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Life Time Fitness (NYSE:LTM)

Q2 2012 Earnings Call

July 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

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

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

Michael Lasser - UBS Investment Bank, Research Division

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

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

Sean P. Naughton - Piper Jaffray Companies, Research Division

Paul Swinand - Morningstar Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2012 Life Time Fitness Earnings Conference Call. My name is Keisha, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.

I would now like to hand the conference over to Mr. John Heller, Senior Director of Investor Relations. Please proceed.

John Heller

Thanks, Keisha. Good morning, and thank you for joining us on today's conference call to discuss the second 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 second quarter results, we have filed a Form 8-K with the SEC, which also includes the press release. On today's call, Bahram Akradi, our Chairman, President and CEO, will discuss key highlights from our second 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, Keisha 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 third 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 am pleased to be here to share my thoughts and perspective on the second quarter 2012 results. We had a great second quarter. Revenue growth remains strong across the board. Dues revenue grew nearly 11% for the quarter over a year ago.

Our in-center revenue had its 10th straight quarter of year-on-year double-digit growth at 12%. The continued strong growth rate demonstrates the effectiveness of our member connectivity initiatives and the quality of our in-center products and services.

Net income for the quarter was up over 21% versus last year and our earnings per share was $0.73, 19% higher than last second quarter. Same-store sales was up 4.2% and mature center same-store sales for the quarter was up 3.6%. Operating margin for the quarter was 19.6%, up 160 basis points over last year. I am very pleased with these results.

Attrition for the quarter was 8.6%. Excluding the impact of the Lifestyle Family Fitness center acquired late last year, attrition for the quarter was 8.2% versus 8.1% last year. Our trailing 12-months attrition was 36% or 35.5% if you exclude the impact of Lifestyle Family Fitness clubs. There has been a lot of noise around attrition since our first quarter earnings release.

Let me emphasize, the attrition numbers work very well within our business model. Remember that our goal is to maximize dues revenue. With our current attrition rate at around 36%, we have been able to focus much more on price increases and mix improvement, and this allows more improvement in our most important metric which is the growth in dues revenue.

I could not be more satisfied with our 10.9% year-to-date dues growth. This is an impressive performance by our team. Overall, I am thrilled with where we stand halfway through the year. Total revenue year-to-date is up nearly 12% over last year. Over the next couple of years, I would like our stretch goal for revenue growth to be 15%. I will emphasize that this is not our official guidance, but rather a big target that we will strive to achieve.

I would like to comment specifically on Lifestyle Family Fitness acquisition. While we are going through remodeling and repositioning of these clubs in 2012, we expect they will be very productive facilities in 2013 and beyond. We are very bullish on this acquisition and the membership demographic trends that we are seeing.

Our strategic game plan for growing Life Time as a healthy way of life company is working. We have the potential for strong growth in the next 5 years. We're working hard to accelerate our Greenfield development and bring more iconic destination locations online in prominent areas with colorful demographics. Although it can take time to build this backlog, executed properly, these centers can drive both higher average dues and higher in-center spend per membership. We will announce more details on these locations in the next few quarters. Stay tuned.

In addition to our center growth, we have opportunities for fast growth in our Athletic Events and related businesses. When you add in these possibilities in our emerging myHealthCheck media and certification and training business, we are very excited about what our company could look like in the near future.

Finally, we continue on our path of making Life Time the top-shelf brand within all segments of healthy way of life company. Our strategy is to provide the highest level of product delivery and consumer experience while still providing a solid value. As I stated last quarter, we believe executing on our brand, strategy is the key driver to achieving our financial goals, and it is working.

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

Michael R. Robinson

Thanks, Bahram. Let's start by discussing in more detail some events and initiatives that have occurred over the past few months. First, let me remind everybody that we are still 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.

In the fourth quarter of 2011, the company determined that achieving the 2012 diluted earnings per share performance criteria required for divesting of the remaining stock was probable and we recognized the related compensation expense. During the second quarter of this year, the company recognized the noncash performance share-based competition expense of $700,000 pretax versus $1 million pretax in Q2 of last year. Results and guidance reported in our earnings release and discussed in this call are inclusive of this expense. We expect the total impact of this expense in 2012 to be approximately $0.04 per share. The company anticipates recognizing the remaining portion of the performance share-based compensation expense of approximately $1.3 million pretax or $0.02 per share ratably over the remaining 2 quarters in 2012.

In May of 2012, the Compensation Committee of the board approved the grant of long-term performance-based restricted stock for approximately 50 members of senior management. The committee approved this grant to serve as an incentive to our management team to achieve certain cumulative diluted EPS and ROIC targets in 2015 and 2016. The EPS targets are 1.5x the compound annual growth rate under our current long range plan, and the ROIC targets are 1.1x the ROIC under our current long range plan. We do not believe that the achievement via [ph] the cumulative EPS or the ROIC targets is currently probable and have not taken any compensation expense related to this plan.

