Life Time Fitness’ CEO Discusses Q2 2011 Results

Posted July 21, 2011 8:41 pm by

Life Time Fitness’ CEO Discusses Q2 2011 Results

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2011 Life Time Fitness Earnings Conference Call. My name is Regina, and I will be your operator for today. [Operator Instructions] Today’s event is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. John Heller, Senior Director of Investor Relations and Treasurer. Please go ahead, Mr. Heller.

John Heller

Thanks, Regina. Good morning, and thank you for joining us on today’s conference call to discuss the second quarter 2011 financial results for Life Time Fitness. We issued our earnings press release this morning. If you did not obtain a copy, you may access it at our website, which is lifetimefitness.com. Concurrent with the issuance of our 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 2011.

Once we have completed our prepared remarks, we will answer your questions until 11 a.m. Eastern Time. At that point in the call, Regina will provide instructions on how to ask a question. I will close with a tentative date of our third quarter 2011 earnings call. Finally, a replay of this teleconference will be available on our website at approximately 1 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 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 our second quarter of 2011 results. We had a very good second quarter. Revenue growth was strong, up 11% over second quarter last year, continuing the steady pace we have seen over the last several quarters. Dues revenue for the quarter was up 9% from a year ago. In-center revenue was remarkably strong once again, up over 17%, making the sixth straight quarter of double-digit growth. Net income was up 14% over last year. Excluding the impact of noncash compensation expense, net income was up nearly 17%.

Earnings per share were $0.61. Adjusted for noncash compensation expense, non-GAAP EPS was $0.63, nearly $0.18 higher — 18% higher than last quarter. This is a record high EPS for the company. Mature center same store sales continued its positive trend, up 4.5% over second quarter last year. Attrition for the quarter was 8.1% versus 8.4% a year ago, and our trailing 12 month attrition was 35.8%. This marks accomplishment of our goal over the last couple of years to reduce attrition to below 36%.

I am very pleased with these results. They indicate that the strategies we have deployed over the last 2.5 years have been clearly successful. The quality of our places, our people and our programs define Life Time as a Healthy Way of Life company and establishes its own category. We’re well on our way to accomplishing our 2011 objectives we have laid out at the beginning of the year.

First, we are nearly at our desired leverage ratio of debt to EBITDA of 2:1. Our deleveraging strategy has paid off. On June 30, we renewed our revolver credit facility, extending the maturity date to 2016 and increasing the amount to $660 million from $470 million. In fact, we have commitments from banks totaling nearly $900 million. This speaks volume about the strength of our balance sheet and cash flow. Second, on the revenue front, our performance in the second quarter gives us even more confidence that our stress [ph] goal of $1 billion of revenue for 2011 is within reach. In fact, we have officially raised the high end of our guidance to reflect the potential of reaching this milestone.

Third, we’re continuing our transformation of Life Time into a Healthy Way of Life company. As a Healthy Way of Life company, we help communities, organization or individuals achieve their total health objectives, athletic aspirations and fitness goals. By doing what they love to do, we accomplish this by delivering the best places, people and programs. A number of these programs can be offered both inside and outside the facility. This gives us a broader platform for growth.

Our fourth objective was to accelerate growth once we met certain other performance objectives. We’ve accomplished all of them. We have reduced attrition at or below 36%. We have sustained positive mature same-store sales. We delivered 10 straight quarters of positive cash flow, and we have solidified our capital structure and reduced leverage. Now, we are focused on accelerating our growth while delivering solid returns. We will deliver this growth in several ways including growing units and square footage and providing more programming and offering that furthers our Healthy Way of Life company objectives. With a combination of these and other growth initiatives, we look to deliver low double-digit growth in 2012 and beyond all while driving to deliver sequential growth in our ROIC as well. With that, I now will turn to Mike Robinson, our Chief Financial Officer. Mike?

Michael Robinson

Thanks, Bahram. I’d like to provide you with some additional details on our second quarter performance and financial results. First of all, let me remind everyone that starting with the fourth quarter last year, we are recognizing noncash performance share-based compensation expense related to a grant of long-term performance-based restricted stock approved by the compensation committee of our Board of Directors in June 2009. This grant was to serve as an incentive to our senior management team to achieve certain EPS targets in 2011 and 2012. These EPS targets were intended to be aggressive goals in excess of 3 and 4 year baseline expectations set in 2009.

In the fourth quarter of 2010, the company determined that the 2011 EPS performance criteria required for the vesting of 50% of the stock or approximately 450,000 restricted shares was probable.

In the second quarter, we recognized approximately $1 million of noncash performance share-based compensation expense. We expect to recognize additional expense of approximately $2 million or approximately $1 million per quarter the rest of 2011. While we report our results inclusive of these expenses, at times we will refer to adjusted or non-GAAP earnings ratios and guidance throughout our comments.

