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Life Time Fitness (NYSE:LTM)

Q3 2011 Earnings Call

October 20, 2011 10:00 am ET

Executives

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

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

John Heller - Senior Director of Investment Relation and Treasurer

Analysts

Connor Browne - Thornburg Investment Management, Inc.

Dana Ford Walker - Kalmar Investments Inc.

Sharon Zackfia - William Blair & Company L.L.C., Research Division

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

Sean P. Naughton - Piper Jaffray Companies, Research Division

Edward Aaron - RBC Capital Markets, LLC, Research Division

Lee J. Giordano - Imperial Capital, LLC, Research Division

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

Michael Lasser - UBS Investment Bank, Research Division

Paul Swinand - Morningstar Inc., Research Division

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

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

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2011 Life Time Fitness Incorporated Earnings Conference Call. My name is Tony, and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. John Heller, Senior Director of Investor Relations and Treasurer. Please proceed.

John Heller

Thanks, Tony. Good morning, and thank you for joining us on today's conference call to discuss the Third Quarter 2011 Financial Results for Life Time Fitness. We issued our earnings press release this morning. If you did not obtain a copy, you may access it at our website, which is lifetimefitness.com. Concurrent with the issuance of our 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 and update our financial guidance for 2011. Once we have completed our prepared remarks, we will answer your question until 11:00 a.m. Eastern time. At that point in the call, Tony will provide instructions on how to ask a question. In order to give as many as possible a chance to ask a question, please limit yourself to only one question. I will close with a tentative date of our fourth 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 the differences between GAAP and non-GAAP measures in our earnings release and our Form 8-K. Other required information about our non-GAAP data is included in our Form 8-K.

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

Bahram Akradi

Thanks, John. I'm pleased to be here to share my thoughts and perspective on our third quarter of 2011 results. We had a very solid third quarter. Revenue growth remains strong, up 11% over the third quarter last year, continuing the steady pace we have seen over the last several quarters. Dues revenue for the quarter was up over 10% from a year ago. In-center revenue had its seventh straight quarter of double-digit growth, up over 16% from last year. Net income was up over 15% versus last year. Excluding the impact of noncash compensation expense, net income was up nearly 18%.

Earning per share were $0.66. Adjusted for the noncash compensation expense, non-GAAP EPS was $0.67, 18% higher than last second quarter. Mature centers same-store sales continued its positive trend, up 4.1% over the third quarter last year. Attrition for the quarter was 9% versus 9.6% a year ago and our trailing 12-month attrition was 35.3%. Last quarter, we reached our stated goal of getting attrition under 36%. Even with high unemployment, our attrition levels are approaching some of the lowest in the history of the company. We will continue to drive hard to keep attrition below 36%.

I am very pleased with these results. I'm proud of our team who successfully execute the strategies that differentiate Life Time as a Healthy Way of Life company and impact lives positively each and every day. We remain on track to accomplish our stated objectives for the year. Our balance sheet is solid and our debt leverage is within the range we were targeting. Our revenue performance continues to be strong as we drive for over $1 billion in sales this year.

Our transformation into a Healthy Way of Life company is well underway as we focus on helping our communities and members achieve their health, fitness and athletic aspirations by delivering the best programs, people and places. And finally, we have committed to growth and improving our margins and returns. We will achieve this through: one, growth within our existing facilities; two, square-footage growth; and three, more Healthy Way of Life programming, both inside and outside the facilities; and fourth, finally, all the while driving improved productivity and margins. I look forward to finishing the year strong and setting our sights and our goals and objectives for the next year. With that, I will now turn to Mike Robinson, our Chief Financial Officer. Mike?

Michael R. Robinson

Thanks, Bahram. I'd like to provide you with some additional details on our third quarter performance and financial results. First of all, let me remind everybody that starting with the fourth quarter last year, we are recognizing noncash performance share-based compensation expense related to a grant of long-term performance-based restricted stock approved by the Compensation Committee of our Board of Directors in June 2009. This grant was a retention tool as well 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 3- and 4-year baseline expectations set in 2009.

In the fourth quarter of 2010, the company determined that the 2011 EPS performance criteria required for the vesting of 50% of the stock or approximately 450,000 restricted shares was probable. In the third quarter, we recognized approximately $1 million of noncash performance share-based compensation expense. And we expect to recognize additional expense of approximately $1 million in the fourth quarter, related to the first 50% of these performance-based restricted shares. While we report our results inclusive of these expenses, at times, we will refer to adjusted or non-GAAP earnings ratios and guidance throughout our comments. We currently believe achieving the remaining 50% target in either 2011 or 2012 is not probable. Therefore, we have not recognized any compensation expense related to the remaining 50% of this performance-based restricted stock grant. This remaining grant has approximately $9 million in noncash pretax share-based compensation expense associated with it. We will continue to evaluate the probability of achieving this portion of the grant quarterly.