Our integration of 9 former Lifestyle Family Fitness facilities in Ohio, Indiana and North Carolina we acquired late last year continues to progress well. We have completed the remodel on 8 of these facilities to give them a Life Time look and feel. The ninth and final remodel will be completed in the third quarter. As a reminder, at the acquisition date, the memberships at these centers came in at less than half the average monthly dues of our current portfolio, which lowers our average revenue per membership company-wide.

As a part of the transition and in conjunction with the remodels, we have been raising the dues at these centers substantially, and in some cases, over 100%. Obviously, this has increased the attrition of these members, which we fully expect. Our goal is to trade out the low dues memberships and attract a demographic that better fits our differentiated model. We are seeing good results from these moves.

Our dues revenue is higher than our first full month dues after the acquisition was completed. Even as we absorb the transition and integration costs in 2012, we expect a positive contribution from these centers in 2012. In April, we completed the acquisition of Chronotrack Systems, a business that provides race timing for athletic and endurance events. Simultaneously, we merged in an event registration business called Bazu, in which we had a previously acquired a majority interest into Chronotrack. This acquisition complements our events businesses and the combined business offers an enhanced product and service portfolio that is being sold to event producers worldwide. We expect this business to have a small positive contribution to income this year.

Now let me talk about attrition and retention. For the quarter, our attrition rate was 8.6%. On a true comparative basis, excluding the impact of Lifestyle Family Fitness members we acquired in December, attrition for the quarter was 8.2%, up just slightly over 8.1% last year. The increased attrition from the Lifestyle acquisition was expected, as we have raised dues pricing on those membership generally 25%, and as I said earlier, in some cases, over 100%.

We expect the incremental attrition related to the Lifestyle acquisition to continue throughout the year. In addition, in our core business, we instituted a dues increase late last year. This drove slightly higher attrition in the quarter. Please keep in mind that the incremental revenue from the dues increase well outpaced any loss of dues from this attrition. Again, both of these influences were expected and well within our tolerance ranges.

Our trailing 12-month attrition rate is 36%. Excluding the impact of the Lifestyle acquisition, trailing 12-month attrition at the end of the quarter was 35.5%, lower than last year's trailing 12-month rate of 35.8%. We continue to be pleased with our retention results, especially given the net dues growth from our recent pricing actions and the membership transitions from our acquisitions.

For the memberships that have cleared out and we replace with new memberships, we are seeing a healthy increase in average dues in effect, trading a lower dues membership for a higher one. The estimated average life of the membership is 33 months, unchanged from last quarter. We finished the quarter with 708,585 memberships, this was a 6.7% increase from the second quarter 2012. Excluding the impact of the Lifestyle Family Fitness acquisition, memberships grew 2.8% for the quarter. While this growth is lower than a square footage growth, again, the real result is a stronger, better membership base paying a higher dues rate. We clearly see this in our total dues growth.

The balance of flex members increased to approximately 94,000 versus 93,000 at the end of Q1. The number of open centers at June 30, 2012 was 105 compared to 92 at June 30, 2011. 60 are our large current model and 82 have been opened more than 3 years, which we classify as a mature center. We operate approximately 10 million square feet of fitness facilities, including our acquired centers.

Our total revenue was $288.3 million for the quarter, which was up 12.3% from last second quarter. Our main revenue drivers for membership dues revenue grew -- growth at 10.7% for the quarter, our powerful dues stream accounts for 65% of our revenue. Dues increases taken late last year and in Q1 of 2012, represent approximately 2% to 3% 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 12.2% 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 second quarter same-store sales were up 4.2% and our 37-month mature same-store sales were up 33.6%. The recent acquisitions will not be included in the same-store sales until the 13th month of operation.

Revenue per membership in the second quarter was $400 per membership, which was up 3%. Excluding the impact of Lifestyle Family Fitness centers, revenue per membership was $410, up 5.4%. In-center revenue per membership was $129 and up 4.4% in the quarter. Excluding the lifestyle centers, in-center revenue per membership was $133, up 7.4%.

As we've discussed, we expect the lower dues in smaller facilities with fewer revenue driving amenities, such as cafés and spas in the Lifestyle 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 second quarter of 2010 and 2011, we were at $112 and $124 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 program offerings.

