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Town Sports International Holdings, Inc. (NASDAQ:CLUB)

Q1 2008 Earnings Call

May 1, 2008 5:00 pm ET

Executives

Daniel Gallagher - Chief Financial Officer & Senior Vice President

Alexander A. Alimanestianu - President, Chief Executive Officer & Director

Analysts

Anthony Gikas - Piper Jaffray & Co.

Sharon Zackfia – William Blair & Co.

Ed Aaron – RBC Capital Markets

Paul Lejuez – Credit Suisse

Laura Richardson – BB&T Capital Markets

Tom Shaw – Stifel Nicolaus

David Wells – Avondale Partners, LLC

Vivian Ma – Oppenheimer & Co.

Operator

Good day ladies and gentlemen and welcome to the Town Sports International Holdings, Inc. conference call. My name is Emate and I’ll be your coordinator for today. At this time all participants are in listen only mode. We’ll facilitate a question-and-answer session towards the end of this conference. (Operator Instructions) I’ll now turn the presentation over to your host for today’s call, CFO for Town Sports, Mr. Dan Gallagher.

Daniel Gallagher

Thank you for joining us today. This is the Town Sports International Holdings earnings conference call discussing first quarter 2008 results. I am Dan Gallagher, Chief Financial Officer of the company.

I would caution listeners that to the extent we make any forward-looking statements in this conference call they are made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. These statements are subject to various risks and uncertainties many of which are outside of our control which may cause actual results to be materially different from any forecast we may have had. We have issued a press release discussing our results for the quarter which has also been filed with the SEC under our Form 8-K. In addition to those of you who cannot have access to this release and filing we have also made them available at our website www.MySportsclubs.com. This conference call is also being webcast and may be accessed via the company’s Investor Relations section of our website. A replay and transcript of the call will be available via the company’s website following this call.

I will now turn this call over to Alex Alimanestianu, the President and Chief Executive Officer of Town Sports International for discussion on the operations of the company and then I will give further details financial discussion later in the call.

Alexander A. Alimanestianu

Good evening everyone. Once again we are happy to be with you to discuss our latest quarterly operating results. We are pleased to have gotten off to a good start in 2008 and to be able to reaffirm today the 2008 guidance that we presented in February when we reported our year end 2007 results. Even in a challenging consumer environment our overall trends remained consistent and positive. We continue to offer our core metropolitan customers an affordable and convenient way to stay committed to their exercise fitness and lifestyle goals and using our clustering strategy to guide our expansion we continue to build clubs that solidify our strong market position in our core regions.

Beyond offering the most convenient network of clubs however we must also consistently deliver a high quality member experience. Our recent hiring of Marty Annese as Chief Operating Officers reflects our commitment to putting in place the experienced and talented leadership needed to develop and drive our customer service initiatives as well as the company’s overall growth and profitability.

Now looking at some highlights from the first quarter comparable club revenues grew 4.5% which marks an improvement from the past two quarters. Our average attrition rate of 3.1% per month was in line with our expectations for the quarter. Our EBITDA increased by almost 14% to $27.2 million on an increase of net revenues of 9.5%. We opened two clubs and closed one club in the first quarter bringing the total number of clubs under operation at the end of the period to 162. Total membership was up 7.6% from year ago levels to 512,000 members which was in line with club unit growth. The new clubs in Q1 were as follows.

We opened a 42,000 square foot multi-recreational club in the New York City suburb of New Rochelle in Westchester County. This is our ninth Westchester County club and our third in a Donald Trump building. We opened our 27th club in New Jersey in the affluent New York City commuter suburb of Montclair. Our new clubs opened over the past year continue to ramp very well and we expect this portfolio to achieve in excess of our hurdle internal rate of return of 20%. Further these new clubs expand our clusters and strengthen the company’s market position in our core trade areas.

Personal training and our group sales programs remain fast growing areas of the business. Personal training revenue continued to grow at a strong rate up almost 16% for the quarter. This business remains a driver of club revenue growth as only around 8% of our membership currently uses a personal trainer. Thanks to our newly rolled out fitness model we’ve increased this percentage from approximately 7% a year ago. Our corporate and group sales program continues to be the fastest growing component of our overall member and revenue growth. Revenues from this division in Q1 grew nearly 50%.

