Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Life Time Fitness (NYSE:LTM)

Q1 2012 Earnings Call

April 19, 2012 10:00 am ET

Executives

John Heller -

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

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

Analysts

Paul Swinand - Morningstar Inc., Research Division

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

Edward Aaron - RBC Capital Markets, LLC, Research Division

Sean P. Naughton - Piper Jaffray Companies, Research Division

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

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

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

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

Operator

Good morning, ladies and gentlemen, and welcome to the First Quarter 2012 Life Time Fitness Inc. Earnings Conference Call. My name is Chris, and I will be your conference moderator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.

And at this time, I would now like to turn the conference over to your presenter for today, Mr. John Heller, Senior Director of Investor Relations and Treasurer. Sir, you may proceed.

John Heller

Thanks, Chris. Good morning, and thank you for joining us on today's conference call to discuss the first quarter 2012 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 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 first quarter and our operations. Following that, Mike Robinson, our CFO, will review our financial highlights and update our financial guidance for 2012. 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, Chris 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 1 question. I will close with a tentative date of our second quarter 2012 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 first quarter 2012 results. We had a great first quarter. Revenue growth remains strong across the board. Dues revenue grew 11% for the quarter over a year ago. Our in-center revenue had its ninth straight quarter of double-digit growth at nearly 15%. This continued strong growth rate demonstrate the effectiveness of our member connectivity initiatives and the quality of our in-center products and services. Net income for the quarter was up 23% over last year, and our earnings per share was $0.62, nearly 22% higher than last first quarter.

Mature center same-store sales for the quarter was up 5%. This is the highest quarterly mature center same-store sales we have achieved since becoming a public company in 2004. Our trailing 12-month attrition was 35.6%, below our targeted rate of 36%. Operating margins for the quarter was 18%, up 130 basis points over last year. I am very pleased with these results.

We remain on track with our strategic game plan of growing Life Time rapidly as a healthy way of life company. This has many segments. First, we want to continue to grow the number of healthy way of life destinations or facilities in more prominent markets. In 2011 and 2012, 4 of the 6 new greenfield locations are Diamond-level centers. The economics of these centers are very powerful. Revenue at these clubs has been just great and is significantly higher on a per membership basis than our typical model.

We're continuing to pursue locations in areas with these types of higher demographics, and we are very pleased at this point with how that pipeline is filling up over the next few years. We continue to drive in-center business growth at all our locations by relentlessly focusing on delivering consistent and excellent member programs, products and services. We have made tremendous strides in this area, and we see ongoing opportunities to drive improvement in member participation and retention.

Second, we will grow our healthy way of life events and related businesses. We are developing a number of very high-quality brands in the athletic events space. Life Time Tri, our Olympic and sprint distance brand; the Leadman Tri, our ultra-distance triathlon brand; the Torchlight Run, an evening city 5K and Turkey 5K are just some of the examples of the brands we're building in athletic events space.

We have related businesses, such as events registration and timing, that are -- that we have recently required. Through greenfield expansion and acquisition of events and related businesses, we expect to have a run rate of $25 million to $30 million in revenue by the start of 2013.

We look for fast growth in this segment of our business, both in revenue and profit in the next few years. Most importantly, we like the synergy between the business and our healthy way of life destinations and in-center businesses as athletes that come to these events make great members with high in-center training revenue. And on the other side, our current members are great candidates for participation in these events.

The third segment of our growth is an invention of Life Time called myHealthCheck. myHealthCheck is a division of Life Time that helps businesses deploy a health plan that ties employees' premium contribution to a health score created by Life Time.

This health index is called myHealthScore. This encourages personal responsibility by the employee. It also has a comprehensive diagnostics, programming and coaching to help the employee improve their health score to reduce their premium contribution and increase membership flow to our centers.

We're targeting good growth in the run rate of this business by the end of this year. We see the event and myHealthCheck businesses as synergistic to our healthy way of life destination. We see all these businesses as interconnected, allowing us to leverage our systems and know-how from one business to the next.

Finally, underpinning all of what I have just talked about is our continuing path of making Life Time a top shelf brand within all segments of our healthy way of life company. Our strategy is to have our brand viewed with the likes of companies such as Nordstrom, Lexus, lululemon, Four Seasons, Whole Foods and Apple. We want to provide the highest level of product delivery and consumer -- and the customer experience while still driving a solid value. We're extremely pleased with how all of this is progressing. Our strong performance in the first quarter is a solid indication that we're focused on what matters, and our strategies are working. We are driving to deliver double-digit growth in revenue, EBITDA and net income for the foreseeable future. As we make our brand stronger and more coveted, the achievability of our financial goals become more certain.

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

Michael R. Robinson

Thanks, Bahram. Let's start by discussing in more detail some of the events and initiatives that have occurred over the past few months.