Now let me talk about attrition and retention. For the quarter, our attrition rate was 9% compared to 9.6% last year. Starting in the second quarter, the quarterly attrition rate is now directly comparable, as we have anniversary-ed the methodology change in our attrition calculation that went into effect April 1 last year. That is,

[Audio Gap]

count potential memberships that elect to cancel during their 14-day trial as members or attritions. Our trailing 12-month attrition is 35.3% versus 37.1% last year. This includes approximately 60 basis points of improvement related to the methodology change I just mentioned. The estimated average life of a membership is 33 months, unchanged from last quarter but improved from a year ago, when it was 30 months. We finished the quarter with 653,300 memberships. This was a 4.9% increase from the third quarter 2010, or just over 30,000 net memberships added in the past year. Sequentially, we had a decrease of approximately 11,000 memberships from Q2, which is typical, as members return to school in September and the pool season ends.

For the third quarter, we grew the net balance of Flex Memberships by approximately 11,000 units to approximately 84,000. The number of open centers at September 30, 2011, was 92 compared with 88 at September 30, 2010. Of the 92 centers, 57 or 62% are our current model center, and 73 or 79% of all centers have been opened 3 years or more, which we classify as mature centers. We operate 9.2 million square feet of fitness facilities.

Our total revenue was $265.4 million for the quarter, which is up 11.4% from last third quarter. Our main revenue drivers are as follows. Membership dues revenue grew 10.4% for the quarter, which outpaced our membership growth of 4.9%. Our goal is to have continued dues growth in excess of membership growth. One element of our growth strategy you will hear me discuss a bit later is to prudently take price and improve our membership mix to drive higher dues per center. These results demonstrate we are doing that. Our powerful dues stream accounts for 65% of our revenue. In-center revenue grew by 16.3% in the quarter. We are strategically driving this growth by increasing our products and services in our portfolio, incenting members to use these services through our LTBUCK$ affinity program and continuously enhancing our connectivity initiatives. Our focus is to drive more member involvement, which we expect will improve member retention and customer satisfaction.

Our revenue productivity metrics are strong and consistent across the board. Our third quarter same-store sales were up 4.7% and our 37-month mature same-store sales were up 4.1%. Revenue per membership in the third quarter was $395 per membership, which was up 5.9%. In-center revenue per membership of $124 was up 10.7% in the quarter. For perspective in the third quarter of 2009 and 2010, we were at $100 and $112 of in-center revenue per membership, respectively. We believe the improvement over both the last 2 years is evidence of our member connectivity and engagement, as well as expanded program offerings.

Now I would like to discuss our cost structure. Overall, operating profit margin in Q3 improved sequentially 80 basis points to 18.8%. Year-over-year, this margin decreased 30 basis points from 19.1% in Q3 2010, but at the same time, profit dollars increased $4.3 million. Excluding the effect of the $1 million of incremental noncash performance-based restricted stock compensation expense, operating profit margin for the quarter increased 10 basis points to 19.2%. Just as we saw in Q3, for the fourth quarter, we expect operating margins to improve slightly in a normalized in-center growth environment, excluding the impact of the noncash performance share-based compensation expense.

We continue to see improvement in our center operating margin. Center operating costs were down about 90 basis points, excluding a -- including absorbing approximately 10 basis points of noncash compensation expense related to the performance-based restricted stock grant. Leverage from increased dues revenue more than offset the negative margin mix resulting from a significant growth in our lower-margin in-center businesses. Cost in excess of enrollment fees were essentially flat, compared to 3Q 2010.

Marketing and advertising costs were up 80 basis points as we increased marketing campaign spend, continued to invest in our LTBUCK$ affinity program and incorporated marketing spend in new events and other corporate initiatives, such as My Health Check. As we have discussed, we expect our marketing cost to be up over last year as we invest more in member retention initiatives, including myLTBUCK$ as well as our in-center and corporate businesses. These initiatives are showing results as evidenced by our strong top line growth and significantly improved attrition rates.

G&A was up 20 basis points for the quarter as a percent of revenue at 4.7%, including absorbing nearly 30 basis points or $700,000 of non-cash compensation expense related to the performance-based restricted stock grant. While the G&A percent of revenue was essentially flat in the quarter, when we exclude the incremental share-based compensation expense, we are still investing in a overhead structure to help drive the retention and connectivity initiatives of our centers and initiatives underway to grow our other Healthy Way of Life-related businesses.