As we’ve stressed before our unique clustering strategy provides the foundation for this business. Looking out over the balance of 2008 we remain on track to open 11 clubs this year. In addition to the two clubs opened in Q1 we opened a fitness only club in Bay Ridge, Brooklyn on April 1st. Two new multi-recreational clubs are currently in the pre-sales phase and will also open for workouts in the second quarter, one in Dobbs Ferry, New York and the other in Washington, D.C. in the Columbia Heights neighborhood. Both of these clubs are not only performing ahead of plan but both also broke the company's record for the most membership sales in the first week of pre-sales. We expect to open one club in the third quarter and five clubs in the fourth quarter. We will be closing four clubs this year including the one already closed in the first quarter. These are four older clubs with expiring leases that were acquired as part of multi-club purchases and that are not critical to the cluster. We expect to relocate many members of these closed clubs to other company clubs nearby and therefore retain them as paying members. These closings are already factored into our guidance for the year.

We are pleased with the initial results of our new membership consultant hiring and compensation program which we have been testing in four of our Washington, D.C. clubs for the past three months. The new program is designed to attract and retain more qualified sales employees and to enable the clubs to operate and achieve their sales targets with fewer, more productive consultants. The new program also frees up the club general manager and allows the general manager to focus more on the customer facing aspects of the business and spend less time on directing membership sales activities. We will roll out this program to all D.C. clubs by the end of June and will move North with the roll out from there. We are underway with the design phase of our enterprise management IT system and our new laundry facility both of which should have returns in future years that are comparable to club investments.

And that brings me to our most important initiative which is to focus on strengthening our service levels and improving our overall operating capabilities. Marty Annese, our new COO, who started with us this week has extremely broad operating experience and a record of strong performance in multi-location, service-intensive businesses most recently with Starbucks where he ran the Northeast zone, $1.1 billion business comprised of over 1,100 locations. Marty will develop with urgency and enthusiasm the organizational culture and the processes we need to become a customer centered company that delivers a consistent and high quality member experience and that maximizes growth and profitability.

As we deliver an improved member experience we will drive greater membership growth through higher referrals and lower attrition as well as increased ancillary revenue and increased pricing power. These changes will take some time but we are confident that the results will be worth the wait. We look forward to discussing more specific initiatives with you on our future calls.

Finally we were pleased to announce earlier today our plan to repurchase up to $25 million of our common stock. In a difficult capital markets environment we are grateful to be in a position where we can allocate available capital towards the growth of our core business as well as towards the purchase of our stock. We are always focused on investing our capital where we expect the highest returns and the greatest benefits to shareholder value.

I would now like to pass the call over to Dan Gallagher to cover a more detail financial statement review.

Daniel Gallagher

To focus on first quarter results our consolidated revenue for the quarter was $126.3 million an increase of $10.9 million or 9.5% over the prior year. The key driver of the growth was membership revenue which increased by 9.3% or $8.7 million. Ancillary club revenue which includes personal training or small group training and our Sports Club for Kids program was up $1.9 million to $22.3 million or 9% when compared to the prior year. Quarterly revenue at our comparable clubs, those clubs open over 12 months, was up 4.5%. The increase was driven by member growth of 1.7% and overall average price increase of 1.5% and ancillary and other revenue growth of 1.3%.

We have set out in our earnings release made available today an analysis of our EBITDA for the quarter. Our EBITDA was $27.2 million compared to $23.9 million in the first quarter of 2007 up 13.6%. Our EBITDA margins were 21.5% compared to 20.7% in the prior year’s quarter. Deprecation expense came in at $12.6 million which compared to $11.1 million in Q1 of 2007. As a percentage of revenue 2008’s figure was 10% compared to 2007 figure of 9.6%. 2008’s figure was elevated because of the large volume of new clubs coming on line in Q4 2007.

