l ife t ime f itness, i nc equity investment presentation 1 richie hartz ha da jang diana yang april...

LIFE TIME FITNESS, INCEquity Investment Presentation

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Richie HartzHa Da Jang Diana Yang

April 30, 2013

Kaushik AndraHeziyou XuDiana YangIris Yijin Zhang

AGENDA

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INTRODUCTIONINTRODUCTION COMPANYCOMPANY INDUSTRYINDUSTRY VALUATIONVALUATION

Introduction

Company Overview

Stock Performance

Industry Overview

Financial Analysis

Valuation

Recommendation

COMPANY PROFILE

• The Healthy Way of Life Company

• Designs, develops and operates sports and athletic,

professional fitness, family recreation and spa centers

• Helps clients achieve total health objective, athletic

aspirations by doing what they love

• Types of memberships: individual, couple, family

• First center opened in 1992

• Headquarters: Chanhassen, Minnesota

• Ticker: LTM

• Market Cap: $1.89 Billion

• Employees: 20,000

• Number of centers: 105 (as of Feb 28, 2013)

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Source: LTM 2012 Annual Report Item 1 P1-2

COMPANY HISTORY

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1992: Life Time Fitness founded, first club opened in Minnesota

2001:Life Time formalized its Athletic Events division

2012: Acquired Racquect Club of the South (RSC)

2008-2011:Expanded to about 15 states

2000:Life Time expanded offering to include proprietary line of nutritional products and supplements

2004: Life Times completed its IPO with NYSE

1992 2001 2008 20122000 2004 2011

2011:Opened its first location in Ontario, Canada

Source: LTM offical website http://www.lifetimefitness.com/aboutlifetime/company/index.cfm?strWebAction=fact_sheet; MarketLine Report

5 AREAS OF PROGRAM SERVICES

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Source: LTM offical website http://www.lifetimefitness.com/aboutlifetime/company/index.cfm?strWebAction=fact_sheet


BUSINESS COMPETITIVE STRENGTHS

6Source: LTM offical website http://www.lifetimefitness.com/aboutlifetime/company/index.cfm?strWebAction=fact_sheet; LTM 2012 Annual Report Item I P2-3


Business Competitive Strengths – Cont’d

7Source: LTM offical website http://www.lifetimefitness.com/aboutlifetime/company/index.cfm?strWebAction=fact_sheet; LTM 2012 Annual Report Item I P2-3


REVENUE DECOMPOSITION

8Source: LTM 2012 Annual Report


GROWTH STRATEGY

9Source: LTM 2012 Annual Report Item 1 P3-4


SWOT ANALYSIS

Strengths WeaknessesComprehensive programs & services Concentrated business operations

Strong economic model Unable to attract and retain members

High value services Seasonality

Robust financial performance ensures financial stability

Reliance on credit facility and ability to access additional capital

Reliance on acquisition to grow

Subject to claims (construction, fitness-related)

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Opportunities ThreatsInorganic and organic expansion plans to boost top-line growth

Intense competition

Favorable outlook for the global leisure facilities

Stringent regulations (advertising, sales, service providers)

Potential litigation against intellectual property rights

Source: LTM 2012 Annual Report Item 1A P19, Item 7 P38; MarketLine Report


HISTORICAL FINANCIALS

11Source: Calculated based on LTM 2012 Annual Report Financial Statements


2013 Q1 REPORT

12Source: Calculated based on LTM 2013 Quarterly Report Financial Statements


(Quarter ended in March 31) 2013 Q1 2012 Q1

Total Revenue $290.7 million (8.3% growth) $268.4 million

Net Income (Profit margin) $28.1 million (9.67%) $25.7 million (9.58%)

EBITDA (% of sales) $82.0 million (28.2%) $75.7 million (28.2%)

CapEx (% of sales) $59.1 million (20.3%) $38.5 million (14.3%)