Other operating expense was up 40 basis points for the quarter, primarily as a result of our investment here in athletic and endurance events and the My Health Check business infrastructure and cost associated with acquired businesses. While other operating expenses increasing slightly as proportion of our total cost structure, as we expect, we are seeing top line growth related to these synergistic Healthy Way of Life businesses. The associated revenues related to the other operating expenses increased 17.1% over Q3 2010.

We continue to see leverage and depreciation and amortization as we continue to grow revenue well ahead of square-foot expansion. These costs were down 20 basis points for the third quarter. Interest expense, net of interest income, decreased to $5.1 million from $6.8 million last third quarter. This decrease in interest expense reflects the payoff of approximately $70 million in higher-rate mortgage debt early in the second quarter this year and the low variable interest rates on our revolving line of credit. For the full year 2011, we expect interest rates to be down from total year 2010.

Our tax rate for the quarter was 40.2%, even with last Q3. We expect our effective tax rate in 2011 to be slightly above 40%. That brings us to net income for the quarter of $27 million, including $600,000 after-tax for the effect of the noncash compensation expense. Excluding that charge, non-GAAP net income for the quarter would have been $27.6 million, representing 17.9% growth over last third quarter. Weighted average diluted shares for the third quarter totaled 40.9 million shares. Overall, we achieved diluted EPS of $0.66 for the third quarter, including $0.015 for the noncash share-based compensation expense. Excluding this expense and the effect of rounding, the quarterly EPS was $0.67, a 19% increase over 2010.

My next topic will be on cash flow and our capital structure. Our cash flow from operations totaled $58.8 million for the quarter, compared to $45.4 million last Q3, up 29%. For the quarter, we generated nearly $20 million of free cash flow. We have now generated 11 consecutive quarters of free cash flow. We continue to focus heavily on our capital structure, cash and debt availability. Total debt decreased $16 million in the third quarter. As of September 30, we have $388 million outstanding, including letters of credit on our $660 million revolver. That leaves approximately $284 million in cash and revolver availability. Our net cap -- our net debt to total capital came down to 37.4% at the end of the quarter. Our covenant calculations for the quarter continue to show a significant room versus our covenant limits.

In August, we entered into an interest rate swap to fixed rates paid on $200 million of our revolver at 1.32% plus the applicable spread. We expect the fixed rate on this piece of the revolver to be slightly higher than 3% in -- to June 2016. Also in the quarter, our Board of Directors authorized a $60 million share repurchase program, with an expiration on August 17, 2013. We view this as an opportunistic program, put in place to use, should we feel market conditions warrant. We are not obligated to repurchase stock and we've not modeled it in to our 2011 expectations. In the third quarter, we did not purchase any shares under the buyback program.

Regarding capital expenditures, we expended approximately $39 million of CapEx in Q3 2011. This was comprised of approximately $24 million for growth and $15 million for maintenance and corporate infrastructure. For 2011, we expect to spend approximately $150 million to $160 million for CapEx to open 3 large centers, commence construction of our -- on 2012 centers and maintain our portfolio of clubs. This would be comprised of approximately $100 million to $105 million for growth and $50 million to $55 million for maintenance and corporate infrastructure. We have spent approximately $7 million so far in 2011 on acquisitions, including small racing and race-related events businesses, a MediSpa business, as well as 4 yoga studios in the Michigan market.

A few balance sheet variances to note include deferred revenue decreased about $8 million for the quarter, driven primarily by the completion of summer camps, as well as other kids' activities have been paid for in the second quarter. Accrued expenses increased $5 million, driven by general business growth as well as accrued real estate and income taxes. With that, let me discuss our updated financial guidance for 2011.

We expect our revenue will grow to $1 billion to $1.005 billion, or up from $985 million to $1 billion. This growth is approximately 10%, driven primarily by growth in, in-center revenue and corporate businesses as well as dues, mix growth and membership growth in new centers. We anticipate our net income will grow to approximately $94 million to $95.5 million, or 16% to 18% growth. Excluding the impact of noncash compensation expense in 2011, we expect non-GAAP net income to be $96.5 million to $98 million. We expect our diluted EPS will grow to $2.29 to $2.32. Excluding the impact of noncash compensation expense in 2011, we expect non-GAAP diluted EPS to be $2.35 to $2.38.