Now I'd like to discuss our cost structure. Year-over-year, operating margin was 19.6%, an increase of 160 basis points from 18% in Q2 2011, and the highest Q2 level in 4 years. Income from operations increased $10.3 million from Q2 2011. Center operating margins continue to improve. For the quarter, center operating costs improved 320 basis points, or if you focus right on the centers, 250 basis points when you compare the center revenue to the center operating costs. Leverage from increased dues revenue and mix changes continue to drive this margin improvement. In addition, we are seeing margin improvement year-over-year in our lower margin in-center businesses. Reduced leased expense from the buyout late last year of 6 former leased properties also contributed to the improvement. Costs in excess of enrollment fees were higher during the quarter, but clearly much more than offset by the initiatives and results mentioned above.

For the quarter, marketing and advertising costs were down 10 basis points. As we have planned, we continue to invest in our LTBUCK$ affinity program and marketing spend in new events and other corporate initiatives. These programs are showing results as evidenced by the strong growth in dues and in-center revenue.

For the quarter, G&A expense was up 10 basis points from last year as a percent of revenue at 4.8%. Leverage from core general administrative functions is being offset slightly by planned investments and expanding our consumer-facing technology. These initiatives are designed to further enhance member connectivity and drive more product and service differentiation.

For the quarter, other operating expense was up 130 basis points, primarily as a result of our continued investment in our Athletic Events businesses, including the Chronotrack acquisition; the myHealthCheck business infrastructure and costs of sales related to our growing media business. While other operating expenses increasing slightly as a proportion of the total cost structure, as we expect, we are seeing significant top line growth related to these synergistic healthy way of life businesses.

The associated revenue related to these operating expenses doubled over Q2 2011, driven by growth in our events businesses, including the Chronotrack acquisition discussed earlier, as well as our total health business.

In 2012, while we will continue to invest, we expect the cost of revenue relationship will improve as we grow the revenue base. Depreciation and amortization was up 30 basis points for the quarter to 10%. This increase was expected as we absorb the incremental depreciation from the 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 $6.5 million from $4.7 million last second quarter. This increase in interest expense reflects the impact of the W.P. Carey mortgages we assumed as a part of the 6 centers lease buyout at the end of 2011.

Our tax rate for the quarter was approximately 40%. We currently expect our full year tax rate to be approximately 40%. That brings us to net income for the quarter of $30.3 million, up 21.4% over second quarter 2011. Weighted average diluted shares for the first quarter totaled 41.8 million. Overall, we achieved diluted EPS of $0.73 in the second quarter, up 18.6%.

My next topic will be the cash flow and our capital structure. Our cash flow from operations totaled $68 million for the second quarter compared to $58.4 million last Q2, up 17%. For the quarter, free cash flow was slightly positive and year-to-date is $36 million before acquisitions. We have now generated 14 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 foot 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 structure leverage ratio.

We continue to focus on our capital structure, cash and debt availability. Our total debt for the quarter increased $25 million since Q1, driven primarily by acquisitions closed in the quarter. As of June 30, we have $430 million outstanding, including letters of credit on our $660 million revolver that leaves approximately $245 million in cash and revolver availability.

Our net debt to total capital was 39.1% at June 30, and our EBITDA leverage was well under 2.5:1. Our covenant calculations for the quarter continued to show significant room versus our covenant limits. Year-to-date, we spent approximately $106 million in capital expenditures, excluding acquisitions. This was comprised of approximately $63 million for growth and $43 million for acquisition remodels, maintenance and corporate infrastructure support.

In the quarter, we opened 2 large Greenfield centers, one in Tulsa, Oklahoma, our first in that market; and one in Sandy Springs, Georgia, our 6th facility in the Atlanta market. We have no additional planned Greenfield center openings in 2012.

For the full year, we expect to spend approximately $220 million to $250 million for CapEx for the 3 large centers we've opened, commencing construction on our 2013 and 2014 centers, remodeling our acquired centers and maintaining our portfolio of clubs. This will be comprised of approximately $145 million to $165 million for growth and $75 million to $85 million for maintenance, acquisition, remodel and corporate infrastructure.

A few balance sheet variances from Q1 to note include -- goodwill is up $8 million, driven by acquisition activity. Other assets is up $12 million, driven by acquisition activity and normal business growth. And accrued expenses are up $16 million driven by accrued real estate taxes, accrued payroll, acquisitions and other general business growth.

With that, let me discuss our updated financial guidance for 2012. Based on our second quarter results, we are both narrowing and increasing the top end of our annual earnings guidance. We expect our revenue will grow to $1.122 billion to $1.137 billion or 11% to 12% growth. We anticipate our net income will grow to approximately $113 million to $116 million or 22% 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 the performance restricted stock. We currently expect our diluted EPS will grow to $2.70 to $2.76 or 19% to 22%. This EPS guidance includes an anticipated $0.04 of the noncash performance share-based compensation expense for the 2012 tranche of performance restricted stock.