Total operating expenses for the quarter grew to $112.2 million an increase of 9% from last year’s first quarter. Our operating income was $14.1 million compared to $12.4 million in the prior year’s quarter an increase of 13.4%. Gross interest expense was $6.5 million for the quarter compared to $7 million. The decrease related to lower interest rates charged to our new $185 million term loan facility which is at LIBOR plus 1.75% and replaced our $170 million 0.958% senior notes. Fully diluted earnings per share were $0.18 a share compared to $0.14 per share in 2007 after removing the effects of the early extinguishment of debt costs.

Based on the current business environment our recent performance and current trends in the marketplace and subject to the risks and uncertainties in our forward-looking statement the company is reaffirming its guidance for 2008. The company continues to expect the opening of a total of 11 new clubs in 2008 and currently expects revenue for the year to be in the range of $510 million to $520 million or approximately 8% to 10% growth over 2007 driven by club membership, ancillary revenue growth and the maturation of recently opened clubs as well as new clubs opened during the year. We expect net income to be between $21.3 million and $22.3 million for 2008 when compared with 2007’s net income of $13.6 million. We expect annual EPS between $0.80 per share and $0.84 per share for the year with a similar quarterly cadence for the remainder of 2008 to that of 2007. This EPS guidance assumes 26.5 million shares outstanding and does not assume any of the potential share repurchases. While we achieved operating leverage in the first quarter our guidance does not incorporate such leverage over the remaining three quarters.

Turning to our liquidity total debt at the period end stood at $310 million and cash was at $12.1 million giving a net debt figure of $297.8 million. In addition we have a $75 million revolving credit facility in place of which $63.5 million was unutilized as of March 31st. Cash flows from operations for the quarter totaled $37.8 million compared to $18.9 million for the comparable period in 2007. An increase in EBITDA contributed to $3.3 million of the improvement in cash flows from operations. Also contributing to the increase in cash flow from operations were changes in working capital including decreases of $2.7 million and $2.2 million in cash paid for interest and taxes respectively and a decrease in prepaid expenses of $5.8 million due to the timing of lease payments.

Capital expenditures totaled $22.5 million for the quarter. We now expect capital expenditures for the full year of 2008 to approximate $90 million. This is down from previous guidance of $95 million and has been reduced due to the expected timing of 2009 club openings. This amount includes $19 million to continue to upgrade existing clubs which is at a level that is consistent with our past on a percent of revenue basis. We will spend approximately $9 million to enhance our management information systems and $6 million for the construction of a new regional laundry facility in our New York market. The remainder of our 2008 capital expenditures will be committed to building or expanding clubs. We expect to commence a multi-year information system upgrade for our front end management systems for which we will incur approximately $6 million in 2008. We also expect to receive approximately $9 million in tenant incentives from our construction from our landlords during the full year of 2008.

We believe our investments will continue to provide solid returns. Our own internal measure of returns indicates that we produce 24% return on operating capital. Broadly we define return on operating capital as EBITDA as a percentage of capital we use to run the day-to-day operations of the business. For the technically inclined operating capital includes gross fixed assets, working capital excluding cash, deferred member revenue and costs and deferred lease liabilities. As of April 1st, 2008 we had 4.2 million square feet of club facilities under management compared to 3.8 million at the end of the first quarter of 2007 a 10.5% increase. We project an eventual increase in square footage under management by 6% and our target is to bring our total club count to 168 clubs on December 31st, 2008. Again our net club increase will be seven this year with 11 openings and four closures.

This completes the prepared comments on the results for the quarter and before we move to Q&A I’d like to remind everyone that we’re holding an Analyst Day on May 21st in Boston. Please contact Jean Fontana at 203-682-8200 or via email at jean.fontana@icrinc.com for details.

Question-And-Answer Session

Operator

(Operator Instructions) Your first question comes from Anthony Gikas - Piper Jaffray & Co.

Anthony Gikas - Piper Jaffray & Co.