Before I turn it over for questions, I'd like to reiterate what we discussed in our second quarter call regarding growth in 2012 and beyond, as well as our focus on driving improved margins and returns. We're planning to grow through 5 key drivers. First is unit growth, both greenfield and conversion. We currently have 3 centers representing approximately 4% square-footage growth, under construction for 2012. We are targeting 6% plus square-footage growth for the year, with the difference coming from acquisitions or conversions we're planning to complete in the next year or so. Our next 2 growth drivers revolve around optimizing the dues growth in our existing centers. First, we will drive price and improve the dues mix in centers and markets that the demographics and psychographics support. Second, we will drive occupancy improvement in select centers and markets. Our strategies here will be center-by-center, with the ultimate goal to grow dues in each center either by price, mix, occupancy improvement or a combination of each.

Our final 2 growth drivers come from what we internally call our company's inside, the 19 businesses we've identified that we operate both inside our fitness centers, called in-center revenue, or synergistic to our centers, which we report as corporate revenue, that differentiate Life Time Fitness as the Healthy Way of Life company. In-center growth will be driven by further penetration of our member base, with targeted connectivity initiatives and our affinity program, myLTBUCK$, as well as continued introduction of new and expanded program offerings, such as the 90-day weight loss challenge, LifeClinic chiropractic services and MediSpa services. Corporate revenues will be driven by growth in synergistic businesses such as events, media, education, certification and My Health Check, a program designed to emphasize personal responsibility for employee health, identify health risks and lower healthcare costs for both employees and employers.

As we stated in the past, we are targeting at least low double-digit revenue growth in 2012 and beyond with these balanced growth initiatives. Increasing margins and improving returns are key focuses for the company. We've seen some ROIC improvement over the past 1.5 years. However, we're not satisfied. Improving return starts with our revenue growth strategy. As you can see in what I outlined before, 4 of our 5 growth initiatives require no or generally low investment. Mix price -- mix improvement price and occupancy growth are all revenue-profit and profit-margin drivers requiring no ROIC denominator investment. Our in-center and corporate business initiatives are positioning us to enhance profits with generally low investment. That concludes our prepared remarks regarding our third quarter financial results. We're pleased to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Brent Rystrom of Feltl.

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

Yes, I'm just wondering if you could give a little more clarity on the acquisitions or other expansion next year beyond the 3 units you've identified. Would you characterize that you have a high degree of comfort with adding that square footage? Would you characterize at this point the modeling perspective that it's something that is a 50-50? How would you kind of do any of that opportunity?

Michael R. Robinson

If you're referring really -- I mean, we are looking at acquisitions across the board in all elements of the business. But the specific one that I quote when I look at next year and our target of 6% square-footage expansion, of which 4% is coming greenfield, I would characterize that as we're certainly confident. Nothing is done until it's done, but we have a number of things that we're looking at and a number of opportunities to be able to deliver that incremental growth.

Operator

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

Sharon Zackfia - William Blair & Company L.L.C., Research Division

You saw a nice increase sequentially kind of in the rate of growth of monthly dues, which I assume is a reflection of some of the optimization you've been doing or talking about. Can you talk about whether a mid-single-digit pace is what we should think of going forward and what the reaction was from members as you started to kind of further optimize that pricing mix?

Bahram Akradi

Sharon, what we're basically continuing to do is working on differentiation of Life Time as a Healthy Way of Life company. We're improving the programming across the board, and that allows us to adjust the dues pricing as we go forward. We systematically adjust the pricing for new members going forward. Existing members kind of stay with their current rate. Eventually, we adjust them, maybe not all the way up, but slightly up. But this gives us an automatic increase in our dues revenue as the members churn, so the attrition actually in this case will help when we replace that member with a newer member. So I can't tell you that we can continue to grow dues on a 10% quarter-on-quarter, year-by-year. But I can tell you we have a strong belief we can continually raise dues quarter-on-quarter, same quarter, year-on-year. And that's going to keep coming. I think it's -- whether if it's going to be like 7%, 8%, 9%, 10%, I can't give you exact guidance.

Michael R. Robinson

I guess, if you look at that due, the actual dues growth of 10-plus percent, that's being driven by several things. It's clearly being driven by mix, some of our newer clubs opening at higher dues rates than the existing clubs, like Syosset at $119 or Summerlin, Nevada at $119. It's also being driven by what Bahram talked about and as we prudently raised new members dues across the board. As I think about that, I agree with Bahram. I would not -- I don't think it's prudent to model in that you can have significant year-over-year growth. But good year-over-year growth, yes.

Operator

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

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

So as I look at your results, it's very consistent with what we've seen in the prior quarters, where you've seen a nice improvement in, like the prior question mentioned, the dues growth and churn. The one seriously weaker spot remains the gross membership adds. The question I have is are you seeing -- as you look across the chain -- and you obviously had some very strong starts to some of the new center you just recently opened. Are you starting to see any, as you look across the chain or maybe divide the chain up between the new and the older synergies, starting to see any so to say letup in that pressure on the gross membership adds?

