy Way of Life companies inside of our LTM. So the opportunity to build these events bring in the customers that want to do the event, maybe they're not members, and give them a first-class event. With the way we're managing building with those events, as well I want to emphasize that the consistent theme in the brand that has to be whatever the products are, they have to be the best in class, they have to be a top-notch experience with the customer and they have to be grand scale. So we're working on iconic events across the country. Like last year, we acquired Chicago Triathlon, it's the largest Olympic distance triathlon in the world with 20-some years of heritage. So not only it's a financially proper and appropriate acceptable metric for us that helps our company overall accretively, it also helps the branding and positioning Life Time as a Healthy Way of Life company. So we are acquiring and we are building. Once we acquire some of these things, we really don't think of them as an individual event. We think about them as a brand of its own and the opportunity to replicate some additional races from that one that we buy. So we're pretty excited. And it helps the connectivity. It enhances the Life Time member experience because they get priority registrations, et cetera, et cetera, which is kind of cool.

Unidentified Analyst

In Chicago, are you monitoring who is a member and who's participating, for example?

Bahram Akradi

Obviously, we know that detailed to the nth degree, yes. And I can't give you any stats right now because I -- don't ask.

Operator

Your next question comes from the line of Greg McKinley with Dougherty and Company.

Gregory McKinley - Dougherty & Company LLC

I wonder if you could talk a little bit about any changes you're seeing in the value of the new memberships that are signing up. For example, you talked about 21,000 memberships in January. Are you seeing favorable or unfavorable mix shift in terms of price points Onyx, Platinum, Gold, Family, Couple, Single? Anything that could be indicating a change in value of the new memberships coming into the system?

Bahram Akradi

Not really. I mean we obviously, every day, every week, every month, we are looking at the average dues that we sell versus the overall average dues of the company. And obviously, our main driver is to drive the total dues for the company. The second thing is we want to make sure that we don't deteriorate our average dues too much. But everything is right within the ballpark that we needs to be right now. As Mike mentioned, we noticed by middle of the mouth that we really need to enhance the promotion to get the results we want. We did it. We got exactly the results we were looking for. We're very excited about the impact we've had on our January, and as you guys can do the math, the number of a membership gain in January is fundamentally the most critical membership gain month for the year. So having a great January, it's monumental. And so we had a great deal. But all metrics are within from the average dues to whatever, they're within the ballpark.

Unidentified Analyst

And then, could you talk about a little about -- I know you mentioned you're pleased with Syosset so far, any additional color you can give us there in terms of how many members you've seen relative to your initial ramp plans or any color on how due structures there versus the rest of the system?

Bahram Akradi

As you know, we don't give you guys exact detail, club-by-club information for not only other reasons but also competitive standpoint. All I can say to you is that those facilities out on the East Coast are expensive facilities from the land acquisition, construction, operations. So obviously we expect great results on the sales side and all I can tell you is that at this point, we are more than satisfied with what's happening out there. My main focus, if that will tell you anything, is only one thing. All I care about is a Diamond level, which what we consider Four Season, Ritz Carlton's class of experience for our customer is all I care about. All I want is for our customers to get the best-in-class experience that they could possibly imagine. The results are great.

Michael Robinson

Greg, the price point on that Diamond that Bahram is talking about is $119. And that is where we start -- that's the highest price point we have across the system.

Operator

Your next question comes from the line of Brian Nagel with Oppenheimer.

Brian Nagel - Oppenheimer & Co. Inc.

A couple of questions if I could. First off, with respect to the performance-based restricted stock, clearly your results improved throughout the year, but as you look at -- as your determination of what made this now that achieving this goal is probable, is there one or any -- is there a short list of specific factors that led to that assessment in your overall results?

Michael Robinson

No. It's the accumulation as you go through the year and you look at it, and how we're positioning ourselves. You've got to look at dues and dues growth membership and membership growth, what's going on in the profitability of it. And ultimately for us, as you gauge and we looked at it in the fourth quarter and we looked at the member retention initiatives and how they were grabbing themselves. We looked at some of the things that we've been doing, such as of the events businesses and the accomplishments there as you got into the fourth quarter in that. It just built the confidence that we were now on a trend line to achieve that metric.

Bahram Akradi

Brian, I want to add a little bit of color to your question. When middle of 2000 -- we started talking about this in early 2009, as you can imagine what the condition of the market was and the mood everywhere was. Our Board made a determination that they wanted to put a performance-based incentive to satisfy two things, a longer-range incentive plan for the management to make sure that people not only just work hard, would have something to look for, but most importantly, it was well beyond the outside range of our guidance. If you took what we thought we would do in 2000 out, the high end of our range in 2009 and 2010 at that time and look at our capital planning model for five years, this was well outside of that. At the time we put this in, we really thought that in order for us to get there, we would have to have steady performance above the plan, quarter after quarter after quarter which is not too difficult to do one quarter here or there. But to do it one quarter after another for 10, 12, 13, 14 quarters, that makes it less probable. So it was possible when we put this thing in place but definitely not probable. Therefore, we made a determination we would not take a charge until we saw that this thing becomes actually probable and the time that we could see this becoming an actual probability was after we looked at our 2010 performance and looking into doing the budget for 2011. And then the important part of that is really coming into end of 2010 and the first month of 2011, month and half, and see how we are weathering against our stretch goal. And I'm not talking about the billion dollars but the high end of our range. And so once you start looking at that, that starts becoming, okay we are close. We still have to perform at the very, very high end of our stretch goal for this to happen, our high-end of our goal. But we have the confidence based on the team's performance and commitment that by committing to that level of performance for four more quarters, now we have the probability to achieving that.