Couple questions, maybe just characterize for us your thoughts on new member acquisitions during the quarter. Did they meet your expectations or were things a little bit soft as we’ve heard from some of your competition? Also do you think that you’ve seen some impact to new membership acquisitions due to a slowing economy? That’s the first question. Second, do you feel like you have enough visibility on the business for the remainder of the year to be buying back a lot of stock at this point? It sounds like you’re feeling pretty good about the year. Then I have a couple follow ups.

Alexander A. Alimanestianu

With the 4.5% comp club revenue increase we feel that that really captures how the business is performing. It may be that in tougher economic environments it is a little more challenging to get people to make a commitment to join a club. We’re certainly not seeing that though with the new clubs. We are as I think others are in the industry reacting to the economy by cutting or reducing somewhat the up front join fees but that’s not a material impact on revenue. But I think that’s one thing we are doing to counteract any impact that a slowing economy could have. But we’re very pleased with the first quarter. The personal training business was up 16%. The attrition levels were in line and the 4.5% comp we were pleased with. So I think that’s the key. It is an economically resilient business. We have seen that in the past. We are seeing that right now. I think while it is a discretionary expenditure to some degree I think a lot of people perceive it as much less discretionary. A lot of members perceive it as much less discretionary than other expenses. Overall we’re very pleased with the quarter and the economy is going to do what it’s going to do. We’re going to run our business as best we can based on the metrics that we’re seeing and the performance that we’re seeing.

As to visibility, Dan, and the repurchase of stock do you want to discuss it?

Daniel Gallagher

The repurchase of stock that was just recently approved by our Board was the $25 million plan that we have and we are going to look at the stock price. We’re always focused on investing our capital where we expect the highest returns and the greatest benefit to the shareholder and at certain stock prices that warrants an investment and that’s how we’re reacting to that and we look to our Board for guidance on making that investment going forward.

Anthony Gikas - Piper Jaffray & Co.

Couple quick follow ups then, how would you characterize your pricing power with type of price increases should we be factoring in to our models for this year? And then you mentioned that there were $9 million of tenant incentives for calendar 2008. How does that compare to previous years?

Daniel Gallagher

The tenant incentives to previous years, with $9 million in 2008 and if you look at 2007 we had about, it’s right on the face of the cash flow statement, $5.4 million.

Anthony Gikas - Piper Jaffray & Co.

Price increases for the year?

Alexander A. Alimanestianu

As to price increases we typically do CPI increases in September. We haven’t settled yet on the specifics of increases for this year. We’ll do that in the summer.

Daniel Gallagher

Back to your original question, Tony, we are reaffirming guidance. We’re doing our best to forecast the economic impact to the company on the company and part of that includes a forecasted increase in our attrition rate for the second half of the year. I mentioned that on our earlier call back in February and that’s still in our model even though we haven’t seen it as of yet we’re still baking that into our model for the second half of the year. That’s also knowing that in the third quarter we do see a natural spike in attrition in general because that is the quarter of our dues increase is one of the reasons for that so back in 07 were at 3.4% for the third quarter so it naturally increase as well. But we increased it a little more in advance of the economy possibly.

Anthony Gikas - Piper Jaffray & Co.

Just real quick my last question, would you characterize your guidance for the year as assuming that a similar economic environment that you operated in, in the first four months of this year?

Daniel Gallagher

No, basically the attrition would be slightly elevated in the second half of the year from what we’ve just experienced and what we would have experienced in prior year. Absent that, I would yes.

Operator

Your next question comes from Sharon Zackfia – William Blair & Co.

Sharon Zackfia – William Blair & Co.

I had a few questions actually on margins because you did a really nice job on margins in the first quarter and obviously your full year guidance would imply down margins year-over-year, so where do we expect to see the margin pressure going forward from here?

Daniel Gallagher

At the 4.5% comp store revenue we were able to achieve some modest margins and assuming we do get some pressure on attrition in the second half of the year and that might be a little lower. The comp sales then 4.5% we would some give back to this margin and if the attrition does not pick up as we have it now then we would see the benefits of the margin. But that’s currently what we’re forecasting towards.