Michael R. Robinson

Well, I'm going to start big picture strategically, and then talk and let Bahram answer also. But again, I stress all the time that our focus, when we sit down from a management perspective, our look at this is how do we drive dues growth center-by-center. And that dues growth can come from a number of things. It can come from membership growth, it can come from price increases, mix increases, et cetera. And that's really how we manage this business. So just focusing on that one element is, certainly, it's an import item, but it's not what drives us. I do think that generically, as you look at things, that the challenges that we have in the membership growth area still reside more in the clubs that are located in lower demographic areas. We still see economic headwinds in areas like that, and frankly, expect that as we go into the future and we look ahead at 2012. That said, the strategy that we are stating, we are executing and we truly are pleased with the execution of that.

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

If I could just follow up with 1 question, too?

Michael R. Robinson

Just a short one, Brian.

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

Sure, okay. As you look at -- again, I understand now, I mean, we're talking about the growth issues more holistically with different drivers. We committed to 3 centers next year as some potential acquisitions. What keeps you right now -- with the company operating better and better, what keeps you from really so to say stepping on that accelerator faster, to really start pushing some of that new center growth from here?

Bahram Akradi

Brian, this is Bahram. We are pushing as hard as we can. However, as we stated in the past, we are committed to looking for A and A+ sites across the country. We have numerous fantastic locations in the pipeline with the gestation times of 3 to 4 years. Now some of them, we started 2 years ago, some we started a year ago. So we have some great sites that we're so excited about. But they are going to take longer time to get out of the pipeline for the opening. And I want to emphasize on the strategic approach that Life Time took 2.5 years ago, 3 years ago. Our commitment has been to improve every program, running, cycling, basketball, yoga, swimming, weight loss to be actually the best program in the country. I don't claim we're there across every program, but we're sure trying as hard as we can. That's the place we want to be. And we want the customer to choose Life Time, not because of price, because clearly, this is a customer who has recognized the best program for the area of their passion is at Life Time. So we don't really focus on the membership count as much as we focus on optimizing dues revenue and then recognizing that the customer who comes to us, because appreciates the better programming and the best operator in the area of their passion, they also are more likely to spend in-center revenue. We like our strategy, we're committed to it, we're confident. And so we're also committed to finding all different ways to grow the company. And as the next few years will prevail, we'll demonstrated that our growth will become more balanced as a Healthy Way of Life company rather than just square-footage growth. Now we're very committed to finding square-footage growth and improving that as well, but only in great locations.

Operator

Your next question comes from the line of Paul Swinand from Morningstar.

Paul Swinand - Morningstar Inc., Research Division

I was wondering if you could comment on the in-center revenue drivers. And how much of those are things that are new programs that you've added versus existing programs that you had in the past, whether it is massage or the café? And then also and part of that, have you done any analysis on how much the event business, which is growing, is driving additional revenue in the centers? Or is there still not a lot of crossover?

Bahram Akradi

Good question. Let me take that on. We see 2 things. We are doing a better job, let's say, in personal training. But part of that is because of the way we connect the customers to the personal training. Part of that, we have increased penetration of just pure programming in personal training. And part of it is because we're introducing new programs that our members can get involved in, in personal training. So it's a combination of all those things that is driving in-center revenue. The other piece is you asked about Athletic Events. The Athletic Events, we look at it, once we execute the full strategy, and we're at the early stages of this, we're still investing more dollars in it than we are getting all the benefits we want out of it, still performing well. But again, I think we can do better. It isn't fully integrating the way we want to yet. So we're not getting as much, although we're getting some training dollars or coaching dollars. It's not where we have the plans to get us to at this point. So there is some overlap integration, not as much as it's anticipated when the program matures.

Operator

Your next question comes from the line of Sean Naughton of Piper Jaffray.

Sean P. Naughton - Piper Jaffray Companies, Research Division

Over the last few years, Q4 top line has consistently seen a sequential slowdown in the growth. And based on the guidance that you're providing for the full year, kind of seems like the same things is going to happen again this year. Is there something in terms of the business or the seasonality that's changing that revenue stream that we may not be thinking of?

Michael R. Robinson

If you look at the second and third quarter are generally, relatively strong growth for the in-center business pieces of our total revenue portfolio. Primarily that's -- you've got summer activities, kids' activities, a number of summer camps, those types of things that really drive the sequential growth up from first to second and third quarters. That comes back down in the fourth quarter. The second thing that drives that is actually the holiday periods. If you think about the holiday periods, the Thanksgiving week and the time around Christmas and New Year's, there's not a lot of -- there's a reduction in the spend that goes on, especially in areas like personal training, where normal daily routines are interrupted because of all of the holidays. And those are the big drivers. And we anticipate the same thing this year.