Rent Expenses $9.7 million $9.6 million

Operating Expenses/Sales 82% 82%

Return on Sales (EBIT/Sales) 18% 18%

Interest Coverage 8.55 7.70

Basic EPS 0.68 0.62

Debt $698.9 million $704.4 million

BV Equity $1085.7 million $1072.9 million

BV D/E 63.5% 65.7%

KEY FINANCIAL RATIOS

13Source: Calculated based on LTM 2012 Annual Report Financial Statements


2010A 2011A 2012A

10% 10% 10%5% 5% 5%9% 9% 10%

0.58 0.61 0.60 0.45 0.45 0.43

73% 72% 66%24 37 32

157 165 12232 28 2430 28 20

2 2 311 13 1512 13 18

1 2 0

Profitablility RatiosReturn on Equity (ROE)Return on Asset (ROA)Profit Margin

Liquidity RatiosCurrent RatioQuick Ratio

Leverage RatiosDebt to EquityInterest Coverage

Operating Efficiency RatiosReceivables TurnoverInventory TurnoverPayables Turnover

Receivable Conversion PeriodInventory Conversion Period Payment Deferral Period Cash Conversion Cycle

2013E 2014E 2015E 2016E 2017E 2018E

10% 10% 10% 10% 10% 10%5% 5% 5% 5% 5% 5%9% 9% 9% 9% 9% 9%

0.59 0.59 0.59 0.59 0.59 0.59 0.44 0.44 0.44 0.44 0.44 0.44

70% 70% 70% 70% 70% 70%30 30 30 30 30 30

145 145 145 145 145 14528 28 28 28 28 2825 25 25 25 25 25

2 2 2 2 2 213 13 13 13 13 1314 14 14 14 14 14

1 1 1 1 1 1

STOCK PERFORMANCE

14Source: Yahoo Finance

INDUSTRY OVERVIEW

• Primary Industry: Fitness– Secondary industry: Leisure Facilities, Health

and Fitness clubs

• Major products and services offered by industry

– Tennis centers, gyms and fitness centers, ice and roller rinks, dance centers, swimming pools, weight-loss supplements

• No major players in this Industry– No players hold a market share larger than

5.0%

• Industry Structure Highlights– Capital Structure- medium– Revenue volatility- low– Regulation level- light

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Source: IBISWorld

U.S. OVERWEIGHT AND OBESITY DISTRIBUTION

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Concerns over obesity will continue to drive fitness industry

PREVALENCE OF OBESITY IN U.S.

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Source: CDC

INDUSTRY OUTLOOK

• Increasing awareness of healthy lifestyle and stabilization of U.S economy will keep industry in a growth phase

– Revenue for the industry expected to rise at an average annual rate of 2.9% to $29.9 billion in 2018

• Large and growing health and wellness industry– Retiring baby boomer generation will create strong opportunities for gyms and fitness clubs– Younger than 17-market presents opportunity as childhood obesity concerns continue

• Slow expansion of existing establishments– Most major markets already heavily saturated– Establishments only expected to increase at an average rate of 1.1%, primarily coming from expansions

of large-scale gyms

• Continued support from government– Reduction of Healthcare costs

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Source: IBISWorld

PORTER’S FIVE FORCES

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Threat of New Entrants: Low Large capital investment on property, equipment, and acquisitions

Threat of Substitute Products: HighTraditional methods of exercise and self-instruction through online

materials and alternative weight loss programs

Bargaining Power of Buyers: Moderate Variety of membership packages to choose from;Attractive price and program mix to grow membership dues

Bargaining Power of Sellers: ModerateProperty and professional equipment

Intensity of Competition: HighConcentrated business operations;Other centers, clubs, profit/non-profit organizations

Source: LTM 2012 Annual Report Item 1 P12, Item 1A P16

MACROECONOMIC OUTLOOK

• Key External Drivers– Participation in sports, per capita disposable income, number of adults aged 20-64