Sharon Zackfia – William Blair & Co.

So there’s nothing strange here in terms of, I know last year in the first half there were some laundry issues. It’s not a matter of easy comparisons or anything like that?

Daniel Gallagher

No, the laundry has been the laundry. No.

Sharon Zackfia – William Blair & Co.

On your comp, I always get a little confused on this, but the price component does move around and it did pick up a bit here in the first quarter sequentially. Is that something that happens with the mix of the new clubs or can you help us think about that?

Daniel Gallagher

As we get closer and closer to zero when we’re in very low single digits it does fluctuate a little bit but it is predominantly a factor of how many clubs we opened last year, what was their price point then and what’s their price point now. On top of that it’s our price increase in September as well that affects it.

Sharon Zackfia – William Blair & Co.

Lastly, I think all of us are kind of focused on the New York City market and wondering how you’re faring there. Obviously your first quarter results look good in the aggregate but are you seeing New York stabilize, the deteriorating? Can you give us any color on what you’re actually seeing in the City?

Alexander A. Alimanestianu

Sharon, we don’t break out regional performance. What I can say is that we are satisfied with the overall performance of the Manhattan portfolio in Q1 and I think in a difficult economic environment we think that we benefit in Manhattan from being I’d say the most affordable value oriented quality option in the market. As we look out our windows from our offices the sky is not falling.

Sharon Zackfia – William Blair & Co.

Did Manhattan meet plan in the quarter?

Daniel Gallagher

I think as Alex said, we don’t give detailed guidance by region.

Operator

Your next question comes from Ed Aaron – RBC Capital Markets.

Ed Aaron – RBC Capital Markets

A couple questions for you, first did you give, I might have missed it, did you give a mature club comp number for the quarter?

Alexander A. Alimanestianu

No, that’ll be in our Q which comes out probably early next week or later this week but it’s 2.8%.

Ed Aaron – RBC Capital Markets

I guess I’m trying to look back here to think about what the average spread between the regular comp number and the mature club comp number is over time, but is that pretty consistent do you think with.

Alexander A. Alimanestianu

I don’t think that’s out of line, no.

Ed Aaron – RBC Capital Markets

I know it just started this week so it’s probably a little early to ask this question, but just curious if Marty has any initial observations about what he’s going to be focused on in terms of initiatives and then also, Alex, from your perspective how much flexibility do you think he’ll have to make any changes or investments that might come to his mind but that might also involve some temporary up front expenses that could affect the earnings performance of the company?

Alexander A. Alimanestianu

Yes, it is very, very early to be talking about specifics about Marty’s initiatives or our initiatives in that area. But I think at the next call in July, well a couple things. One, next call in July we should be able to talk more about specifics and then at the Investor Day on May 21st Marty will be there so you’ll have a chance to talk to him directly. But I think the focus is going to be clear, it’s on the member experience. Obviously beyond that, driving the growth and profitability of the business. Everything we do in the member experience side is going to have to relate to the overall objectives of the company which are to grow and increase our profitability. So we expect him to have flexibility to do the things he needs to do or that we need to do to enhance the member experience and I don’t anticipate that that’s going to create expense pressures but I don’t want to comment too much on that until we get a clearer sense of exactly what it is we need to, what we intend to do. But I think a lot of what we can do is low hanging fruit that does not involve material changes certainly in the model or the expenses of the company.

Ed Aaron – RBC Capital Markets

The attrition rates, you mentioned were pretty stable for the quarter as a whole, did you see any trends throughout the quarter and if you think that you can maybe comment on anything you might have seen in April that’s either similar or different to what you saw in the first quarter?

Alexander A. Alimanestianu

We don’t comment on April in general terms but as far as the monthly breakout for the first quarter there was no anomalies in our attrition rate. We were happy with each and every month.

Ed Aaron – RBC Capital Markets

Last question, maybe for you Dan, I’m trying to understand how to reconcile the difference between your overall depreciation which is roughly $50 million in a year and your maintenance cap ex which is closer to $20 million, why would there be such a big gap between those two numbers?