As we look to Q3, we expect revenue growth in line with the annual guidance and mid- to high-teens net income growth. That concludes our prepared remarks regarding our first quarter financial -- our second quarter financial results.

We are pleased to take your questions now.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Brian Nagel.

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

So my question -- the question that I have is around the other income and then the other related other expense. So first of all, on the other income, you've seen -- you guys talk a lot about this in your prepared remarks, but you've seen a real acceleration now in growth, culminating almost a double here in Q2. How should we think about from -- basically, from a modeling perspective, how should we think about the trajectory of that business going forward from here? Will it prove as steady as your core center business or is it going to be more erratic quarter-to-quarter?

Michael R. Robinson

I'm going to start that and ask Bahram to comment as we go through it. I'm going to break this down in a sense. If you look at what's going into that corporate revenue line, there are 3 strategic initiatives or 3 groupings of strategic initiatives that we've seen good, solid growth on here. We have the health business, which is driven by the myHealthCheck, myHealthScore business that Bahram has talked about in the past. That's had a very low base, but is -- clearly is now growing at a 100% clip or so. We are still in an infrastructure investment stage there, but our expectation is that as you model that out over the next couple of years, we see very good growth, and we see this business going to a positive contribution in the next 6 to 18 months. The second business that we've seen very, very good growth on and again we talked about this a lot is our events business. Now that's a little bit larger than the health business we talked about before, but that also had 100% growth in the quarter. We are still investing in infrastructure in that area and really building out a team that can deliver events across our club network first and beyond that. So that's an investment for us now, but -- and also, you have to think about that from a timing perspective. We have -- the events businesses are really focused in Q2 but more, more in Q3, much more heavily weighted in Q3. So it's been an investment for the first half of the year. We expect it will be an investment this year, but we really have the base for solid growth in this business as we look into the future. We also have the Chronotrack acquisition that we talked about -- I talked about a little bit briefly earlier on, and that is -- that has added to the growth profile. Again, it's not a big business, but that was a positive contribution for us. We have a media business, that's the -- right now, that and the events business are the 2 largest businesses that go in there. That is continuing to grow, but is an investment for us too. But as we look into the future, we expect that to turn -- to drive positive contribution also, as we really extract more value from the tremendous demographic we have from our membership base. So I hope that gives you little bit underlying. Now just to summarize from the top level, our expectation is this is strong, that you're going to see strong growth. It will grow clearly faster than the center business growth we believe, coming from a small base. We will see a narrowing of that revenue to cost, and we're not going to be satisfied and we're investing these businesses to be long term, brand building, very focused on healthy way of life and producing very solid earnings for us as you go out 2, 3, 4 years. But you've got to invest in it in the meantime and that's where we're going.

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

But Mike, is there any way then to think about the profitability of this stream of revenue versus the center business? Now you alluded to this array, how should we think about the margins going forward?

Bahram Akradi

Brian, I'll take this for a minute. The Athletic Event business in combination with the media, which is the sponsorship that comes together, is a profitable business. It's not where we want it to be right now but collectively, it does make money. So I want to make sure we're not losing money on these businesses as you -- with a big portion of Athletic Event business is the funds, money coming from sponsorship not just registration. That money right now shows up on our media, largely on our media business. So altogether, that's a positive contribution. How do we break it? It's hard to really break it down because the real synergy in here is the fact that we have millions of participants and members with highly coveted demographics that advertisers like to be in front of. And if you just sell them the health club customer, that's just one venue. But when you start adding the healthy way of life venue, which is the events, the activities that goes on in the club, out the club, it becomes a really, really attractive place for them to expose their brands to. So opportunity for us to continue to grow, as Mike said, substantially faster and that's a percentage on those -- obviously because they're small right now, but substantially faster than the club business is good. They will be profitable and the profitability should dramatically increase from various add as we are, as Mike mentioned, we're spending some tremendous amount of money as we build the Greenfield and acquire on building the team and as well as branding of these things. On top of that, the synergy of that and our other 2 businesses, the clubs themselves, the memberships of the club and myHealthCheck, which is a corporate business, because a lot of times, like we did last night in our Torchlight, where we had more than 6,000 people participating, one of our sponsors had more than 300 of their employees, almost 400 of their employees participate as a team building event in the triathlon. So this all -- in that 5K run, all of these things are kind of working together. As we've talked about, they're synergetic and they're connected. So they should all grow. Our goal, as I mentioned, we're not going to be satisfied with a 12% growth in this company. While we're not guiding in any shape or form to 15%, I am personally not satisfied until we get our growth rate north of 15% on the top line and of course, bigger than that on the bottom line.