Brian Nagel - Oppenheimer & Co. Inc.

So as you mentioned when you outlined your guidance for 2011, you mentioned stretch goals there too. So there’s stretch goals then in an excess of the numbers you provided or the guidance you provided with us today?

Michael Robinson

The higher end of those income goals are stretch goals for us. We've got to perform and deliver at and above the levels that are in our baseline plans.

Brian Nagel - Oppenheimer & Co. Inc.

The 21,000 members in January, how did that compare with last year? You may have given this number so apologize, but how did that compare within 2010?

Michael Robinson

2009, we had an incremental 20,000 memberships. 2010, we had incremental 18,000 memberships, 2011, an incremental 21,000 memberships.

Bahram Akradi

It was very strong, that's all I can tell you. It was a very, very strong month for us. And the key is, I want to -- it's not all good. There's good and bad in this. The bad side of this is we gave up the little bit, as I mentioned, as a percentage, it's only like a couple of percent, it’s not a lot of give on that enrollment fee, the admin fee. However, we think that there is correlation between those people who pay at least $80 or $90, $100 or the ones who pay $10 or nothing for admin fee in terms of attrition. However, all the activities we have put in place over the last several years are just starting to reach to what I call the leap stage, creep stage from a sleeping stage. We expect to have a much, much more system-wide connectivity programs for the members to offset some of these members who come in with basically no enrollment fees.

Operator

Your next question comes from the line of Brent Rystrom with Feltl and Company.

Brent Rystrom - Feltl and Company, Inc.

Mike, on the share release as far as the divesting of the 450,000 shares, can you say if the EPS target to hit that, is that in the 225 to 235 range, or is it above that?

Michael Robinson

It's in it.

Brent Rystrom - Feltl and Company, Inc.

And then secondly, from the timing on acceleration of growth, obviously it sounds like it's in summer of 2011 that you'll be thinking about that with the debt to EBITDA goal. Are you still looking as employment levels as a big factor, because when we talked probably a couple of months ago we were kind of talking about the debt to EBITDA. We were talking about employment levels and we were talking about a term in the center expense levels, and it kind of seems like you got two those in hand. Maybe the employments is the one you are still waiting for, is that a fair assessment?

Bahram Akradi

Not really, Brent. This is Bahram. We had focused on, as I mentioned in the remarks, we've been working on building our company so that we think we're prepared to perform and grow the current condition. So we want to grow -- we want to now kind of step on the growth even if the unemployment is at the 9% to 9 1/2% rate it is today. So we have really solidified our model. We have gotten ourselves to exactly where we want to get to on the financial metrics. Now we keep an eye on the unemployment. If the unemployment goes to 7%, obviously, I think it will start having additional positive effect on our numbers, But I think we're really in good place now to take the control of our growth based on the fundamentals of our business in current micro conditions.

Brent Rystrom - Feltl and Company, Inc.

Is it possible, Bahram, that this could be something that come in play late in 2011? Or is it likely the acceleration wouldn’t show up until 2012?

Bahram Akradi

Well, let me give you a perspective. As you know, the gestation time for our critical boxes, things like Syosset, are very long. So to think that we can have, all of a sudden, more things purchased entitled and on the pipeline is not necessarily -- I wouldn't go out and say, "Oh God, they're going to finish five clubs in 2000." However, I wanted to challenge you guys to think a little more to the fact that we were going to grow as a Healthy Way of Life company. We are committed to what I said to you. We want -- I am, Mike is, the rest of this organization is. We want to grow in the double-digit numbers, and now we are prepared. We're solid. We're ready to go. And we have many, many opportunities to grow. I do not want to get into those details today.

Michael Robinson

Brent, I would argue that if you look even at the growth rate, the 9% growth rate in 2010, you're actually seeing some of the manifestation of our drivers right now. Our square footage growth is only about 4 1/2% or so, or in the 4% range. But you're seeing us do things like grow our Events business. You saw the top line in the Corporate business is growing. So I would tell people that look for a little bit where -- like Bahram was saying, a little bit more well-rounded growth rather than the significant waiting of that growth coming from new centers.

Operator

Your next question comes from the line of Christian Buss with ThinkEquity.

Christian Buss - ThinkEquity LLC

And I guess I was wondering if you could provide some perspective on what your assumptions are about the overall demand environment over the course of the year within your guidance?