First of all, let me remind everyone that starting with the fourth quarter 2010, we have been recognizing non-cash 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. The company achieved the diluted earnings per share performance criteria for vesting 50% of the stock in 2011.

In the fourth quarter of 2011, the company determined that achieving the 2012 diluted earnings per share performance criteria required for vesting the remaining stock was probable, and we recognized the related compensation expense.

During the first quarter this year, the company recognized a non-cash performance share-based compensation expense of $700,000 pretax versus $1 million in Q1 last year. The results and guidance we reported in our earnings release and discussed on this call are inclusive of this expense in both years. We expect the total impact of this expense in 2012 to be $0.04 per share. The company anticipates recognizing the remaining portion of this performance share-based compensation expense of approximately $2 million pretax or $0.03 per share ratably over the remaining 3 quarters in 2012.

Early in December of last year, we completed the acquisition of 9 former Lifestyle Family Fitness facilities in Ohio, Indiana and North Carolina. While smaller than our typical centers, they complement our current locations in these markets. They allow us to reach key demographics in areas we don't cover with our current Life Time Fitness centers and take advantage of our powerful brand in these markets.

We leased 8 of these facilities and purchased one facility in Fishers in Indianapolis.

We've remodeled 4 of these facilities to date and plan to have all facilities completed in the next few months to give them the Life Time Fitness look and feel. They are in generally good condition, so we expect this remodel CapEx to be moderate.

As a reminder, the memberships at these centers come in at roughly half of the average monthly dues of our current portfolio, which lowers our average revenue per membership company-wide. Also, they don't have the broad portfolio of in-center businesses that our typical large center has, so they also have a lower in-center revenue per membership.

As with most acquisitions, we're sorting through the various memberships we have and continue to expect increased churn until the final memberships settle out. However, even as we absorb some transition and integration costs in 2012, we expect a positive contribution from these centers in 2012.

In January, we acquired the Racquet Club of the South located in Atlanta. We will rebrand this facility Life Time Tennis Atlanta and plan to upgrade the property and remodel the clubhouse and small fitness facility in 2012. This will not have the same financial metrics as one of our typical centers. Instead, it will have a much smaller membership profile with a higher service revenue content. We expect Life Time Tennis Atlanta to be a small investment in 2012.

Now let me talk about attrition and retention. For the quarter, our attrition rate was 8.9% as compared to 8.4% last year. The higher incremental churn rate of the Lifestyle Family Fitness members we acquired in December was a key reason for the uptick in attrition. In addition, remember that we instituted a dues increase late last year. This drives an increase in attrition also. Please keep in mind, the incremental dues from the dues increase well outpace any loss of dues from this attrition. Both of these influences were accepted and well within our tolerance ranges.

Our trailing 12-month attrition rate is 35.6% versus 36.1% last year. We continue to target performance at 36% and continue to be pleased with our retention results, especially given the net dues growth from our recent pricing actions and the member transitions from our acquisitions. The estimated average life of a membership is 33 months, unchanged from last quarter.

We finished the quarter with 704,467 memberships. This was an 8.2% increase from first quarter 2011. Excluding the impact of the Lifestyle Family Fitness acquisition, memberships grew 3.8% for the quarter.

For the first quarter, the balance of Flex Memberships remained unchanged from year end at approximately 93,000. The number of open centers at March 31, 2012, was 96 current Life Time branded centers plus 7 acquired centers compared with 90 at March 31, 2011. 58 are our large current model and 82 have been open more than 3 years, which we classify as mature centers. We operate approximately 10 million square feet of fitness facilities, including our acquired centers.

Our total revenue was $268.4 million for the quarter, which was up 11.6% from last first

quarter. Our main revenue drivers are as follows: Membership dues revenue grew 11% for the quarter. Our powerful dues stream accounts for 65% of our revenue. Dues increases taken late last year and in Q1 2012 represent approximately 2% of this growth. We will continue to look at our pricing and mix composition and be opportunistic when and where we think it is prudent.

In-center revenue grew by 14.8% 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 LT Bucks affinity program and continuously enhancing our connectivity initiatives. Our focus is to drive more membership involvement, which we expect will improve member retention and customer satisfaction.

Our revenue productivity metrics are strong and consistent across the board. Our first quarter same-store sales were up 5.4%, while our 37-month mature same-store sales were up 5%. The recent acquisition will not be included in same-store sales until the 13th month of our operations.

Revenue per membership for the first quarter was $386 per membership, which was up 1.8%. Excluding the impact of the Lifestyle Family Fitness centers, revenue per membership was $392, up 3.5%. In-center revenue per membership was $124 or up 4.9% in the quarter. Excluding the Lifestyle centers, in-center revenue per membership was $126, up 7%. As we've discussed, we expect to lower dues in smaller facilities with fewer revenue driving amenities, such as cafés and spas, in the LFF acquisition will lower our revenue per membership statistics for the remainder of 2012.