• Stabilization of U.S economy and modest employment growth• Minimal exposure to events in Europe• Impact of Healthcare regulation and reform• Fed will continue easy-money policies

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Source: IBISWorld

Valuation — Trading Comparables

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Enterprise Value / Price NTM Enterprise Value NTM Forward

(in $USD millions) EBITDA EBIT Diluted EPS Tangible BVForward Total

Revenue Forward EBITDA P/E

Life Time Fitness 7.6x 11.6x 17.0x 1.8x 2.09x 7.2x 15.47x

Bal ly Tota l Fi tness Holding Corporation NM NM NM NM NM NM NM

Healthways Inc. 12.6x 24.9x 67.3x NM 0.95x 7.6x 31.22x

Town Sports International Holdings Inc. 5.2x 10.6x 19.3x NM 1.04x 5.2x 13.78x

Renaissance Inc. 7.7x 14.9x 16.1x 1.7x NM NM NM

Ardent Leisure Group 10.5x 17.8x 37.2x 2.1x 1.77x 8.4x 12.09x

KOSHIDAKA Holdings Inc. 4.7x 7.5x 10.5x 3.8x 0.78x NM 10.73x

Canlan Ice Sports Corp. 6.5x 13.7x 28.8x 0.8x NM NMNM NM

Grupo Sports World, S.A.B de C.V. 13.6x 32.7x 41.8x 2.4x NM NMNM NM

Goals Soccer Centres plc 8.5x 10.6x 50.4x 1.5x 3.72x 8.6x 9.55x

High 13.6x 32.7x 67.3x 3.8x 3.7x 8.6x 31.2xLow 4.7x 7.5x 10.5x 0.8x 0.8x 5.2x 9.5xMean 8.7x 16.6x 33.9x 2.1x 1.7x 7.4x 15.5xMedian 8.1x 14.3x 33.0x 1.9x 1.0x 8.0x 12.1x

LTM EBITDA LTM EBIT LTM Diluted EPS LTM Tangible

BV/Share NTM Revenue /

Share NTM EBITDA NTM EPS Li fe Time Fi tness 324.1 208.5 2.68 26.29 29.6 360.2318 2.98Impl ied Price_Mean $50.96 $66.62 $91.03 $54.04 $48.93 $64.27 $46.13Impl ied Price_Median $46.54 $55.08 $88.56 $50.24 $30.89 $69.21 $36.03

Source: CapIQ

Valuation — WACC Analysis

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Capital StructureTotal Debt 698,859Market Value of Equity $1,923,628.74Debt-to-Total Capitalization 26.6%Equity-to-Total Capitalization 73.4%

Cost of DebtCost of Debt 1.4%Tax Rate 35.0% After-tax Cost of Debt 0.9%

Cost of EquityRisk-free Rate 1.7%Market Risk Premium 9.1%Beta 1.08 Cost of Equity 11.5%

WACC 8.7%

WACC Calculation

Source: Bloomberg

Discounted Cash Flow Analysis— Fair Value

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Enterprise Value 2,487,374 Less: Debt (698,859) Add: Cash 13,694