Michael Robinson

The demand is -- we'll break it down a couple of ways. We still expect that the customer, the consumer, is going to be discerning, okay? So we just have seen that. We've seen that for the last eight or nine quarters, especially in new membership additions. So new membership additions, we got to work very hard for. We've had to work very hard for them in the past. That's inherent in the guidance. So that means that we've got to continue to run for quite a bit of a promotional discounting and enrollment fees, things like that. And that also means that we're going to continue to see costs in excess of our enrollment fees. Beyond that, we've seen really good results in our retention initiatives and the member engagement and the involvement initiatives, and that comes through with the growth we've seen in our in-center businesses. I mean, we grew the in-center businesses on a per-membership basis, averaged 10% last year. Frankly, we don't expect that, that 10% is a sustainable number. High-single digits, yes. And that's more inherent in what's built into our budget on a go-forward basis.

Bahram Akradi

Let me add to what Mike said to your question, as well. If you look at our 90-plus locations, there is really maybe a handful of locations at any given time where you feel like they're going to get the membership without having to go out and get it and work your tail off to keep them. The other 85, we have to work hard to get the new membership counts and we have to work hard to make sure we don't give up any one member that we don't have to, to achieve our results. So I re-emphasize Mike's sentiment that all of what we think is happening at Life Time right now is truly results of intense focus on achieving our results and none of it is just falling into our hand just because the market's good. Does that answer your question?

Christian Buss - ThinkEquity LLC

It does. On your newer centers and your mature centers, could you talk a bit about where you are from a productivity standpoint and where you would like to be exiting 2011?

Michael Robinson

I'll give you -- the main productivity measure that I would probably point to now is what's our occupancy and utilization against the target occupancy. And we're still in the mid- to low-80%. And our hope is to start driving that up a little bit. I think if we can move that 2% or 3%, that's a good, good result for us.

Bahram Akradi

And I can tell you that on the other side of your question, mature versus the new it’s a mix. You have some stores when the roll out, like Syosset, they are way ahead of where we would anticipate them to be, even with a good expectation from the particular market with the how many memberships they have at this stage of the club being open. Then you have some that are a little bit behind then the new ones. And then you have same thing on the mature stores, some are doing still well, they exceed the 10,000. And some struggle at 8,000. So it's a mixed bag on both fronts.

Operator

Your next question comes from the line of Sharon Zackfia with William Blair.

Sharon Zackfia - William Blair & Company L.L.C.

Just curious on the January new membership additions, was that improved traffic and conversion, or was it led by one or the other?

Bahram Akradi

It was both. We are attacking our marketing radically different. As you know, I have been driving the marketing division myself. We have built over the last year a phenomenal internal marketing agency. I don't know if you have had the chance to see any of the work that is coming out from branding to the look and feel of our marketing. But we're deploying all sorts of different strategies in there and we generated a lot of leads this January and we did a really nice job of conversion with those, the second half of the month.

Brian Nagel - Oppenheimer & Co. Inc.

Okay. And then a new unit development going forward. I mean, there are obviously some further big boxes that'll be closed and I'm thinking of Borders and the number of stores that are going to be closing over the next few months. I mean, are those the kind of things that you would consider looking at and say, like a Lincoln Park or areas like that with all these big three-story Borders?

Bahram Akradi

Yes, that's a great question, Sharon. We're looking at all opportunities in the really hot urban markets like Lincoln Park. Obviously, we look at both existing buildings and land, whatever we can find. And then we have to renegotiate the cost of the lease. But we are, as I told you before, we are seeing better opportunities and we're looking at really the A markets, so, say, let's call Lincoln Park one of those good markets we will be looking at and if we find the opportunity that fits our strength structure or acquisition cost, we're all over it.

Sharon Zackfia - William Blair & Company L.L.C.

And one last question for Mike, the stock-based compensation for 2011, should we just pro rata out like $1 million per quarter, or how should we think about it?

Michael Robinson

Yes, it's going to be -- it will come in pro rata. And $1 million a quarter is the right way to think about it.

Bahram Akradi

And of course, the numbers are the numbers and they are what they are. We emphasize that two things about that, Sharon, as we close the call with your question, is the fact that it is definitely a non-cash item; and two, all it means is that the Core business, the Base business is performing extremely solidly for us to had reached a place we can actually give those grants or take the expense bottom.

Sharon Zackfia - William Blair & Company L.L.C.

So that essentially mean earnings growth will be weighted more to the second half of the year, is that fair?

Michael Robinson

Yes, a little bit. And just to close that out, when you're modeling it, it's probably about 20% that goes into center operations and about 80% goes into G&A.

Operator

Ladies and gentlemen, this concludes our question-and-answer session for today. I will turn the call back to Mr. John Heller for any closing remarks.

John Heller

Thanks, Jasmine. Thank you for joining our call today. We look forward to reporting to you our first quarter 2011 results, which tentatively has been scheduled for Thursday, April 21, 2011, at 10:00 a.m. Eastern. That is also the planned date of our annual shareholders meeting. Until then, we appreciate your continued interest in Life Time Fitness. Thank you, and have a good day.

Operator

Ladies and gentlemen, this concludes today's conference. Thank you for participation. You may now disconnect. Have a wonderful day.

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