Our core in-center business growth strategy remains solid. For perspective, in the first quarter of 2010 and '11, we were at $111 and $118 of in-center revenue per membership, respectively. We believe the improvement over the last 2-plus years is evidence of our member connectivity and engagement, as well as expanded programming offers -- offerings.

Now I'd like to discuss our cost structure. Year-over-year, operating margin was 18%, an increase of 130 basis points from 16.7% in Q1 2011. Income from operations increased $8.1 million from Q1 2011. Center operating margins continue to improve. For the quarter, center operating costs improved about 220 basis points. Leverage from increased dues revenue more than offset any negative margin mix resulting from the significant growth in our in-center margin -- our lower margin in-center businesses. In addition, reduced lease expense from the buyout of 6 former leased properties contributed to this improvement.

For the quarter, marketing and advertising costs were up 30 basis points. As we planned, we continue to invest in our LT Bucks affinity program and incorporated marketing spend in new events and other corporate initiatives. These initiatives are showing results as evidenced by our strong growth in dues and in-center revenue.

For the quarter, G&A expense was down 20 basis points from last year as a percent of revenue at 5.1%. We are seeing good leverage driven by top line growth even while continuing to invest in overhead structure to help drive the retention in connectivity initiatives at our centers and the initiatives under way to grow other healthy way of life-related businesses.

For the quarter, other operating expense was up 50 basis points, primarily as a result of our continued investment in our athletic endurance events and myHealthCheck business infrastructure and cost of sales related to our growing media business.

While other operating expenses increasing slightly as a 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 revenue related to these operating expenses increased nearly 18% over Q1 2011. In 2012, while we continue to invest, we expect improvement in the cost-revenue relationship as we grow corporate revenue.

Depreciation and amortization was up 30 basis points for the quarter to 10.1%. This increase was expected as we absorb the incremental depreciation from our former leased facilities we purchased in December 2011, as well as the increased remodel activity from acquisitions.

Interest expense, net of interest income, increased to $6.3 million from $5.5 million last first quarter. This increase in interest expense reflects the impact of the W.P. Carey mortgages we assumed as a part of the 6 centers leased buyout at the end of 2011.

Our tax rate for the quarter was 39.5%, down 110 basis points from last Q1. We currently expect our full year tax rate to be approximately 40%.

That brings us to net income for the quarter of $25.7 million, up 32.7 -- 23.2% over first quarter 2011.

Weighted average diluted shares for the first quarter totaled $41.7 million. Overall, we achieved diluted EPS of $0.62 in the first quarter, up 21.6%.

My next topic will be cash flow and our capital structure. Our cash flow from operations totaled $73.9 million for the quarter compared to $60.1 million last Q1, up 23%.

For the quarter, we generated $35 million of free cash flow before acquisitions. We've now generated 13 consecutive quarters of free cash flow.

Please keep in mind, in 2012 and beyond, we intend to increase investment and long-term growth opportunities, including square footage expansion, while maintaining a strong balance sheet. We do not plan to manage to positive free cash flow, but intend to maintain a prudent debt-leverage ratio.

We continue to focus heavily on our capital structure, cash and debt availability. Total debt for the quarter decreased $36 million since year end. As of March 31, we have $406 million outstanding including letters of credit on our $660 million revolver. That leaves approximately $265 million in cash and revolver availability.

Our net debt to total capital was 39.1% at March 31, and our EBITDA leverage was under 2.5 to 1. Our covenant calculations for the quarter continued to show significant room versus our covenant limits.

In the first quarter, we spent approximately $38 million in capital expenditures. This was comprised of approximately $24 million for growth and $14 million for acquisition remodels, maintenance and corporate infrastructure support.

In March, we opened our first center in Canada in Mississauga, Ontario, a suburb of Toronto. Last Friday, we opened our second large center for the year in Tulsa, Oklahoma. We plan to open one additional large center in 2012 in May in Sandy Springs, Georgia, part of our Atlanta market.

For 2012, we expect to spend approximately $200 million to $250 million for CapEx to open 3 large centers, commence construction on our 2013 and 2014 centers, remodel acquired centers and maintain our portfolio of clubs. This will be comprised of approximately $140 million to $170 million for growth and $60 million to $80 million for maintenance, acquisition, remodel and corporate infrastructure.

A few balance sheet variances to note include deferred income taxes were down $6 million, driven by the tax deductibility of a non-cash performance share-based compensation expense related to the restricted stock that had vested in March. Our assets were up -- other assets were up $4 million, driven by normal business growth, as well as acquisition activity in Q1. Deferred revenue was up $6 million, driven by growth in personal training and early registration for summer children's activities and events.

With that, let me discuss our updated financial guidance for 2012. We expect our revenue will grow at $1.11 billion to $1.135 billion or 10% to 12% growth. Based on our first quarter results, we're increasing both the bottom and top end of our annual earnings guidance. We anticipate our net income will grow to approximately $112 million to $115.5 million or 21% to 25% growth.