Operator

Your next question comes from the line of Scott Hamann.

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

Just a question on the membership trends. It seemed like coming out of first quarter, if I recall, there was a little bit of sluggishness, some of it might have been weather-related. And looking at the second quarter trends, it seems like maybe the new additions were a little bit lighter than we had anticipated. And I know advertising and marketing was down a little bit. So I'm not sure if that was kind of deemphasized. My question is how do you guys think about striking a balance between some of the leverage you have to bring new people in? And also, on kind of optimizing the current members you have?

Bahram Akradi

I don't know. Are you putting membership count in the bank, or are you putting dollars in the bank? I don't know how many different ways we can say this, and you ask the same question. So let me expand on this for you and the rest of people because obviously, it's a question that more people have. Our focus is to grow the revenue of the company and the EBITDA of the company and the dues of the company. As we look at what we do right and what we do wrong or what we can do better, we have noticed that our weakest customer is the lowest end customer. They spend the least amount of money in the club, they have the highest attrition. We notice that the mistakes we've made is most likely offer way too much value to clubs that we priced the lowest in our own system, and then viewing it again with lifestyle is another indication that we generally are more successful where we get a membership value that is more in line with all that we offer. So in a sense, in certain locations of Life Time, on our own, not counting the 9 Lifestyle, maybe about 10, 11 of our clubs, we have been observing that we have much higher attrition than our average. In fact, they are the ones who skew the attrition higher than -- the past year than lower. And we have lower ancillary revenues, and we basically are not getting the traction we want in those places. So what we've done is rather than trying to lower the admin fee and get more membership count in those particular boxes, what we've done is we basically said, "we're going to add a little bit admin fee, don't do specials in those clubs, raising the dues in those facilities and actually get the exactly the kind of member we want to have at Life Time". The strategy is working. Dues is up 11% nearly for the last 6 months. That dues revenue growth is substantially higher than the square footage growth. That is what I pay attention to. And sometimes that means shedding off a few members and sometimes means getting a fewer members into a place with much higher dues. As Mike mentioned, our attrition right now, in ways, is working for us. Most clubs, the rate at which we are bringing new member, the current rate at the clubs is higher than the average dues of all the existing members. So the members going out replaced by the new members coming in, paying the full dues rate is helping our average dues go up significantly. We're way over last year in member -- average dues per member despite the fact that we have added these low-priced members even with what Mike said, 100-plus percent increase on dues from these -- of all our customers, they're still the lowest-priced customers that we have. So despite all of that, the average dues is higher than our budget, and average dues is higher, significantly higher than last year. That's -- as we are studying and we are studying this everyday of every week, I have a team of about 20 people working with me in membership acquisition and retention. And I could not be more proud of the intensity of that team and the results they have delivered with again, 11% dues increase and you take that dues increase, divide it by square footage increase, and you should see that this is enormously successful. Now are we out of room for this? Are we tapped out? Hell no. As I look across the board, we have significant opportunities where we have priced clubs way too low, we offer way too much value, and then we bring in that marginal customer that causes the higher attrition. So our strategy is, as we always have done, not to do dramatic changes. Continually, we make small, quick adjustments. So I see a continued opportunity in being able to adjust dues in certain markets and make sure we work on this balanced attrition. Mid-30s is just fine, it's perfect as long as we grow dues the way we're growing dues right now. Does that answer your question?

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

Yes, yes, it does, Bahram. And then just, I mean, just on the attrition, should we -- just to set expectations, are we expecting higher attrition while you kind of flush through this new philosophy? Are you still kind of shooting for XLFF around 36%?

Bahram Akradi

That's exactly right. XLFF right around 36% and if it's literally -- I'm giving you this as comfortably as I can. If it's 0.5% higher or 0.5% lower in that 36%, I call it 36% and it's nonevent as long as we grow our dues and we achieve our strategy of getting the type of memberships. But when I look at us growing the dues and growing membership, I'm telling you, that's a positive trend. That's what's happening in the company.

Operator

Your next question comes from the line of Michael Lasser.

Michael Lasser - UBS Investment Bank, Research Division

I also wanted to ask about membership acquisition. Do you think your pricing activities is influencing your ability to add new members? And I guess, it still would be difficult to measure obviously, because you have some sense of attrition but your price perception of the market may give some sense to that.