Operator

The next question comes from the line of Scott Hamann of KeyBanc Capital Markets.

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

I have 2 questions. Number one, advertising and marketing. Can you kind of help me understand what percentage of the increase or what part of the increase is tied to myLTBUCK$ versus some of the other things and kind of what's the expectation going forward? And then secondly, just on the CapEx guidance, I believe it's the top end was kind of ratcheted down. And maybe you can kind of talk to -- if there was a timing issue around some of the growth stuff for next year, how should we kind of think about that?

Bahram Akradi

Okay. This is Bahram. I'll take the marketing and Mike will take the CapEx for you. The marketing, we are spending more and more dollars of our marketing dedicated to our existing customers. So that's through myLTBUCK$, keeping them connected, making sure they come back and they engage in a personal training program or something else. So we have been giving these dollars and they also are set up where when somebody comes, they get x amount first when they join and then so much in 6 months, so much in 12 months. So we have budgeted an increase and we're seeing their budgeting is pretty accurate in terms of those increases. So we'll see sequentially $2 million, $3 million, $4 million a year, more spend for right now on LTBUCK$. And that takes, I would say, about 60% of the increase on that marketing. And then I still believe that we are not investing as much as I like towards branding Life Time truly as a Healthy Way of Life company, differentiating us from other health clubs and gyms. That's going to be a work in progress. So we're going to continue to invest in our branding and positioning of the company in the next several years. So you should anticipate increase in marketing, not flat or decrease.

Michael R. Robinson

On your question on the CapEx side, I think you should just look at that reduction as just a refinement of our total year estimate. There's really been no change in our view of how we're driving both 2011, 2012 or beyond elements in that growth. It's -- the year has progressed just as we had expected it from a CapEx perspective.

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

But the timing of the openings for next year aren't going to be changed from what you anticipated?

Michael R. Robinson

No, there's -- the timing of those openings, I don't think we've gone through and said much about 2012, the 3 centers. The one center I know we've announced is Mississauga, Ontario. And that is a first quarter opening. We have begun the presale on that center. And the other 2 centers, I don't think we have not announced those presales yet. So you can expect them to come a little bit later in the year. But in general, no timing changes.

Operator

Your next question comes from the line of Lee Giordano of Imperial Capital.

Lee J. Giordano - Imperial Capital, LLC, Research Division

Can you talk a little bit about the trend and the cost of building up the new centers? And secondly, will you be changing the format at all, evolving the concept as you build out new units?

Bahram Akradi

The cost, so far, we don't see any reason to see sort of an increase. Our numbers look very flat to the last couple of years in terms of what the cost of square foot to build. It's mostly a function of the market and the cost of the property. We may spend as much as $3 million to buy a piece of land or $15 million, depending on where we're going. So -- and then some of the markets, because of their just conditions, cost more per square foot. So we don't see any difference in what's going to happen in the next 2, 3 years. The models that we have are working extremely well. We have refined a couple of alterations of our 2 and 3 storeys to give us ability to get into tighter, smaller sites that are maybe a little more urban or the square-footage of the land is not as big, allows us to get a little bit more vertical and get up. Otherwise, the concepts are working, the clubs are working beautifully. We don't see a radical need to change the models right now.

Operator

Your next question comes from the line of Michael Lasser of UBS.

Michael Lasser - UBS Investment Bank, Research Division

Bahram, can you parse the price increases a little bit further. So from your commentary, it sounds like more of them are weighted towards new members. But it seems like you have fertile ground in that some of your members are deeply committed and are very -- have a very little likelihood of attriting. So is there an opportunity to raise the pricing there? And then along those lines, is the model changing a little bit where you're just trying to generate as much as you can from the in-center side and less worried about optimizing capacity? And how is that going to look over the long-term?

Bahram Akradi

Okay. So we don't think the market, the consumer sentiment is so strong that it's prudent for us to come in with any sort of a radical price increase for existing members. So we are very, very cautious to not send a signal to the customer that we want to take their dues up significantly here or there. Having said that, I think as time goes on and we have had very, very modest or small price increases in our overall centers, I think that in years to come, maybe in 2 years or whatever, it gives us still a nice price point opportunity. Beyond that, we have been committed, as I mentioned, to take Life Time to a place of its own, Healthy Way of Life company, best-in-class programs to the point the customer will choose to come to us, or not choosing to come to us because of price. We have been diligently executing towards that strategy. What I believe that will allow us to do in maybe 2 years or 3 years, when the economy is much more robust than it is today, I hope, then we will have opportunity to do a little more dramatic price increase across the board. At this point, we either do nothing or we do very small price adjustments for existing members. But having said that, I think you will see that our dues should continue to grow and our average dues should continue to grow in the years to come.

Michael R. Robinson

I want to kind of tackle the second part of that question and what we're seeing in the future, right? Clearly, there's an emphasis -- I want to go back to the comments that I made before. We're looking to optimize the total dues in a center, right? And we're looking to continue to drive in-center revenue growth because we think that helps the entire center economics, in the sense that by getting people involved, by getting them to come into the club more often to be connected more often, yes, they're going to spend money. We're going to grow our in-center revenues in the fee-based services, but they're also much, much, much more likely to stay longer, the average life of a membership should grow, the retention should increase, the attrition rates hopefully continue to come down because of that. So it's a holistic strategy for us. And I don't think that you could just step back and say, "Okay, we're going to go from a model that is 65% to 70% dues to a model that's now 60% dues and 40% in-center growth." I don't think that's necessarily what we're talking about here. What we're talking about is a holistic strategy that may differ slightly club-by-club, but it's really driven to optimize the dues, the total dues in that club. Sometimes that's coming from price increase and mix increase, sometimes that's going to come from the membership ramp or a combination. But just as importantly, the emphasis on delivering the best programming around, because it maintains and grows the length of time and the ultimate take, the ultimate revenue that's coming in from that member, from the life of that membership.

Michael Lasser - UBS Investment Bank, Research Division

That's really -- that's helpful. Now let me ask one quick follow-up along those lines. Your commentary before about seeing more difficult trends in clubs that are in areas that are slightly lower on the economic income demographic scale, presumably the profitability of those clubs is also lower. First, is that correct? And how much is the delta between those clubs and some of your better-performing clubs in higher-income areas?

Bahram Akradi

Well, it all depends on what we -- when we went into those markets, what we spent to build the clubs. Some of those clubs also have a lower total investment capital, so the ROIC hurdles for those clubs are not as hard. So when we go to the markets, A markets, we spend more money on land, we spend more money on construction, operating costs may be more expensive, utilities may be coming at more expensive cost, and then we collect significantly more revenue from the members. So you're just playing with bigger numbers, percentages work out. Having said that, strategically, I emphasize again, we have been focusing on a customer base who can decipher and appreciate the fact that we are not offering hollow boxes full of equipment. And they can appreciate the quality of our facilities, the quality of our people and the depth and the intenseness that we have demonstrated around proving products and programs that actually give them results. Not every customer is astute enough to appreciate that. So when we are in the more affluent markets, the customer will appreciate the differentiation of Life Time, so it works much more naturally than when we are in more areas that are more challenged financially, it's a little more difficult for them. They might be a little more concerned about price chopping. And that's what Mike is talking about. It's not a big number of our clubs, it's a small number of clubs. And I don't want to put so much attention on that.

Michael R. Robinson

And I guess, I do want to come back to your point on profitability on that. And my comment on the profitability piece, a number of you heard me do a comparison when I call out a club, like Gilbert, Arizona or Garland, Texas, or something like that, where we saw the membership count and the revenue go down more than 10% as we were working through the recession. But if you look at the margins on those businesses, Gilbert, for instance, we were running that at roughly at 38% EBITDA margin. That bottomed out in the 32%, 33% EBITDA margin. So still a very good, robust margin, not what we would drive toward but still very, very good. And we have seen some improvement on that as we've worked through these challenging economic times.

Operator

Your next question comes from the line of Ed Aaron of RBC Capital Markets.

Edward Aaron - RBC Capital Markets, LLC, Research Division

I just wanted to follow up on the Q4 guidance a little bit, if I could, just a clarification question. If I adjusted the performance compensation in both quarters, it looks like the Q4 guidance implies like a single-digit earnings growth rate, which would imply a slowdown. Is that -- am I thinking about that the right way?

Michael R. Robinson

I think you should step back and look at it and say, "What we're giving you is a guidance rate that we feel confident, highly confident in," and work from there.

Operator

Your next question comes from the line of Greg McKinley of Dougherty Markets.

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

In the absence of new centers opening, Mike, you had talked about some seasonal factors impacting sort of utilization of the club from Q3 to Q4. Should we typically think in the absences of new openings that we'd also have sequential member declines from Q3 to Q4 due to the same reasons?

Michael R. Robinson

We typically see early in the fourth quarter continued sequential declines as you move off of -- as you again moved back in that back-to-school season and out of the pool season. So we don't -- as we look at it right now, we don't see any difference in the trend lines that we've seen over the last couple of years that way.

Operator

And your next question comes from the line of Connor Browne of Thornburg.

Connor Browne - Thornburg Investment Management, Inc.