This net income guidance includes an anticipated $1.6 million after tax in performance share-based compensation expense for the 2012 tranche of performance restricted stock. We expect our diluted EPS will grow to $2.65 to $2.73 or up 17% to 21%. This EPS guidance includes an anticipated $0.04 of non-cash performance share-based compensation expense for the 2012 tranche of performance restricted stock.

As we look to Q2, we expect revenue growth in line with our annual guidance and mid to high teen net income growth. Keep in mind, we expect the largest net income and EPS growth in Q4 with comparisons that included share-based charges in 2011.

That concludes our prepared remarks regarding our first quarter financial results. We're pleased to take your questions now.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Paul Swinand.

Paul Swinand - Morningstar Inc., Research Division

I wanted to just get an update on what the cost to build the new clubs are and especially when you're talking about Diamond-level clubs. Should we be thinking about the higher cost obviously when those clubs go in. And then if you could also in that CapEx discussion just discuss what you're spending per club to update a club. The top of mind since the Skokie club is being redone right now, but we're happy to see that impact on retention and all the user experience. But I want to make sure I'm modeling correctly going forward.

Bahram Akradi

Okay. Our clubs are new generally. And that depending on where we build the club, mid-35 range and they could get as high $45 million, $50 million, depending on the type of market we're building the club. It's more truly the location than it has to do with the Diamond-level facility or a gold or platinum level facility. Some places, we're able to acquire land for $2 million to $4 million. And some places, we will spend as much as $15-or-more million just for land alone. So the -- realistically, as you look at this, for us, it's not very complicated. The increased cost of property easily correlates to the cost of dues an incremental $10 or $15, assuming you can get the same number of memberships, and you can, when the real estate is more expensive almost all other retailers are faced with the same thing. So it doesn't -- it just changes the currency. So the mathematics works. We still are looking for the same IRR and same ROIC under the facilities. We do our business plan. It's kind of varied. I don't want to have -- can I tell you to plug in an average of $40 million or $36 million? No, because it all depends what that mix will be in a given year. If I have 3 clubs in the Midwest, the 3 clubs could all come in under $100 million. if I have 2 big clubs with tennis in the East Coast, I could spend $100 million in just 2 of them. So that's just should give you a perspective. I don't think you can, on an average get that granule.

Michael R. Robinson

Paul, your second question really relates to the ongoing maintenance CapEx and how we look at that. Obviously, it is absolutely critical that we keep these clubs looking like new. And we have built into our models and have spent over the past several years and continue to spend in a range of $3.5 to $4 a square foot for that maintenance CapEx, and that continues to be a number that we feel can deliver the quality and the look and the feel that we want to see for our business. As you mentioned, the club in Chicago that you're seeing, we go through a normal routine of reviewing these clubs and their needs and want them looking fresh all the time. And the benefits of it, obviously, you see in customer satisfaction, and retention of our membership base, and it works.

Bahram Akradi

We repeatedly talk about best programs, best people and best places. In order for us to demand the top shelf pricing and be able to get it without resistance, we have to deliver the very best product. Historical practice of most folks in the health club space is to build the club and then continually to rob it as time goes on by not investing back in the facilities. We have done the opposite of that since the inception of the company. We're going to continue to do so.

Operator

Our next question comes from the line of Scott Hamann of KeyBanc.

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

Mike, can you quantify what the impact on attrition was for the price increase and then the addition of the acquisition clubs?

Michael R. Robinson

Yes. Big picture, the 2 drivers were exactly what you said, and they're roughly half and half. The increased churn or the increased movement as we work through and settle out the memberships, which we clearly expect when we acquire these types of centers, was that I think our total increase was 50 basis points. That was about half of it. And again, I'll just remind everybody who is listening that we increased our price to about 80% of our membership base late last year and then had some other price increases to a smaller portion of that early in the first quarter. We typically see an increase in attrition from that. We saw an increase in attrition. But frankly, it was a smaller increase in attrition than we model ourselves. So we were extremely pleased overall with the net impact of what happens on this. Keep in mind, when we manage this business, we're really managing this business on a dues-per-club basis and looking at how we can optimize that dues per club. And the increases that we derive from these -- from the dues increases themselves clearly met the hurdles we were looking at and frankly delivered a lower attrition level than we would have modeled in initially.