We currently believe achieving the remaining 50% target in either 2011 or 2012 is not probable. Therefore, we have not recognized any compensation expense related to the remaining 50% of this performance-based restricted stock grant.

Now, let me talk about attrition and retention. For the quarter, our attrition rate was 8.1% as compared to 8.4% last year. Starting with the second quarter, the quarterly attrition is now directly comparable as we’ve anniversaried [ph] the methodology change in our attrition calculation that went into effect April 1 last year. That is, we no longer count potential memberships that elect to cancel during their 14-day trial as members or attritions.

Our trailing 12-month attrition rate is 35.8% versus 38.2% last year. This includes approximately 100 basis points of improvement related to the methodology change I mentioned above. The estimated average life of the membership is 33 months, unchanged from last quarter. We finished the quarter with 664,307 memberships. This was a 5.1% increase from the second quarter of 2010 or just over 32,000 net memberships added. Sequentially, we had an increase of approximately 13,500 memberships from Q1. For the second quarter, we grew the net balance of Flex Memberships by approximately 1,500 units to approximately 73,000 units. The number of open centers at June 30, 2011 was 92 compared to 88 at June 30, 2010. Of the 92 centers, 57 or 62% are our large current model, and 71 or 77% of all centers have been opened 3 years or more, which we classify as mature centers. We operate 9.2 million square feet of fitness facilities. Our total revenue was $256.7 million for the quarter, which is up 11.1% from last second quarter. Our main revenue drivers are as follows: membership dues revenue grew 9.2% for the quarter, which outpaced our membership growth of 5.1%. Our goal is to have continued dues growth in excess of membership growth. One element of our growth strategy you will hear me discuss a bit later is to prudently take price and improve our membership mix to drive higher dues per center. These results demonstrate we are doing that. Our powerful due stream accounts for 65% of our revenue. In-center revenue grew by 17.3% in the quarter. We are strategically driving this growth by increasing our products and services in our portfolio, incenting members to use these services to our LTBUCK$ 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 measures metrics are strong and consistent across the board. Our second quarter same-store sales were up 5.4%, and our 37-month mature same-store sales were up 4.5%. Revenue per membership in the second quarter was $389 per membership, which was up 4.7%. In-center revenue per membership was $124, was up 10.9% in the quarter. For perspective, in the second quarter of 2009 and ’10, we were at $102 and $112 of in-center revenue per membership, respectively. We believe the improvement over the last 2 years is evidence of our connectivity with our members, as well as expanded program offerings.

I would like to move some discussion on our cost structure. Overall operating profit margin in the second quarter decreased 60 basis points to 18% from 18.6% Q2 2010. And at the same time, profit dollars increased $3.3 million. Excluding the effect of the $1 million of incremental noncash performance-based restricted stock compensation expense, operating profit margin for the quarter decreased 20 basis points to 18.4%. Keep in mind the significant growth in our lower margin in-center businesses, which was up over 17%, costs us over 20 gross margin points, which offset underlying margin improvement. The incremental pretax profit delivered by these businesses over last Q2 was approximately $2 million. We will take this incremental revenue and profit all the time.

For the second half of 2011, we expect operating margins to improve slightly in a normalized in-center growth environment, even as we absorb approximately $2 million of additional noncash performance share-based compensation expense. The combination of presale cost and the typical lower startup margins for the 4 large center openings from December of last year through the first half of 2011 should naturally move higher to higher profitability.

And business growth from infrastructure and connectivity related investments are primary drivers of this anticipated margin improvement. Continue to see improvement in the center operating margin. Center operating costs were down about 50 basis points including absorbing approximately 10 basis points of noncash compensation expense related to the performance-based restricted stock grants. Leverage from increased dues revenue and reduction in cost in excess of enrollment fees more than offset the negative margin mix resulting from significant growth in our lower margin in-center businesses. As we planned, marketing and advertising costs were up 90 basis points as we increased marketing campaigns spent primarily for presales, continued to invest in our LTBUCK$ affinity program and incorporated marketing spend in new events and other corporate initiatives such as My Health Check. As we discussed, we expect our marketing cost to be up over last year as we invest more in member retention initiatives including LTBUCK$ as well as our in-center and corporate businesses. These initiatives are showing results as evidenced by our strong top line growth and significantly improved attrition rates.

G&A was down 20 basis points for the quarter as a percent of revenue at 4.7% including absorbing approximately 30 basis points or $700,000 of noncash composition expense related to the noncash performance-based restricted stock grants. While we saw leverage in the quarter, we are still investing in overhead structure to help drive the retention and connectivity issues at our centers. Acquisitions and initiatives underway to grow other Healthy Way of Life related businesses. Excluding the incremental share-based compensation expense, I expect we will remain at or near last year’s G&A rate for the remainder of the year. Other operating expense was up 70 basis points for the quarter primarily as a result of investment in our advanced and total health business infrastructure and costs associated with acquired businesses.