Bahram Akradi

So obviously, we would like to get 10% membership increase and 5% dues, average dues increase. I mean, you want to get both, right? But the most important thing is that to position each facility correctly in the market that it's in. And as I mentioned, we have mixed results, very, very mixed results in our membership stats, as well as dues stats across the board. In some clubs, we are absolutely not concerned about membership count. In fact, we plan in our strategy to lose some members because we decide to toughen the entry into the club. We make it more difficult because of the condition of the market that it's in. For people getting in, we have implemented in the second quarter a number of initiatives that would make signing up in certain clubs much more difficult. As an example, we will not accept cash for the admin fee or enrollment fee, they would have to be paying with a system, those credit card or checking account that matches to their EFT. Because we had noticed, we are signing up in certain clubs, customers, they pay cash for one part, then they put some -- they give us some EFT and then we go try to collect on that EFT and we don't get it. So we don't want that member. So we are being a lot more selective, quality over quantity. And yet, I am absolutely confident we will continue to grow membership counts and we will grow dues revenue. And as I've mentioned to you guys, I am thrilled with the results of our expected goals and strategies. Right now, everything is working and there is plenty of runway to grow the dues revenue and ancillary revenues and the corporate revenues for the company.

Michael Lasser - UBS Investment Bank, Research Division

Let me add just 2 quick questions. First, on the breakdown of the other revenue, is that -- is the 3 businesses 1/3, 1/3, 1/3 or is it different distribution than that?

Michael R. Robinson

No, no. The media business and the events business represent probably close to 2/3, maybe a little bit more than 2/3 of our -- the total revenue. And then we have a number of other businesses that make up the rest of it. The biggest of which is this health business I talked about, but it's smaller, maybe 60% -- 50%, 60%, 70% of the size of the other 2.

Bahram Akradi

And that business, we have been -- while we had some sales, I would emphasize we have been in -- literally, it's almost preconstruction. We're not 100% complete with the development of the product, which I anticipate will be completed here by the end of the 3Q, middle of the 4Q and we will actually be going to market with that product much more aggressively. Right now, most of businesses, most of the clients we bring in, really are coming in as a beta customer, and they realized we're still working on fine-tuning that product. So we haven't gone bonkers trying to get clients with that business, and we have a fourth element to that, which would be an individual health membership that we will be able to launch by the same timetable, the same time that I mentioned to you. So we're ecstatic about the development, what we have been working very, very methodically and quietly been working on building these things. We're excited about what they could bring to us in terms of increased visibility, growth and membership counts, albeit those members will be at a much, much, much lower dues, average dues revenue than our access members to the clubs, but we're really excited about where we're going.

Michael Lasser - UBS Investment Bank, Research Division

One last one from you. The company has been quite effective at actually achieving its stretch goals in the past and you open the door to this 15% revenue goal. How do you expect to get there? What's going to be the main component that drives the company towards that run rate?

Bahram Akradi

Yes. So we basically, as you guys all know, we dramatically pulled back in 2009 on the center square footage growth on the new centers to get our balance sheet to exactly where we want it to be, which is consistent with our viewpoint of the world as it has been the last 4, 5 years and will be in the future. Now having said that, we are exactly where we like to be in our financial metrics. And just from the cash flow from operations and maintaining the same leverages, we have the ability to significantly increase the growth rate over what we have done. So the question then is the pipeline of having facilities coming online in the places we really are interested in. And we are filling that pipeline, as I mentioned to you guys, in 2013 and '14 combined, we have some great Greenfield coming in. I have added more people now to the real estate team, looking for more opportunities and more aggressively looking on that. The Athletic Event business, I think, can substantially grow. We might be able to experience 100% growth on those, that and myHealthCheck, albeit, it's on a small basis, but that's substantial. And then, I believe that we have substantial room, as I mentioned earlier, in our current facilities as we reprice and grow the revenues, not necessarily the membership count, but we grow the revenues of these clubs, both on the dues side and in-center. So as we have sitting in front of you guys, the 15% top line growth is a BHAG and a stretch goal. But we don't set those with idea that we're not going to have, as I mentioned before, setting goals with no plan of how you're going to get there. It's just wishes and dreams, and we're not in that business. We're going to figure out how to do that. We feel this company is a growth company. We've positioned ourselves as a growth company, and in order for us to be a legitimate growth business, we've got to get to that 15% top line growth and we will get there. It is not an official guidance, I emphasize over and over, it is not a guidance. It is just this BHAG stretch goal we're going to work on figuring out how to get there.

Operator

Your next question comes from the line of Brent Rystrom.

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

Just a quick question. Mike, you had mentioned G&A being elevated because of member connectivity, things that you're working on. When do you think you'll start to see G&A leverage a little bit better again?