Implied Equity Value 1,802,209

Shares Outstanding 41,646.000

Fair Value of LTM $43.27

Current Stock Price $46.19

DCF implies that stock is trading around its fair value

Implied Share Price SensitivityPerpetuity Growth Rate Terminal Multiple

43 2.0% 2.5% 3.0% 3.5% 4.0%

7.7% $45.55 $50.62 $56.78 $64.42 $74.14

8.2% $40.23 $44.40 $49.37 $55.41 $62.90

8.7% $35.72 $39.19 $43.27 $48.15 $54.07

9.2% $31.84 $34.77 $38.17 $42.18 $46.96

9.7% $28.46 $30.96 $33.84 $37.17 $41.10

WA

CC

Fair Value Calculation

Implied Share Price SensitivityTerminal Multiple

43 5.5x 6.0x 6.5x 7.0x 7.5x

7.7% 38.49 42.36 46.23 50.10 53.97

8.2% 37.17 40.94 44.71 48.48 52.25

8.7% 35.90 39.57 43.24 46.90 50.57

9.2% 34.66 38.23 41.81 45.38 48.95

9.7% 33.46 36.94 40.42 43.90 47.38

WA

CC


VALUATION SUMMARY

• 52-Week High: $52.43• 52-Week Low: $39.10

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$10 $30 $50 $70

52-Week Range

DCF

TradingLTM EBITDA

$52.43$39.10

$62.90$28.46

$57.47$41.91

• 2.0%-4.0% Perpetuity growth rate

• 8.2%-9.7% WACC• Mid-Year Convention

• 7.0x – 9.5x LTM EBITDA of $324mm

Lifetime is currently trading at its fair value

Current Price $46.19


RISKS & DECISION DRIVERS

(1) GICS Diversification

(2) Sharp drop in stock price

(3) Leader in U.S. Market

Final Thoughts

Why We Chose Lifetime


(1) Low intrinsic Value

(2) Fragmented Industry

(3) Reliance on discretionary income of consumers

(4) Limited growth opportunities in domestic market

RECOMMENDATION

Watch List


Questions?

Life Time Fitness

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Valuation — DCF ANALYSIS

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Fiscal Year Ending December 31, '13E - '18P Terminal value2012A 2013E 2014E 2015E 2016E 2017E 2018E CAGR Perp EBITDA

Sales 1,126,947 1,248,270 1,369,229 1,486,617 1,596,619 1,694,911 1,776,907Growth (%) 11.2% 10.8% 9.7% 8.6% 7.4% 6.2% 4.8%

Operating Expenses 918,720 1,026,991 1,126,508 1,223,086 1,313,588 1,394,456 1,461,917EBIT 208,227 221,279 242,722 263,531 283,031 300,455 314,990Margin (%) 18.5% 17.7% 17.7% 17.7% 17.7% 17.7% 17.7%

D&A 115,016 125,117 137,241 149,007 160,032 169,884 178,103% of Sales 10.2% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%EBITDA 323,243 346,396 379,962 412,538 443,063 470,339 493,093 7.3% 493,093 493,093Margin (%) 28.7% 27.8% 27.8% 27.8% 27.8% 27.8% 27.8%

EBIT 208,227 221,279 242,722 263,531 283,031 300,455 314,990 7.3% 314,990 nm

Less: Income Taxes (72,697) (77,448) (84,953) (92,236) (99,061) (105,159) (110,247) (110,247)Effective Tax Rate 34.9% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0%Plus: D&A 115,016 125,117 137,241 149,007 160,032 169,884 178,103 178,103Less: CapEx (224,194) (210,661) (205,384) (208,126) (207,560) (203,389) (213,229) (213,229)% of SalesLess: Change in Working Capital 1,349 (1,493) (568) (552) (517) (462) (385) (385)Unlevered FCF 56,794.4 89,057.1 111,623.9 135,925.1 161,329.0 169,232.7 24.4% 169,233 nm

Terminal Value Assumption 3.0% 6.5xTerminal Value 3,077,202 3,205,108Implied Perpituity Growth Rate 3.0%

PV of Terminal Enterprise Net Equity Share Price PremiumCFs Value Valuation Debt Valuation EV/ EBITDA Current Implied to Current

Perpetuity Growth 499,119 1,988,255 2,487,374 685,165 1,802,209 5.0x $46.19 $43.27 -6%EBITDA Exit Multiple 499,119 1,986,620 2,485,739 685,165 1,800,574 5.0x $46.19 $43.24 -6%

Source: LTM 2012 10-K

l ife t ime f itness, i nc equity investment presentation 1 richie hartz ha da jang diana yang april...

Documents

annual report item

ltm offical website

life time fitness

chart data range

life times

lower right corner of

life time expanded offering

annual reportgrowth