Daniel Gallagher

The overall depreciation of the company compared to our maintenance cap ex?

Ed Aaron – RBC Capital Markets

Yes.

Daniel Gallagher

We’ve always used 4% as our maintenance cap ex since I’ve been here which has been over nine years and we have never deviated from that and we’ve managed to run this business at the very similar operating margins that we are running them at, so I’m not seeing a need to spend more than the 4% of revenue that we’ve been doing very consistently probably for over seven years. Like I said, since I’ve been here. I guess that’s the best way I can answer that question.

Ed Aaron – RBC Capital Markets

I’m just trying to get my arms around why the accounting policy for how fast you’re assets are depreciating would be different from what you have to do to maintain essentially the level of the assets.

Daniel Gallagher

A lot of our depreciation that we incur for the company relates to our leasehold improvements which run over the life of the lease and I would say a smaller degree of our maintenance cap ex reflects a leasehold improvement component as opposed to equipment and other types of maintenance cap ex that we’re spending money on.

Operator

Your next question comes from Paul Lejuez – Credit Suisse.

Paul Lejuez – Credit Suisse

Free cash flow for this year, do you guys expect to have positive free cash flow?

Daniel Gallagher

Right now we’re forecasting to be very slightly on the positive side and that’s exclusive of any activity we have on the share buy back program. That’s where we are now.

Paul Lejuez – Credit Suisse

The buy back would be mostly you’d be borrowing to buy back stock?

Daniel Gallagher

Yes, assuming what our performance is as we’re currently forecasting it, yes.

Paul Lejuez – Credit Suisse

Could you tell me what percent of your members are month-to-month right now versus locked into one year versus two year agreements and how that compares to last year?

Daniel Gallagher

I don’t think I have that readily available, Paul, but I can get it for you separately.

Alexander A. Alimanestianu

The sales have been running about 95% commits for quite a while now. That’s one indicator.

Paul Lejuez – Credit Suisse

One year or two year?

Alexander A. Alimanestianu

Mostly one year, about 75%.

Paul Lejuez – Credit Suisse

And has that been increasing, is that higher this year than it was last year in the first quarter?

Alexander A. Alimanestianu

I do have the slide now, if I’m comparing one year commits as a percent of our membership base at the end of 06 it was 75%, then it went up to 78% and now it’s in the 80s, so it is going up. As far as what they originally joined under, in their 13th month they are now becoming a month-to-month member. I’m reporting on what they originally signed up under.

Paul Lejuez – Credit Suisse

So that’s not the number of.

Alexander A. Alimanestianu

No, that’s not the number of members that are locked in at this time.

Paul Lejuez – Credit Suisse

You mentioned the system’s initiative, can you just remind us what are the system’s changes going to help you do that you’re not able to do right now?

Alexander A. Alimanestianu

The company has grown significantly since 2001 when we designed our last system so the technology available today is very different, without getting into a lot of detail, we are talking about significant productivity enhancements, supporting new revenue streams whether it’s online sales, simple things like document management for expense control and productivity. It’s a myriad of things that will impact the entire enterprise from all the club experiences, take a simple thing like making a reservation for a group exercise class, our current system doesn’t provide for that to be able to do that online. The new system will. The current system doesn’t provide for online sales, the new system will. Dan, do you want to touch on some other?

Daniel Gallagher

Some of the things that come to mind is right now our contracts that we’ve signed up with members are very much paper intensive and we’re going to migrate towards an electronic capture where the signature is captured electronically, the contracts will be easily found when questions come up, we’ll have what I’ll membership accounts online where people can view their billing history when they have questions and they can email their questions about their billing history directly to our customer service center which will be a lot more increased efficiency for us there and it’ll also help us improve how we respond to the member whether it be billing or any questions they have.

Paul Lejuez – Credit Suisse

Finally as you look down your income statement, were there any lines that surprised you guys either to the positive or the negative? What were the standouts?