While other operating expense is increasing slightly as a proportion of our total cost structure, as we expect, we are seeing commensurate top line growth. The associated revenues related to these other operating expenses increased 31% over Q2 2010. We continue to see leverage in depreciation and amortization as we continue to grow revenue well ahead of square feet expansion. These costs were down 30 basis points for the second quarter. Interest expense net of interest income decreased to $4.7 million from $6.9 million last second quarter, and it was down sequentially from $5.5 million in the first quarter. This decrease in interest expense reflects the payoff of approximately $70 million in high rate mortgage debt earlier in the quarter and low variable rate — variable interest rates on our revolving line of credit. In 2011, we expect interest expense to be down from total year 2010 as continued debt reduction is offset by a slight rate increase in our recently refinanced revolving credit facility, which I will discuss in moment.

Our tax rate for the quarter was 40.4%, up from 39.7% last second quarter, driven by state tax changes. We expect our effective tax rate in 2011 to be slightly above 40%. That brings us to net income for the quarter of $24.9 million including a $600,000 after-tax effect from the noncash compensation expense. Excluding that charge, non-GAAP net income for the quarter would have been $25.5 million, representing 16.6% growth over the last second quarter. Weighted average diluted shares for the second quarter totaled 40.8 million shares. We expect our average diluted share count to increase about 2% in 2011 above the 40.4 million share average of 2010. Overall, we achieved diluted EPS of $0.61 in the second quarter, including $0.015 for the noncash compensation expense. Excluding this expense and the effects of rounding, the quarterly EPS was $0.63, a 17.7% increase over 2010.

My next topic will be cash flow in our capital structure. Our cash flow from operations totaled $58.4 million for the quarter compared to $46.8 million last Q2, up 25%. For the quarter, we generated nearly $14 million of free cash flow. We’ve now generated 10 consecutive quarters of free cash flow. We continue to focus heavily on our capital structure, cash and debt availability. Total debt decreased $8 million in the second quarter. As of June 30, we have $402 million outstanding including letters of credit on our $660 million revolver. That leaves approximately $269 million in cash and revolver availability. Our net debt to total capital came down to 38.9% at the end of the quarter. Our EBITDA leverage is now approximately 2:1 — 2.1:1. Our covenant calculation for the quarter continued to show significant room versus our covenant limits. On April 4, we retired in full 10 mortgage loans from Starwood Property Trust totaling $69.6 million. You may remember these as the teachers’ mortgages. We used our revolver and cash flow from operations to fund the retirement. Our 10 mortgages were released. At June 30, we have 51 owned unencumbered centers with a net book value of approximately $1.2 billion. As Bahram mentioned his remarks, on June 30, we closed on the refinancing of our revolving credit facility. We increased the amount available under the facility from $470 million to $660 million. We also have an accordion feature, which would allow us to potentially increase the facility by an additional $240 million. The maturity was extended to June 30, 2016. The structure of the facility is more flexible in key areas including acquisitions, dispositions, acquiring new debt, debt retirements, dividends and share repurchases.

It remains a floating rate facility with a spread over LIBOR or PRIME. On average, the spread in the new facility is 75 basis points higher. We are very pleased with the terms and feel this facility will be the foundation of our capital structure for the next several years. Regarding capital expenditures, we expanded approximately $45 million of CapEx Q2 2011. This was comprised of approximately $26 million for growth and $19 million for maintenance and support infrastructure. We opened 2 additional large centers in the second quarter located in Colorado Springs, Colorado and Summerlin, Nevada. Both opened in May and are off to good starts. For 2011, we expect to spend approximately $150 million to $175 million for CapEx to open 3 large centers, commence construction of our 2012 centers and to maintain our portfolio clubs. This will be comprised of approximately $110 million to $125 million for growth and $40 million to $50 million for maintenance and infrastructure support. We spent approximately $700 million so far in 2011 on acquisitions, including small racing and race related events businesses as well as 4 yoga studios in the Michigan market.

A few balance sheet variances to note include: inventories are up $3 million from last quarter, driven primarily by general center and in-center growth and an emphasis on attritional product growth within our personal training business. Restricted cash is down $2 million due to the removal of obligations to maintain restricted cash in certain debt instruments. Other assets are up $10 million for the quarter, driven by acquisitions and unamortized loan costs from the recently completed revolver extension. Deferred revenue grew about $4 million for the quarter, driven primarily by preregistration for summer races and sales of member activity packages such as kids summer camps. Accrued expenses increased $6 million, driven by general business growth such as accrued payroll and property taxes, as well as accruals for summer camps and events.