Bahram Akradi

I want to add to this. These 9 nightclubs were significantly smaller and they fit into our, what we call, the infill strategy on those 4 markets where we're in. Almost every location is a location we cherry picked, we wanted, but they are not locations we would want to build a very large facility in. So it's fitted from that standpoint. We were able to get into these markets, grab these clubs and with $300,000 to $400,000, $500,000 investment in each one have a complete facility that looks and feels like a Life Time Fitness facility, a small fitness facility. So overall, it was a great transaction. It's -- on the other hand, the previous operator had been not able to take the direction we will just because they were competing with a low-end club operators and they have basically sold $19 and $20 memberships. That membership has to and is turning over as we remodel those clubs and take the prices up to $40 and $50 for a single membership, if not more. We are very comfortable with our strategy. We are very comfortable with turning over that membership, getting the right type of customer for Life Time who was willing to spend on programming and appreciates the higher quality and service. This is going to work. It's going to work well over the next year or 2, but they're just like any other club. They're going to be negative at first until we build enough membership and enough dues with those clubs that they turn around and give positive EBITDA and improvement on our numbers. But the negative impact will remain as we continue to remodel and reprice the remainder of those clubs on that segment and it's all in our plans.

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

Understood. And just looking out over the next couple of quarters, do you expect both of these, the price increase impact as well as the new club acquisitions to be a pressure on attrition? And what are you embedding in the guidance in terms of the benefit of the price increases?

Bahram Akradi

What I would look at those, is these clubs are small clubs I emphasize again, with a small base membership that is being more or less turned over. So they're going to have -- it's going to take 1 year or 2 before we get to a meaningful return on those investments. But if we build a brand-new club at that size, it would do the same thing. It would take -- it would start -- actually, the clubs will lose money for a while before they turn around and make money. As far as the negative impact of attrition, we expect to have attrition to tick up in the second quarter relative to last year still due to the effects of these programs we run and again, into many clubs. However, we are working on growing dues beautifully year-on-year just like within the first quarter, in the second quarter and so on. So again, we are focused on a 36% market and managing the attrition right around it, a tick down or tick up as long as we're growing the dues. Now the problem would be, we can't grow the dues and attrition persist or ticks up. That's the problem.

Michael R. Robinson

And not a problem that we're experiencing.

Bahram Akradi

And it's not a problem we're anticipating or experiencing. We're very, very comfortable to say the least about how things are moving forward. We're very pleased with how things are moving forward.

Operator

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

Edward Aaron - RBC Capital Markets, LLC, Research Division

I just wanted to ask a little bit more about recent membership trends. So certainly, I understand the attrition dynamics you've discussed. But just kind of backing into the numbers. It looks like the year-over-year change and net membership adds fell off quite a bit after January. So can you just maybe sort speak of the kind of the cadence of the membership numbers as you move through the quarter and why it sort of seems to me that the attrition had a bigger uptick kind of later in the quarter and what might have caused that?

Bahram Akradi

Yes. So let me walk through this because I think you guys are getting carried away with it and we're continue telling you that you're more concerned about than we are but that's okay, so hear me out. We have had a phenomenal first quarter relative to our own plan. Your guidance were ahead of our plan, and we came over your guidance. So things are going really great. Now let me break that down for you. We are readjusting the membership types in clubs. We're changing prices in some clubs. We're going from a gold club to a platinum club. We're changing the mix. We are selling at higher average dues than we have ever sold before across the board in the system. Inclusive of the fact that these 9 clubs, they are very small relative to our -- their average dues, even after we have raised the price, are significantly lower than the rest of the clubs. We are -- as we turn a membership over and get a new member in, we are increasing the company's average dues altogether in the right direction. So what we are focusing on is same-store sales dues growth club by club by club, and sometimes that means a little bit less membership growth, a little more dues growth. We have clubs where we don't like the experience that is in the club, and we think it's largely because the dues is to cheap. And we're going to raise the dues on a new members, so that slows down the number of new people joining. And within a year, once we anniversary 2013 in that particular club, we'll have a bigger jump in the dues on existing members. Again, we're trying to turn the memberships to the direction we want the membership profile to look like. So our focus is to grow the companies and to have brand that is coveted by that customer that is looking for the best product, the best programs. And if the strategy is working, we're getting the right customers in. We're getting the right dues. We're getting the right ancillaries. We are able to sell variety of different programs that we haven't sold before so -- and we're just really -- we're really -- as we look at our strategy, what the lay out and we expect, it's all working.

Edward Aaron - RBC Capital Markets, LLC, Research Division

Okay. And if I can just sneak in one follow-up question on the maturer clubs. The comps have definitely gotten much better. It doesn't seem -- from what I've heard from you in the recent past, it doesn't sound like that's being driven by improvement in the capacity utilization. To the extent that's true, should we be less focused on that capacity utilization number from mature clubs? In other words can you just change your plans around those clubs to kind of permanently operate successfully at the lower level of capacity than they were previously targeted for?