Daniel Gallagher

No, there was no surprises. We had a little bit of margin improvement which we expected on the advertising line. As we said in the guidance call from February we’re going to hold advertising in absolute dollars this year so we saw a little bit of margin improvement and on the payroll line we saw a very slight margin improvement, certainly not enough to be called a surprise, but I think that came along with the comps that we posted.

Operator

Your next question comes from Laura Richardson – BB&T Capital Markets

Laura Richardson – BB&T Capital Markets

I’m just trying to piece together the guidance basically and everything that’s been asked related to that and it sounds like Q1 was obviously better than we all modeled the sale site analysts. I guess we were expecting some pressure on the margins from all the clubs that opened in the fourth quarter but it sounds like you didn’t see that.

Daniel Gallagher

Those clubs actually, when were on the call in February, we said they were performing fairly well and they continue to perform fairly well. So they definitely came through this first quarter very nicely, we think opening them at the very end of 07 in advance of the busy month of January was a benefit to us but it’s one that we were kind of counting on but it definitely came though and all those clubs are performing very well as a group.

Laura Richardson – BB&T Capital Markets

Is there any reason that you wouldn’t get similar benefits in the second quarter from them? I’m trying to figure out why you’re saying margins should be down?

Daniel Gallagher

I understand the question and it’s come up earlier in the call but asked a different way and I guess my answer to this is if we maintain our attrition rates at the levels that we did in 2007 we probably see some improvement in our margins going forward. But as I indicated we are forecasting a slight up tick in attrition with the economic clouds over us and we think it’s prudent to forecast that way and it’s too early to change guidance at this point in time having only two months under our belt since we gave the guidance.

Laura Richardson – BB&T Capital Markets

It sounds like you’re building some potential bad news into the guidance? Some bad events into the guidance?

Daniel Gallagher

You can say that, it’s into the attrition which gets into the guidance, yes.

Laura Richardson – BB&T Capital Markets

First quarter that year-over-year EPS improvement, you were modeling that degree of EPS improvement all along? It’s good to know what you’re thinking quarter-by-quarter because your guidance is annual so we’re all trying to direct as much [inaudible] can I think.

Daniel Gallagher

I don’t want to get overly into the quarter but it’s pretty close to what we expected.

Operator

Your next question comes from Tom Shaw – Stifel Nicolaus.

Tom Shaw – Stifel Nicolaus

Most of the questions have been asked, but one thing that stands out to me a little bit is obviously there is a lot of strength on the personal training per member side of things but the other ancillary revenue per member according to my calculations is down a fair amount similar to 4Q. Is there anything different from the kids programming or the group training type of revenue streams that’s causing that?

Daniel Gallagher

Overall as our total revenue it is a small number but as a component of that other ancillary, as you call it, it is down a little bit and part of it was due to Sports Club for Kids at a few of our clubs was down from prior year and there is no specific trend. It’s a couple clubs in our chain not a consistent theme so we think it’s more of an operations performance issue as opposed to some other trend of cutting back and the other issue was the massage that we consciously cut back, we cut massage back beginning this time last year. We started to revisit where our massage is not necessarily profitable to our business and we had taken it out of some clubs.

Tom Shaw – Stifel Nicolaus

I guess thoughts on the kids performance training night, I know it looked like it’s in the New Rochelle location but any thoughts on how that’s performing and whether we’ll see that becoming a bigger part of the mix going forward?

Alexander A. Alimanestianu

Tom, that is a program we’re committed to and we’re big believers in the market, the demand for it and we have a certain number of clubs that are large enough to really drive a business like that and we’re still I’d say working on developing the programming for the individual clubs in the different target markets. So I think it’s a business that will deliver significantly for us over time and we are committed to it.

Operator

Your next question comes from David Wells – Avondale Partners, LLC

David Wells – Avondale Partners, LLC

In terms of your attrition rate what was it in the first quarter of 07?

Daniel Gallagher

First quarter of 07 basically 3% and we’re at 3.1% now.

David Wells – Avondale Partners, LLC

Is there some variance in that number between your mature centers versus your others?

Daniel Gallagher

There probably is a little bit of that but we don’t really give that out. We report on total attrition.

David Wells – Avondale Partners, LLC

I know you mentioned earlier on the call that there was some kind of lowering of your joining fees in the quarter, was there other promotional activity in the quarter to speak of?

Alexander A. Alimanestianu

The dues rates are in line with our plan and above last year, so the average monthly dues rates for new memberships. The key price piece we play with or we move around a little bit is the join fee.

David Wells – Avondale Partners, LLC

Any changes in April that you’re seen with regards to that?

Alexander A. Alimanestianu

No.

David Wells – Avondale Partners, LLC

In terms of April, can you give us any color on what trends you’re seeing there?

Daniel Gallagher

No, we’re not giving any trends on April. In the fourth quarter we gave a little bit of color on January because it’s our biggest month of the year and we wanted to get people comfortable. But we’re not in the practice of giving subsequent months in the quarter that we’re reporting on.

Alexander A. Alimanestianu

What I can tell you for April we did a couple of new things, one was we introduced a discounted junior membership for the 14 to 21 age group. So we experimented with that and we were pretty encouraged with the response. We also lowered our price somewhat on our month-to-month membership because we think we’ve been losing some incremental sales by overpricing the month-to-month. It has really become a membership type that we do not sell at all because of the huge disparity we had between the month-to-month and the commit. The month-to-month is still above the commit and we don’t expect it to be a material number of them but there is an incremental amount that we think we can sell with those memberships so we did adjust that.

David Wells – Avondale Partners, LLC

In looking at your interest expense, should we see any kind of downward trends in that as rates keep coming down here?

Daniel Gallagher

If the rates are holding at where they are we would see a down tick in interest expense. In December 07 we had a three month lock into our term loan which went to March 15th. So we’re kind of locked into that rate until that point in time and right now we’re basically on a month-to-month basis with LIBOR at where it is and we’re at 1.75% above LIBOR we would see a little improvement there.

David Wells – Avondale Partners, LLC

Last question, if you could just state once again what your share count assumption was for your guidance? I didn’t catch that earlier.

Daniel Gallagher

For our guidance our share count was 26.5 million. We did not affect for any activity that might happen under the share buy back program.

Operator

Your next question comes from Vivian Ma – Oppenheimer & Co.

Vivian Ma – Oppenheimer & Co.

I have a question actually on the real estate side, I was wondering whether you’ve seen more favorable situation there, more availability or more favorable terms?

Alexander A. Alimanestianu

We will see those if the economy continues to operate the way it’s operating. There are already indications that it’s becoming more of a tenant friendly market and certainly rents have plateaued and started coming down a bit. It’s becoming an environment where it’s going to be easier for us to find real estate at better prices. That is the silver lining in this cloud and we’ve seen it before in the after 9-11 we did see a dip and we took advantage of that. We saw it in Boston, we saw it in New York and we expect to see the same thing and hopefully we’ll be able to take advantage of it.

Vivian Ma – Oppenheimer & Co.

My other question is on the incremental attrition that you are modeling in, factoring into your guidance, what is that amount and what is the scenario that you’re basing that on?

Daniel Gallagher

I’m not sure if I gave this out before but it’s basically an increase in attrition towards the second half of the year and the attrition that we have on a monthly basis for the entire year would be modeled at 3.35% as opposed to what we experienced in 2007. That’s about as much detail as I can give on that.

Vivian Ma – Oppenheimer & Co.

My last question is for the share buy back, do you have a target timeframe to complete the entire program or not?

Daniel Gallagher

We don’t have a target program but everything is approved and we expect to be up and running in short order. There’s a lot of things that come along with that. We have volume limitations as to how much we can purchase under SEC Rule 10-b18 and we also have price considerations and other capital needs that we have to consider as we live throughout the plan which goes all the way to December 2009.

Operator

You have no questions at this time. I will now turn the call back to Dan Gallagher for closing remarks.

Daniel Gallagher

Thank you for joining us today. I look forward to seeing everyone in Boston on May 21st. Thank you.

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Source: Town Sports International Holdings, Inc. Q1 2008 Earnings Call Transcript
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