With that, let me discuss our updated financial guidance for 2011. We expect our revenue will grow to $985 million to $1 billion, up from $980 million $995 million, or 8% to 10% growth, driven primarily by growth in in-center revenue and corporate businesses as well as dues mix growth and membership growth in new centers.

We anticipate our net income will grow to approximately $93 million to $95 million or 15% to 18% growth. Excluding the impact of the noncash compensation expense in 2011, we expect non-GAAP net income to be $95.5 million to $97.5 million. We expect our diluted EPS will grow to $2.25 to $2.30. Excluding the impact of noncash compensation expense in 2011, we expect non-GAAP diluted EPS to be $2.31 to $2.36. For the third quarter, we expect revenue and net income growth to be consistent with the annual guidance.

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

Our final 2 growth drivers come from what we internally call our companies inside. The 19 businesses we’ve identified that we operate both inside our fitness centers, which we call in-center revenue, and synergistic to our businesses, the corporate revenue. That differentiates Life Time Fitness as a Healthy Way of Life Company. In-center growth will be driven by further penetration of our member base, with targeted connectivity initiatives and our affinity program LTBUCK$, as well as continued introduction of new and expanding program offerings, such as our 90-day weight-loss challenge, Life Clinic chyropractic services and medispa services. Corporate revenue will be driven by growth in synergistic businesses such as events, media, education and certification and My Health Check, our risk assessment program designed to identify health risks and lower healthcare costs for both employees and employers. As we stated in the past, we are targeting at least low double-digit revenue growth in 2012 and beyond on these growth initiatives. Improving returns is a key focus for the company. We have seen some improvement in ROIC over the past year and a half. However, we are clearly not satisfied. Accelerating returns starts with our revenue growth strategy.

As you can see in what I outlined before, 4 of our 5 of our growth initiatives require no or generally low investment. Price mix improvement and occupancy growth are all revenue and profit drivers requiring no ROIC denominator investments. Our in-center and corporate business initiatives are positioning us to enhance profits with generally low investments. This balanced growth strategy coupled with a continued focus on optimizing margin rates should position us for a return growth.

That concludes our prepared remarks regarding our second quarter financial results. We’re pleased to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question today, gentlemen, comes from the line of Brian Nagel with Oppenheimer.

Brian Nagel – Oppenheimer & Co. Inc.

First question, Mike, this is just a couple of mentioned [ph] so you may then talk about your growth plans for the next year. And you mentioned in there, you mentioned some type of acquisition. So maybe some additional color on what we should be expecting on that front?

Bahram Akradi

Brian, this is Bahram. We are not going to discuss any specific. Obviously, as you know, the gestation time for our big boxes are very long. And as we have significantly increase our activity on finding new sites, it’s going to take some time before we can produce out of the ground facilities at faster rate now, but there are many in the works. But we are able to find facilities that they fit, the logistics and strategic plans across the country, take them in,, and as you guys have seen what we can do with our construction and our architectural group in terms of redesigning and remodeling quickly of some of these facilities, and we’re truly making them become a Life Time feel facility. We are committed in order we can deliver at least a couple of more facilities in the next year to increase that square footage. So we’re not going to offer more details over all over it.

Brian Nagel – Oppenheimer & Co. Inc.

Okay. No, it’s helpful then. Second question I had with respect to your membership growth and as we look at results you reported today and over the last few quarters, it’s very, very clear, you guys are doing a very great job of managing down churn, monetizing your memberships extraordinarily well. At least from my model, the one you have — the area that continues to lag somewhat would be the actual membership growth. The question I have — I know we’ve talked a lot about this, sort of the macro factors out there. But as you look at your, obviously, you have much more detailed data than we have, but as you look at the individual clubs across your chains, is there anything that you’re starting to see now, maybe somebody’s macro pressures are beginning — that to give us some encouragement of the actual membership growth numbers starting to pick up?

Bahram Akradi

Let me start and then I’ll turn it over to Mike if he has any additional comments. We have clearly focused on a very specific strategy over the last 2.5 years. That strategy is to offer the absolute best programs for every group, every interest group. Whether if they’re interested in basketball, yoga, running, cycling, et cetera. We’ve mentioned that over and over to you guys. We’re less concerned about jamming the club up with folks who cannot appreciate the difference between the best product and just a product. Our strategy is to make the other so-called fitness centers a non-factor in our competitive landscape. And therefore, we’re really striving for that 20% of the market that appreciates the innovation, the best class products, et cetera. So we’re focused on a certain type of customer. And therefore, that customer is going to be less concerned about $5 cheaper or $6 less here or there. With that strategy, our focus is on driving same-store dues revenue increase more than necessarily membership count. However, we still want to grow the membership, don’t get me wrong. In some of our clubs however, we are comfortably at capacity or more and in some clubs, where we have more room for more bodies throughout the club or through certain portions of the club we’d like to get more members. But altogether, I am very, very, very happy with our dues revenue results, which is with focus of our entire management. With that, I’ll turn it over to Mike.