Bahram Akradi

The mature clubs -- really, what you hope the membership -- you open a club and say, "We want 10,000 memberships in here." And after 5 years, that membership settles down at about 8,400, 8,500. I'm just giving an example. The reality is the membership is 8,400, 8 500. Do you have the capacity somehow if somebody shows up and buys 300 corporate memberships, can you have 300 more members in there? Yes. Do we try to continue to grow that membership? Yes. But they basically will settle to where they will settle, and then you need substantial changes to get a radical change in the membership in that club or the other thing you have to do is what we are doing. The way we look at our business is you can build a big box and sell it for $25 a month and have 40,000 members coming in to join. They may use it. They may not use it. That's one strategy, and you don't care what products you deliver. Our approach is to address the customer who loves yoga then give them the best yoga. The person who is interested in weight loss, give them a weight-loss program that nobody else in the country is offering, make sure it's the most robust weight loss. If they're looking for basketball, give them the best basketball programs, leagues, coaching camp, basketball camps, et cetera. So we are focusing the top shelf delivery of the different interest groups. Do I feel like across 100 clubs whereof we are executing at an acceptable level across all these programs? The short answer is, absolutely not. So the opportunity for Life Time is to solidify our brand across all of our facilities to the best programs, delivered regardless of what the interest group is. We have long ways to go. We have tons of opportunities to seize in that space. And I believe as we continue to work towards that strategy, we solidify our differentiation with anything, anybody else out there. We can demand the pricing we want. And with that strategy, I see opportunity to grow dues across all the clubs. And I see also we can grow memberships, but it's systematic. They're coming in for a good reason. It's not because you have a cheap price or a promotion.

Operator

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

Sean P. Naughton - Piper Jaffray Companies, Research Division

First, can you quantify some of the impact that the reduced lease expense had on, on some of that center operating margin improvement? And then just secondly, maybe you could just give us an idea of how things are going with your initial foray into Canada and potentially some of the longer-term opportunity in that market?

Michael R. Robinson

Sure. I'll take the first part of it, and I'll let Bahram talk about Canada. As we have said in the fourth quarter that the reduced lease expense on an annual basis is approximately $8 million, so that will be a couple of million dollars, which should be less than 100 basis point and now it's in roughly the 75 basis points range. It was the impact of that on our center operating expense. However, on that overall operating line, we also saw an increase in our depreciation resulting from the purchase of those facilities. And that went up about 30 basis points, so your net was in roughly the 50 basis points range. That was impacted by the purchase of those facilities. Bahram, you want to talk a little bit about our...

Bahram Akradi

Yes. Our Mississauga facility opened up above and beyond our expectation. The club is doing phenomenal. We had the highest swipes of membership usage as we opened the club as we've seen in a long time. The memberships are strong. The average dues are strong, and we have been looking and working harder on securing additional facilities in that market.

Sean P. Naughton - Piper Jaffray Companies, Research Division

Okay. Do you think that would be -- that would continue to be a greenfield or you're open to either one, whatever makes the most sense from an ROI perspective?

Bahram Akradi

Generally, we're looking for Greenfield to build our types of facilities. Again, we're not interested in buying small facilities that don't fit the look and feel of Life Time and trying to change, with the exception of what we did in LFF. Again, that fitted strategically particular markets we were in. But if we find the right type of facility and the right type of memberships, the high-end customer, the high-end programming, the high-end facility, we will look at acquisitions as well both, but we're also looking at buildings.

Operator

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

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

You've had 9 straight quarters of double-digit in-center revenue growth. It's fantastic performance. What do you see as the big drivers to keep that going versus tougher comparisons? Is there any more low hanging fruit there? And I guess, what programs do you see as being the most successful to drive that going forward?

Bahram Akradi

Good question. We are inventing new programs that not only help just having more ancillary sales, they also enhance or give people reasons to go and buy the other things as well. So we are enhancing our services on spa offering. We are improving the direction of the food. The new facilities opening in our clubs, they have food, and everything we sell in the café excludes high-fructose corn syrup, excludes sugars, food coloring, all the things that we talked about. I mean, there's no hormones in the meat. I mean, the food is phenomenal. The products are phenomenal. We're positioning these as a little mini place, like a Whole Foods, where you can come in and buy what you want to buy and not worry about not having something in that is not good for you. The customers are responding to the food. We are improving the variety of the products. We're offering a spa. We're improving the variety of the programming we offer on testing and personal training. So there is just more products and more high end. And once the customers experience purchase of one, it ties into the other one. We have better effort in our organization for connecting the dots across the board, so things are working. We expect to continue to grow the in-center revenues.

Michael R. Robinson

I look at this in kind of 3 buckets. The first bucket is a focus that Bahram talked about a little earlier on in the call, and that is driving excellence in our programming across the system. If you look at and you totem-poled the performance of our in-center businesses, we have some that are just tremendous, but we also have a number of them that are lagging. And so a big focus we have is bringing the performance levels of those laggers up to median levels or above median levels. That's a huge focus that Bahram is driving through the operations themselves. The second real driver is something that we've talked about for a couple of years, and it's tremendously successful. And that's the introduction that we had a couple years ago of our affinity program, the Bucks program, and the ability to move more people into or to try many of the products and services that we have. That's been successful. We look for that and continue to drive the penetration of that programming more and more as we go into the future. We've got a lot of opportunity. And the third one is what Bahram talked about, continually looking at and expanding the products and the services that we have to offer across the entire system. So it's performance excellence. It's continuing to use that affinity program, growing that, as well as growing the products and services across all of our systems or all of our businesses.