Bahram Akradi

Let me jump on that, Brent. I know you asked Mike, but I want to answer you something. We are working on a number of initiatives and I'm not going to get into details of them more than I just said. We're working on some big things that can change the profile of this company to this healthy way of life, not just the gym. If we were to run this company as just a gym operator, we could shed off a bunch of corporate expense right now. I spend 70, 80 hours a week working 30, 40 hours a week of that on these other opportunities as a healthy way of life company. And so when we look at that right now, we are not quite at a place where we are capitalizing on the synergies of these different components we're building. My expectation is we will get there starting sometime middle of next year, maybe 2014, and when we get there, the revenue and the growth that those will generate are substantially more important than trying to save money in the corporate office. But with that said, I'm going to turn it over to Mike to give you answer to your question about...

Michael R. Robinson

Yes. The background is that what we are doing is smartly investing. Some of that investment goes in the other operating lines. You heard us talk about before, it's really kind of some development as we look to the future and the revenue drivers that will continue to strengthen this brand and some of that is in the G&A piece. The G&A piece of it is predominantly driven by some consumer technology initiatives that we have. And frankly, those, as Bahram said, we are seeing good leverage, very good leverage in the rest of that business. And we will balance that good leverage with investments that we believe we need to make. So I've said this before and I'll say it again, I would expect you should see this as very close to neutral until we start to drive that revenue. So not a significant leverage, but not a significant deterioration either for the next probably 12, 18 months or so.

Operator

Your next question comes from the line of Lee Giordano.

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

Can you talk some more about your profits for selecting these sites for expansion? What characteristics or demographics are you looking for? And then what regions of the country do you see the most opportunity?

Bahram Akradi

Well, we -- I personally am more involved right now, at least for this period of time, with the real estate again. We have a significant number of sites selected from East Coast to West Coast with higher demographics, more affluence, and we have a variety of different products developed so that we can appropriately go to some of these markets. Most recently, I have designed some prototypes, smaller boxes, which allow us to penetrate in the markets that may be difficult to find 10 or 12 or 13 acres of land. And also because of their geographical situation and traffic and such, the draw may not be as large as our -- places we have boxes. So we have, regardless of -- the order of priority for this is to look at the customer that we're after, and then develop a product that can take us to that customer, whether if it's large or small or combination of the 2. So I don't see anywhere less than what we have told you guys before in number of opportunities. We've always talked about 250 to 300 total facilities across the country and I certainly don't see any reason that number would be any smaller now than it has been before. So we have, in order to kind of hit our head on top right now in terms of how many we can. The question is how fast we can fill up a pipeline in production per year and that's what -- our most important effort is to make sure we have a good robust number of Greenfields coming out of the ground in the future years to come.

Operator

Your next question comes from the line of Sean Naughton.

Sean P. Naughton - Piper Jaffray Companies, Research Division

Just a follow-up on the square footage growth. I think you talked about before half would be Greenfield, maybe half acquisition. Has this changed? It sounds like you're leaning a little bit more towards greenfielding? And then maybe, Mike, you can remind us of the leverage you're comfortable in terms of running the company at this point in time? And then also, are we going to continue to skew towards more upper end, higher price point clubs?

Bahram Akradi

So I would emphasize on that. That does not necessarily -- like we're going to do X number of clubs each year in Greenfield and X numbers of clubs in acquisition. That's going to come potentially very lumpy, which means we might find X number of clubs that it makes sense for us to buy, reposition, remodel. Just let me clear, we have been looking at clubs across the country for 1.5 decades at least and whether it was the northwest clubs or LFF clubs, there are no clubs. I'd be bold enough to tell you, there are no clubs. It doesn't matter whose they are, where they are. And we can acquire right now that I'll be happy to put our name on top of them. Every club we see, they lack in flow, they lack in construction, they lack in finishes, they lack in so many different ways. So every acquisition we would think about, we think about with the fact that we have to go in and actually spend a bunch of time, energy, money to reposition, rebrand, reconstruct as a Life Time branded facility. Having said that, we are aggressively looking into that market and we are prepared to make those changes, so they're not a deal killer, as well as Greenfield expansion. So sometimes, you may be a year where we wouldn't acquired a club and produce that higher square footage growth by just Greenfield, and there may be years where we do it in combination of some Greenfield and some acquisition. Does that answer your question?

Sean P. Naughton - Piper Jaffray Companies, Research Division

It does. Just if you've got the kind of the comfortable leverage point you guys want to be.

Michael R. Robinson

Sure, sure. And I want to comment on this a little bit, too. I know in the past we've said, “As you look at our growth, we're really trying to drive a balance to growth.” And that balance in our mind is maybe around 50% is coming from the bricks and mortar of the square footage expansion and we have a number of other growth opportunities that Bahram has talked about, including the pricing the in-center revenue growth. All of the focus that we've got around our events business and the other synergistic businesses we have. So what we really want to do is balance that top line growth, but we'll get that really both through acquisition and through Greenfield. From a leverage perspective, we're sitting at well below 2.5x EBITDA right now. We're really comfortable in that 2, 2.5x EBITDA absent something that would be a bigger deal that we don't have in the pipeline, but something that we would absorb and then work it back down into that strong leverage ratio.

Sean P. Naughton - Piper Jaffray Companies, Research Division

Got it. And then just one follow-up. On the -- you were able to repurchase some mortgages, I guess [ph], they've been a help to the margin. Are there more opportunities there to take advantage of the current financing environment? And then also, can we continue to expect that 320 basis points benefit in center operations moving forward? Or should that be a little bit more moderate potentially in the back half?

Michael R. Robinson

First question, are there more opportunities? We continue to look into and to work those if we can find some. We are certainly in refinancing, we're hoping to recapital in that way, we will clearly do it. But that's really going to be opportunistic. And then as you look at the gross margins or that, we've seen tremendous improvement. My expectation, can we continue at 300-plus basis points of improvement quarter after quarter after quarter on this? No, we can't. Let's be realistic. But as we look between now and the end of the year, I think it is fair to say that we will -- we clearly see continued good margin expansion on a year-over-year basis.

Operator

Your next question comes from the line of Paul Swinand.

Paul Swinand - Morningstar Inc., Research Division

I'm just trying to think longer-term about the myHealthCheck business and just to be clear how it works. Those members, they would actually be members and could use the club, too, or only use it in a capacity of the company-sponsored myHealthCheck?

Bahram Akradi

Latter. They actually are not counted in the membership counts we are offering you right now. So I want to make sure there's no confusion. They are -- they have access to myLT and everything we offer online, they actually have access to our telephonic health advisors. They have many benefits, but they do not have access to our facilities other than coming in for testing or something like that or some particular events sponsored, as you mentioned, by their employer. However, in a lot of ways, as we look at growth of myHealthCheck, it creates an opportunity for upgrading those people to access memberships.

Paul Swinand - Morningstar Inc., Research Division

So then there wouldn't be any kind of capacity constraint because you could schedule them during the day or off-peak hours. Again, if you're thinking out of a long-term model, could you think of each club having 20% or some number ancillary on myHealthCheck members or...

Bahram Akradi

Yes, let's go through that. It has nothing to do with that. There is no capacity restraint on the club use or on our ability to deliver myHealthCheck screening. That's business we can go to the employers, corporate office and execute. We have numerous mobile units that they can drive right in front of their parking lot and do it, and they can come to our facilities to get the testing, but that testing does not constitute a club use broader than that screening. So therefore, there is absolutely no restraint on anything.

Paul Swinand - Morningstar Inc., Research Division

Okay, got it, got it. And then, obviously, there's some data. Is it hard for the customer to switch once they sign up? Or is it like could another company say, "hey, we do the testing cheaper" and take over the next year?

Bahram Akradi

This program is not a program that a company would switch around. If it was just the testing alone, that would be a commodity people can do biometric screening. Ours is a proprietary system with a health score that will tie into their incentives that they would put around their premiums as we do for Life Time employees ourselves. And once the company goes ahead and sets that up, it's very, very unlikely -- it's possible, but unlikely to try to switch because it will be very, very complicated. So I see it, while you may sign a 2-year or 3-year agreement with a company, it would be a much longer term than that, unless you fail them in your execution, which hasn't been our style in failing anybody.

Paul Swinand - Morningstar Inc., Research Division

Okay, interesting. And one quick question on the events business. I noticed some of the events that are very popular or maybe closed out for their limit, the capacity of participants. You're offering some space for Life Time members to sign up still. Can you tell us -- is that a significant part of the membership or are people uptaking that?

Bahram Akradi

It's not significant but it's just another added advantage of being a Life Time member.

Paul Swinand - Morningstar Inc., Research Division

Is that in all cities, in all events? Or is it just...

Bahram Akradi

Well, it's generally when -- we have developed a very sophisticated companies inside. As I mentioned, we focus on every people's group, passion: cyclists, runners, yogis, et cetera. So we have an event that is sold-out, does the Life Time member have an advantage to get in? Absolutely. So that's one more reason for someone to be a Life Time member because access to these type of events they're interested in, they're coveted and a lot of people want to get in over some other health club, yes.

Operator

And that's all the time we have for the question-and-answer session for today. I will now like to hand the conference back over to Mr. John Heller for any closing remarks.

John Heller

Thank you for joining our call for today. We look forward to reporting to you our third quarter 2012 results, which tentatively has been scheduled for Thursday, October 18, 2012, at 10:00 a.m. Eastern. Until then, we appreciate your continued interest in Life Time Fitness. Thank you, and have a great day.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect your lines. Good day.

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