Michael Robinson

Yes, I think a couple of points. I don’t — I think it’s fair to say that we haven’t seen any significant change economically across the system. What we have done is spend a lot of time and it really was part of the remarks I talked about from a growth perspective in looking at the center-by-center economics and the center-by-center positioning, and in some centers, we’re — as Bahram said, we’re optimizing in trying to drive dues growth per center. That can come from 3 — aside from attrition, which we really feel we’ve got under good control. We’re not stopping to drive that, but we like where we are positioned there. There are 3 variables that we can drive. We can drive price, we can drive mix, and we can drive enrollment inquiries. And we’re really looking at every one of those elements at each one of these centers. There’s going to be centers where we may be at 80%, 85% occupancy, but we look at it, we say these are really strong demographic centers. Our best driver or our best levers here are really price and mix rather than trying to drive and bring in that fringe membership. There are others where you don’t necessarily have that as strong a demographics here, that we’re going to go and we’re going to drive membership growth as a driver to increase that occupancy to get those dues levels up. So Bahram stated it so simply, the focus is dues per center, and we’re going to get there in a variety of ways. So I would encourage investors and potential investors to look at it first on what’s going on dues growth itself. And then, understand each of the elements underneath that, membership growth, dues, pricing mix, et cetera.

Operator

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

Edward Aaron – RBC Capital Markets, LLC

So when I look at the business it’s kind of a high-level, it seems like the new sign-ups were still a little bit tough, but you’ve really done a good job of creating a stickier more lucrative member base. And just realistically, how much more room is there to build on that when you consider that attrition is approaching kind of your stated goals, and that the spread between the dues growth and the membership growth is kind of getting back to historically more normal level for the company?

Michael Robinson

Well I think — we think there’s a lot of room yet. And again it goes back to some of the discussions I just had. We’ve said yes, we’ve achieved that 36%. Don’t for any minute think we’ve stopped trying to drive attrition lower. What we do want to do, is set realistic expectations in the investor community, that it does get a bit tougher. But everyday, we’re driving for lower and lower attritions. And we think that, over time, that can be accomplished but we don’t want that built significantly into the business model. So and again, as we go club by club, and we look at our mix, and we look at price and price potential and we look at occupancy rate, where we continue to be encouraged by the fact that we have — we believe we’ve got significant potential in the future.

Edward Aaron – RBC Capital Markets, LLC

That’s helpful, thanks. And then just as a follow-up, the 6% unit kind of growth guidance for next year, how would you suggest that we think about kind of the unit economics of those stores as a whole when you consider that the different markets that you’re looking to enter, the mix of the greenfield versus conversion and so forth, it seems like there’s a more moving parts there than maybe there have been historically?

Michael Robinson

I don’t know that there’s that much. I mean, I think you should start with the concept that we’re going in with the expectation that these are going to achieve the return hurdles that we have always designated, and I wouldn’t look for anything significant as far as changes to the actual business model itself. It’s predicated on timing and when these models are introduced into the centers and for right now, I would say you should introduce that in your model in a balanced way, in all kind of midyear type of averages, maybe slightly towards the front half of the year, but not significantly. Again, I wouldn’t expect anything significant difference there.

Operator

Your next question comes from the line of Scott Hamman with KeyBanc Capital Markets.

Scott Hamann – KeyBanc Capital Markets Inc.

Just on the price issue, have you had plans to do more price increases on existing members since the one in the beginning of the year for 2011, and also on new members, it seems like you’re selectively raising some of the new member dues rates. And can you kind of talk about what the plans might be throughout the balance of the year to continually look at price increases?

Bahram Akradi

We don’t have any plans for price increases on the rack rate for the balance of the year as a general rule of thumb. However, the strategy we have deployed as I mentioned earlier, is to continue to drive each and every program, each and every interest area so much that we do have more price elasticity for our products, for our programs. And my expectation is that over the next year, year and a half, our average dues should continue to grow as we attrition out some of the members with a little lower average dues than the new members we’re signing up with a higher average dues. And then I want to be in a position where we can have a price adjustment and again, it will be in certain markets and not in others by the beginning of the 2012. So I feel like we will be in a great position over the next 5, 6, 8, 9 months to make modifications, minor modifications in certain markets and then benefits from the overall dues revenue increase throughout the next several years.

Scott Hamann – KeyBanc Capital Markets Inc.