Operator

Our next question comes from the line of Greg McKinley with Dougherty.

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

I wonder if you could talk a little bit about this trend you've quantified in the past when we look at cost to acquire memberships in excess of the enrollment fee collected. Has there been any directional change in that? I'm wondering if that's benefited some of your center-level margin improvement that you've delivered. And then maybe also talk a little bit about the competitive environment. I think Madison Dearborn Partners recently bought a big chunk of the Bally stores. Are you seeing them dump a bunch of capital into those stores and markets where you have presence to improve their offering and I wonder if you have any thoughts on that?

Michael R. Robinson

Thanks, Greg. I'll take the first part and let Bahram talk about the competitive environment and what's going on there. Remind me again what we have -- oh, the cost in excess. Cost in excess were up slightly in the quarter. If you look at it on a per membership basis, it's trending roughly the same, maybe up a little bit. It's just that overall there's more activity that's going on, so the actual dollars cost in excess was up slightly over the first quarter of last year. So it is not benefiting the overall margin, but it didn't have a significant impact the other way either.

Bahram Akradi

Okay. And your other question is, really, we have a lot of respect for competitors and the approach they take in their business. However, the customer that is going to those types of facilities now or even in the remodel facility is virtually the exact opposite direction of the customer that is coming to Life Time. So we virtually have no concern. We don't think -- whatever they do has no impact in what we do, 0.

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

Could you just make one final comment. I know you mentioned price increases Q4 and Q1. What was that in percentage terms, if you will?

Michael R. Robinson

It's roughly a 2% increase. It had a 2% benefit. We grew dues 11% in the quarter, and the price increase was roughly 2% of that 11%.

Operator

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

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

I guess I'll keep to the one question minimum. I guess, Mike, we've gotten a little spoiled. You've raised revenue guidance, I think, for the last 8 quarters. So this quarter kinds of stands out as the first quarter in a while that you're not revenue guidance. And I hear what you guys are all saying on what you've done with pricing and the expectation for attrition and so on. But I guess, it's hard to reconcile your normal pattern of raising revenue guidance with what we're hearing from you guys today, which is why I think the stock is reacting the way it is. So maybe if you could help us understand if there was anything that happened in the quarter that would give you pause from raising that revenue guidance this early in the year?

Michael R. Robinson

And the answer is that we're tracking right to, in fact, arguably slightly ahead of where our own internal expectations are. That revenue guidance was a guidance that had us in the middle of that range from our expectations, and so we are -- we want to drive it. We're continuing to drive higher revenue, but we're comfortable with where we're at right now.

Bahram Akradi

Sharon, I'm going to add to that. Our internal BHAG goal is to obviously be significantly better with the revenue growth. And that is going to -- has to come from additional activities, so we will continue to make an effort to bump up the growth rate in the company across all of those areas healthy way of life aspects that I mentioned to you guys earlier. We hope to deliver. But as always, we are not going to promise anything. We are not certain we're going to deliver.

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

Bahram, can I just follow up. I know last year, you had a stretch goal that was above initial guidance and you ended up meeting that. I don't expect you to disclose it, but is there a stretch goal this year as well that would be above the guidance range that is out there?

Bahram Akradi

All right. So as long as you don't go put it in your numbers, the short answer is yes. Of course we have stretch goals, but we haven't disclosed it because it's not a round pretty number like $1 billion. And we're going to work harder. I can tell you right now that in no shape or form this management is going to be satisfied with a 10% to 12% top line growth. That is not what we are wanting to -- we don't want to be at the 10% to 12% top line growth company. That's not attractive for us. If we were $50 billion company and doing that, that's fine. We're only $1 billion company. So we're going to work harder, and we have the strategies to deploy. But we will not promise you guys anything. We don't put anything out there in form of numbers that we are not certain we can hit.

Operator

Our next question comes from the line of Brian Nagel.

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

So I wanted to just jump back on the attrition issue as well, I mean, the risk of being repetitive here. But as we look at the numbers here, Mike, I know you weighed down in response to another question, I mean, just how the degree to which your pricing actions lifted attrition here in the first quarter. So the question I have, as we look in, do think that now, that effect is now complete in Q1 or should we expect a similar type or some other type of effect as we look into Q2, Q3 of this year?