A two-part question. Where can operating margins grow over time as we look out a few years? If I exclude other revenues and other expenses from the calculation, I think we got up over 28% in 2003. Since then, I think we've added some operating leases into the center operation expense line. But today, we're at 21% or so. So where's the upside there over the next few years, number one? Number two, when can we expect other operating revenues to be higher than other operating expenses at some point in the future?

Michael R. Robinson

So your first question, Connor, we have not given a target operating profit margin rate other than to say that we continue to expect to see improvement and good improvement in that. The one area that I always caveat on this is what's going on in our in-center growth because that will come in at lower margins, yet is a very good and key element to our businesses. That said, as we look at the future and we look at operating margin opportunities, driven by, first, continuing to drive the strategy of dues and dues optimization. That should deliver high leverage points. And second, to your last part of the question, starting to see some profitability coming from -- or more profitability coming from some of those corporate businesses. We continue to see a lot of opportunities. I'm not going to give you a specific number. But over time, if you look at the next 3, 4 years, the ability to move that couple of hundred basis points or more is certainly something that we're driving toward. On the corporate businesses and how they relate to the other operating expense. We're in various stages of program rollout in those areas. If you look at our endurance and events businesses, we have a number of races that are very profitable, delivering 25% to 30% EBITDA margin. Our goal is to continue to expand this business, drive participation, drive races and continue to improve the profitability there. We're in more of a beginning stage in an initiative called -- in a business called My Health Check. We're investing in that, we see tremendous opportunity in that. That may be to another year out or so before we actually see the profitability in that. All that said, you should -- our end, we anticipate, we expect that the operating expense, the other operating expense, as you compare it to that corporate revenue is going to continue to narrow and we're going to continue to drive to optimize those businesses.

Operator

And your final question comes from the line of Dana Walker of Kalmar Investments.

Dana Ford Walker - Kalmar Investments Inc.

I'm going to try to sneak in 1 or 2 here. Mike, you were just commenting about My Health Check. Can you talk about how many centers you are furthest along in rolling that out to and what it looks like in terms of offerings?

Bahram Akradi

Yes, My Health Check really is an independent program. It's not club-related. It's company-developed, really helped rolling out of the new adjustments in the law that took place in 2008, 2010, allowing the companies to distribute cost of healthcare differently than it was in the past. In 2008, the law had allowed the corporations to differentiate the contribution by each employee as much as 20% between one and the other based on certain biometrics that is within their control. And in 2010, that law was adjusted, that by 2014, that 20% would go to 30%. So for me, to kind of give you guys a quick look at that, based on the average cost of healthcare per employee today and projected numbers by 2014, those numbers basically mean as much as $2,000 to $3,000 annually that would be different between what 2 different employees in a company could contribute towards their healthcare cost, substantial. It is a significant migration of companies gradually moving towards this model, what we call the results-based or personal responsibility-based healthcare cost distribution. And we believe that's going to be the way it's going to be for everyone in the next 3 to 4, 5 years. We have built a fantastic program, we've got one of our companies inside. We think it has tremendous opportunities of allowing substantial number of memberships, not in the clubs, memberships for My Health Check companies, separate thing again. The revenue model for that is annually roughly about $250 per employee. Once again, it's a low-margin business because it's going to be a huge-volume business. We are committed to it. We're confident it will be a very, very profitable platform. However, at this point, there's been nothing more than investment in 2011, which has been basically lowering the operating margin sum as a whole. And we will see that being the same in 2012. And we think that we will actually see substantial profitability in it in 2013 forward.

Dana Ford Walker - Kalmar Investments Inc.

Bahram, do you see this, though, as being a discrete test with an employee? Or is this a commitment to being a part of a physical fitness program?

Bahram Akradi

This is not a program. And I would emphasize, it has nothing to do with the clubs. In fact, what I want to be clear is that what we execute with this is not part of the club operation. We drive it, our vans, our trucks, mobile units, trailers into the front of the corporations. We can test our employees. We can put them on programs. We can coach them. We can help the corporation develop a program where they can cost differentiate this. It needs to be HIPAA-compliant, it needs to have legal elements. It's complicated. It's not an easy thing. It's not a health club thing. It's a Healthy Way of Life company.

Operator

I'd now like to turn the call over to Mr. Heller for closing remarks. Please proceed.

John Heller

Thank you for joining our call today. We look forward to reporting to you our fourth quarter and full year 2011 results, which tentatively has been scheduled for Thursday, February 16, 2012, at 10:00 a.m. Eastern. Until then, we appreciate your continued interest in Life Time Fitness. Thank you, and have a good day.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation, you may now disconnect, and have a great day.

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