Okay, and then just a follow up on some of the newer investments that you’re making at some of these ancillary businesses, can you kind of help frame up what the profitability profile looks like, the return profile, kind of what types of numbers you’re looking for, stuff around like the Cooper Initiatives and in those programs?

Bahram Akradi

We always look at a 15% ROIC for our big-box facilities at the maturity levels. So with the way we look at investment is similar, we want to be able to get to a nice double-digit ROIC at the majority of any investment. With that, I’m going to turn it over to Mike. Mike?

Michael Robinson

Sure. Let me try to take you through a couple of these businesses. You’ve heard us talk about the Events business, and a good Events business runs at 25% to 35% EBITDA margin. So that’s really where we’re trying to drive this business, and we have events that run at those levels. And so, as you start to think about that business and that business model, these should be solid EBITDA performance drivers, and they should be return-enhancing vehicles for us because generally, they come at a relatively low investment. If you look at our investment in our Training and Certification businesses, we now have our yoga teacher training. We’ve got aerobics instruction and certification, and we just opened in the second quarter, a personal training certification. Again, we’re utilizing our own centers for the most part, for the delivery of this. So the investment side of this is quite low, and the overall profitability of these, clearly in our mind, is going to be above the profitability, we’re driving it to be above the profitability of our in-center businesses. So I think that should give you a good example of where we are. We’re young in the certification businesses. We’ve got some investment there, but we are off to a really good start on that. We now have critical mass, and I think you’ll start to see that growth showing through in the third quarter on Events. Keep in mind, the Events business is very seasonal, and a significant piece of that is in the summer months. Since so you’ve been seeing investment in that come through for the first 6 months, and our expectation is that you’ll start to see some of the revenue that derives from that infrastructure investment coming through in the third quarter.

Bahram Akradi

And then to add to Mike’s comments just for clarity, a lot of these businesses, like the yoga teacher training, the practical personal training school, et cetera, they are all at the infancy stages in our company. We’re working hard to leverage and connect the dots across the board. We are at this stage, where we’re investing more money in the infrastructure at this point than early on. But as Mike mentioned, 2 or 3 years from now, we look at having great margin opportunities from these, as well as the ROIC improvement on our overall business

Operator

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

Michael Lasser – UBS Investment Bank

What was the contribution to same-center revenue from price and mix?

Michael Robinson

The price hasn’t changed much from what I talked about in the first quarter. When we took price on about 20% of our membership base, that was about 1%, and mix is probably a little bit more than 1%. We’ve been successful — clearly successful in taking, and I put in mix, I put the higher price points that we’re charging for new memberships coming into the membership pool in our existing clubs. So I would say of that 5% same-store sales, or let’s call it on the 4.5% on the mature centers, probably 2/3 of that is coming from price and mix with one of those points coming from price and the rest of it, mix. And then obviously, significant contribution from the in-center margin growth or the in-center revenue growth.

Michael Lasser – UBS Investment Bank

How do you think about the elasticity of the pricing on a seasonal basis, do you have any expectation that as we move later into the year, when folks stopped using some of the outdoor amenities? That the response could be not as robust as you saw earlier the year?

Bahram Akradi

I don’t think that has any change in our overall numbers. And we do have a number of members who joined family programs for the summer for the outdoor pool but that has been the same pattern year after year for years. You shouldn’t see anything dramatically different. So if the average dues are X amount of dollars higher now than they were a year ago, they will continue the same pattern of ups and downs as before. Then it would just be that much higher in October than they were last October

Michael Lasser – UBS Investment Bank

I guess I was thinking about it as you guys were a little more aggressive on the pricing action earlier this year. So as we get later into the year, the consumer response might be because of the price increases, as they utilize the clubs a little less maybe that’s — the attrition rates could rise?

Bahram Akradi

I really don’t think that price right now is a factor in our performance. We’re not hearing from our customers coming into the door and knew that their prices is a factor. If they want Life Time, they pay whatever the price there is and if they don’t want Life Time, they’re looking just for a room full of fitness equipment, they can pay half of our price or third of our price to some place else. There’s just not any other factor.

Michael Robinson

Michael, I want to make share that I’d understand. I mean, there is a seasonality to attrition, and certainly we expect second-half attrition to be above first half attrition, mainly driven by the back-to-school crowd, that exited from the summer pool season, things like that. But we don’t expect, and we’re not seeing any indication as we look at and really try to understand our member base, anything beyond that from a pressure point.

Michael Lasser – UBS Investment Bank

It makes sense, with one last follow-up question. On the in-center revenue, are you seeing the improvements driven by an increase in penetration or is it the members who have been using or driving the in-center revenue are you getting more revenue per those members?

Michael Robinson

It’s penetration. If you look across the system, it’s penetration, and it’s more price per ticket. We’re getting more — when you look at our Spa business, we’re getting more revenue per ticket. When you look at the Café business, we’re getting more revenue per ticket and most importantly, we’re broadening the penetration, we’re broadening the usage base, which is exactly what these programs and this strategy is designed to do, get people more involved. Get them connected. And the LTBUCK$ program, the affinity program is a real driver in doing that. We’re bringing membership in trying things out, and then driving more fee-based revenue because of that, and that really does help drive our penetration.

Operator

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

Lee Giordano – Imperial Capital

Can you talk a little bit about the overall competitive environment you’re seeing out there today? Are there any threats or opportunities on the horizon in terms of market share and maybe you could also comment on just the overall consumer spending environment you’re seeing? I know the economy seems a little bit weaker there over the past couple of months are you seeing any difference in trends?

Bahram Akradi

Lee, you’re asking a very good question. So let me emphasize again, in late 2008, when we saw the early pressure on the market and the proliferation of the fitness industry by the barrage of little bitty fitness centers coming in at $10 and $15 and $20 a month, really our strategy was to dramatically and drastically differentiate Life Time way beyond anything like that. So our focus has become, what we have driven the company from day 1, this is what we call member point of view. Our member comes to Life Time does not come to us primarily because they want a fitness center with a couple of treadmills and some free weights. So what we’re focused on is the customer who is interested in running, then we provide the best running program all around, everything about running, from coaching, training, groups to run with, athletic event around running. And I give you this example because I really want you guys to understand, whatever the customer interest is, we try to provide something that is by far, the best thing out there and comprehensive. As a result, we don’t look at Life Time as a fitness center. You guys I’m sure are still comparing us in your head, the first thing that comes to your head naturally, is a fitness center. That’s the last thing that comes to my head. I think of us as a Healthy Way of Life Company. As I emphasized in my comments and remarks — stated remarks in early on, is that we are looking to help people achieve whether if it’s athletic aspirations, or if it’s total health objectives or it’s fitness goals. It doesn’t matter which angle they’re coming at it. And then we’ll find what is their interest point, and then we’ll help them achieve those objectives, those goals by doing what they love to do. With that said, if we continue on delivering on our vision and continuing to improve on our vision, and don’t deviate from the path that we have set up in here, I really don’t see us having a direct competitor out there today. It’s an extremely broad and intense business model and at this point, we don’t have a head-on direct competitor out there. Now we have many competitors across the board, so the little fitness centers compete with about 10%, 15% of what we offer. YMCA is up competing with 10% or 15% of what we offer. The athletic event companies compete with 5%, 3% of what we offer. So it’s our business model is extremely broad. Does that help you?

Michael Lasser – UBS Investment Bank

That’s very helpful.

Michael Robinson

I think you have a second part to that question and that was, can you give us — can you give any sense to general consumer attitude and things like that? What we’ve — we’ve talked about this in the past that we continue to experience and see headwinds. I think that’s still — that is still the case. One area that we have focused on and talk to the investment community in the past is what’s going on from an enrollment fee perspective, and we’re obviously still in a mode where our enrollment fees are lower than what they were back in 2006 and 2007, and the reason for that is very simple, we are still in a membership acquisition mode and are discounting those enrollment fees. Now we have seen a slight improvement in that. If you look at the second quarter compared to the first quarter, or certainly the second quarter compared to the second quarter of last year, but it is not, we don’t think we’re out of the woods from that perspective. And we continue to expect a difficult, more discerning consumer environment for the future. We’ve talked a lot about the fact that we’ve really set our strategies up with that expectation. Our expectation is that the consumer remains discerning, unemployment remains uncomfortably high. And so all of the strategies that we’re doing, the differentiation focus, the connectivity focus, all of these things are meant to win in this type of an environment. And we clearly believe that the results that we’ve been putting up show that we are winning and that we have a confidence level as we look into the future that we’ll continue to do that if we continue to execute on the strategies that we’re talking about.

Operator

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

Gregory McKinley – Dougherty & Company LLC

You started off the Q&A talking about, really your goal of maximizing dues per center and that’s sort of a mix between revenues per membership and total memberships. On the latter point, can you talk a little bit about historically, where your occupancy has been, where it is today and any vision for how you see that unfolding over the next, call it, 12 months or so?

Michael Robinson

I think many of you have heard, we talked about this before, but if you go back to 2007 or early 2008, the occupancy in our mature centers was running at about 90%. As we went through the recession, the attrition level popped up, et cetera, that occupancy level dropped to mid to low 80%. We’re still in that mid to low 80% bracket, although it has improved over the last year or so. So as we look at the future, obviously, we want to drive that occupancy rate back up. But we’re going to do it more in a focus of what’s going on with total dues and drive total dues up rather than focus unrelently just on that occupancy number itself. There will be centers where we look at an 85% or an 82% occupancy, and we say, let’s change the strategy here and let’s go to a dues optimization strategy rather than a full bore membership increase strategy and get the same results or potentially better results. So we’re going to go — like we said in the prepared remarks, it’s center by center in those differences. So as I step back and look at it, we would like to get that occupancy back up. From our perspective, that’s — more reality is probably in the 85% to 90% range, but with the ultimate goal of continuing to drive the total dues per center at the same types of levels and more.

Gregory McKinley – Dougherty & Company LLC

Okay, thank you. And then, 2 just quick follow-ups, is it still your expectation that the cost of membership acquisition in excess of enrollment fee will be roughly approximate to 2010 levels this year? And then, can you just refresh my memory a little bit about your Flex members is now at 73,000, how is that program structured and what are your goals with that?

Michael Robinson

So I’m going to answer the first one and then Bahram and I will share the second one. You have to help me again.

Gregory McKinley – Dougherty & Company LLC

Yes, acquisition cost in excess of enrollment fees.

Michael Robinson

We have seen — we saw a slight improvement in the first quarter. We saw a little bit better improvement in that in the second quarter. Our expectation is that we see a modest improvement in cost in excess of enrollment fees for the total year.

Bahram Akradi

Not too much, because that’s our lever in terms of when we need to kind of do maneuvers to get membership in, and I would model it the way it’s been until you see, I don’t know, unemployment down to 7%. I’ve modeled it the way you’re modeling, that you have in the last. It shouldn’t be a significant number, but I wouldn’t be more optimistic about it that it is at right now.

Gregory McKinley – Dougherty & Company LLC

Very good, and then just some color on your Flex member program and what you’re hoping to accomplish with that?

Bahram Akradi

Yes, so the Flex member program, it’s basically has created the opportunity for our customer, who may have dropped out for 3 or 4 months to just not lose their account number and the benefits of having this older membership whatever might be there, make it a little easier for those who know for 3 or 4 months, they’re going to be out of the state or something like that. And when we introduced it, we knew that with time, it will grow and it’s working exactly the way we expected it. And obviously you’ll have a bank of new members — a bank of members who are not active. They’re paying very little, and when they want to re-sign up instead of having the counting as a new membership sign-up, you’re actually basically getting an activation. So I wouldn’t put much more thought into it than that. It’s simply a strategy that we can either make the member cancel their membership, come back, pay a little bit of enrollment fee then we have to pay some commission, which is kind of a little more work for everybody, or the way we have it set up. I wouldn’t put much thought into it.

Operator

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

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

I guess a question — 2 questions, so one for Bahram. I guess, when you’re talking about doing, what I guess I would call revenue optimization per member, it sounds a lot like what you did pre-recession, and I’m just curious as you think about sales per member, do you think there’s the opportunity to push that growth back into the high single digits going forward, maybe in 2012 and beyond like it was in ’06 and ’07?

Bahram Akradi

Yes, well you’ve got to consider the fact that we are just sharper on our strategies than we were pre-recession. We have focused stronger on the reasons why people want to join Life Time, and make sure that there is really high quality program around their interest. It’s the same strategy, we just have had more years at it. We’re a lot sharper at delivering it. We’re still in a tough macroeconomic environment. So again, our strategy, like Mike said, is to win against these tougher anticipation of how the macroeconomic is going to stay, and so we feel good about that. At this point, I feel like I wouldn’t be more aggressive on modeling other than the fact that, should the environment improves at all, I think that would put just a little more win in our back rather than going into the headwind. So winning in the headwind is great, but if we get a little bit of help from the macroeconomic, I think we’re going to see some great opportunities to maximize price across the programming. Right now, we’re using all that great delivery to increase the connection, reduce attrition, kind of a blend of all of those things here.

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

Okay, and then just one quick question for Mike. As we look at membership growth on the back half this year, should we expect that to decelerate pretty substantially given that there are no new clubs coming in?

Michael Robinson

No, I wouldn’t expect a significant deceleration. I would expect it that we’re going to continue to grow the membership and the membership base in roughly the range that we’re seeing right now.

Operator

Ladies and gentlemen, this concludes the question-and-answer portion of today’s event. I’d like to turn the call back over to management for closing remarks.

John Heller

Thanks, Regina. Thank you for joining our call today. We look forward to reporting to you our third quarter 2011 results. Which tentatively, has been scheduled for Thursday, October 20, 2011, at 10:00 A.M. Eastern. Until then, we appreciate your continued interest in Life Time Fitness. Thank you and have a good day.

Operator

Ladies and gentlemen, this concludes the presentation for today. Thank you so much for your participation. You may now disconnect. Have a great day.

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