Bahram Akradi

I'm going to take this and try to answer you a different way. Okay? Attrition rate that we have stated to you guys, the target of 36%, is a very, very comfortable target for the company, and our annual plans does not expect to improve above 36%. Now our desire is to get below that, and we have to work on how we can accomplish that. We have markets with lots of clubs that we are running in low 30s with all mature clubs. We have markets that we are in 40s in terms of attrition, low 40s, which is actually unacceptable. Part of those numbers in those markets, part of them, in our belief, is a function of just the sitographic, demographics of who lives there, how often they move, how young they are, how mobile they are. But a large part of it, in our belief, is poor performance on behalf of our operations in those markets. So we have the strategies. We have deep-dive initiatives into lots of resources into one club. We have widespread initiatives looking at the whole picture. We're working on initiatives to enhance the attrition issue in the markets where we have high attrition rates. We think we can bring that down. But some of those clubs with those high attritions are actually doing great revenue, great EBITDA generation. So despite the fact that they have high churn, they are making a lot of money. So we really are working in different forces, in different markets. I have clubs that are in the teens in the attrition. I have clubs that are in the -- prototype clubs in the mid-20s attrition, and then we have clubs in the mid-40s attrition. So we're all over that deal. The numbers will work comfortably. Right now, right now, I'm not seeing a significant alarm on the attrition from -- I don't see any alarming, to be honest with you, from attrition change in the first quarter or second quarter relative to last year. They'll still be within that 36%. However, we're working really, really hard and we hope to get the attrition rate to below the 36% rate in a good -- solidly below 36% in -- by the end of the year and into the next year. But it's a whole strategy, and it's not the sensitivity that you guys are showing to the numbers from last year to this year is overreaction in any shape or form I can explain to you. But we are all over it. This is not something that we have entire group of people at the corporate office dedicated on attrition, studies, trends, analytics and programming how we can improve it. Now we did bring the attrition down from high -- mid-40s at the worst time to where we are at right now, which is really solid. We're comfortable with it, but we're continuing to figure out how we can improve it.

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

That's very helpful and all the detail. The second question, if I could just follow up with one. We look around, and from a consumer standpoint, I think, a lot of metrics over the last, whatever, few months, 6 months, whatever, have shown an improving consumer environment. So we're focused here on attrition. Obviously, there's a lot of moving parts with the pricing actions you've taken in your acquisition, et cetera. But as you look at your -- maybe put it this way, your gross membership adds and particularly at some of your older facilities, have you seen a benefit lately of easy macroeconomic pressures begin to drive more new memberships to some of these facilities that we may be missing through the aggregate numbers we look at?

Bahram Akradi

Yes. You're missing through a couple of different things that I think -- a large portion of our facilities, more than half of our facilities, were in the market that we had record high temperatures in March and April, even the winter. So the seasonality -- the temperature change basically had an impact on the new people walking in the door because they're more outside. They're playing outside. Our summer season, where we have a stronger membership sales because of our pools, obviously, is not a factor in middle of March or in April -- in February. But yet, the incredibly amazing weather that makes me not want to come inside and go play outside on my bike or something did play a factor on our memberships probably on both sides on bringing members in and on attrition, both slightly but those numbers show up on the numbers. So while you're looking at customer economics easing, maybe you can see that in our ancillary revenues that we are also showing the strong numbers across the board everywhere there. But the traffic to the club could have had an unusual seasonality factor to it due to the amazing weather, from the oscillation of equator or whatever they were talking about on the weather. So that has an impact directly on our type of business, and we still had a 22% EPS growth. So I mean I'm not sweating anything.

Michael R. Robinson

Brian, I want to go at this just a little bit differently too, and that's if you look purely at the economics of the member that we're bringing in, we are extremely pleased with that. And we go back to the measurement points that we're looking at and that is dues. What is going on with dues and the dues increases? So we've been successful in being able to bring in that higher level dues payment, which tells us that economic -- that we're bringing in the right economic type of person in. We're also seeing continued increase in the spending habits and spending behaviors of the member -- the existing member, as well as the new member, coming into our clubs respective of the in-center revenues. And so those add almost 15%. Those would tell us -- I can't sit here and predict what the true economic condition is but I can tell you that the strategy of bringing the right type of customer in and having it being delivering the right type of economics for Life Time Fitness is clearly working, has been working and we expect it to continue to work.

Bahram Akradi

And we just had our best dues revenue growth in a -- for a quarter in a long time. When you look at our quarterly dues revenue growth, it was great. Not good, it was great. So I don't see -- again, what we think the mood, the feeling here is that everything is working great.

Operator

We have no further questions at this time. I would now like to turn the conference back over to Mr. John Heller for any closing remarks.

John Heller

Thank you for joining our call today. We look forward to reporting to you our second quarter 2012 results, which tentatively has been scheduled for Thursday, July 19, 2012, at 10:00 a.m. Eastern. Until then, we appreciate your continued interest in Life Time. Thank you, and have a good day.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Life Time Fitness' CEO Discusses Q1 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts