Planet Fitness Inc (PLNT) 2015 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Planet Fitness fourth-quarter 2015 earnings conference call.

(Operator Instructions)

I would like to remind everyone that this conference call is being recorded. I'll now turn the call over to Brendon Frey, Managing Director of ICR.

Thank you for joining us today to discuss Planet Fitness' fourth-quarter 2015 earnings results. On today's call are Chris Rondeau, President and CEO, and Dorvin Lively, Chief Financial Officer. A copy of today's press release is available on the investor relations section of Planet Fitness' website at PlanetFitness.com.

I would like to remind you that certain statements we will make in this presentation are forward-looking statements and these forward-looking statements reflect Planet Fitness' judgment and analysis only as of today and actual results may differ materially from the current expectations based on a number of factors affecting Planet Fitness' business. Accordingly you should not place undue reliance on these forward-looking statements.

For a more thorough discussion of the risks and uncertainties associated with the forward-looking statements to be made in this conference call and webcast we refer you to the disclaimer regarding forward-looking statements that is included in our fourth-quarter 2015 earnings release, which was furnished to the SEC today on Form 8-K as well as our filings with the SEC referenced in that disclaimer. We do not undertake any obligation to update or alter any forward-looking statements, whether as a result of new information, future events, or otherwise.

In addition, the Company may refer to certain pro forma non-GAAP metrics on this call. Explanation of these metrics can be found in the earnings release filed earlier today. With that, I'll turn the call over to Chris. Chris?

Thanks, Brendon. Thanks, everyone, for joining us today. Our strong fourth-quarter performance, which exceeded expectations, was a great way to complete a terrific year for Planet Fitness. 2015 total revenue increased 18% to a record $330 million, including system-wide same-store sales growth of 7.7%. All three segments of our business segments, franchise, corporate stores and equipment grew double digits, led by 23% growth in the franchise revenue, our highest-margin segment. Our business model allowed us to translate our top-line success into even stronger gains in adjusted EBITDA, which increased 23% to a record $123 million.

On top of our record financial performance, which Dorvin will review in more detail shortly, the past year was filled with several milestones, accomplishments that underscore the health our business and the strength of our brand. First, we surpassed our 1,000th location in June and ended the year at 1,124 stores after opening 209 throughout the year, including 84 in the fourth quarter alone. This rapid expansion was driven by our group of well-capitalized franchisees, who opened all but three of the 209 locations and are responsible for more than doubling our store count over the last three years.

Perhaps more importantly, new unit sales are outpacing store openings, replenishing the pipeline with over 1,000 new locations that are committed to open in the next seven years, more than 500 set to open in the next three years. 2015 marked our first international franchise locations outside the US, beginning with Canada and, more recently, the Dominican Republic, where the brand is off to fantastic start. The success our concept has enjoyed in Puerto Rico since launching there in 2011, combined with our initial reception of the Dominican, bodes well for the potential expansion into other Latin American markets down the road.

Second, total membership reached more than 7 million members system-wide, a milestone the fitness industry has never seen before. We ended 2015 with 7.3 million members, an increase of 20% year over year, which is well above the industry growth rate. Our non-intimidating environment and tremendous value proposition continues to resonate extremely well with the casual and first-time gym user, a large underserved segment of the fitness market. We view the unique features of our concept, along with our powerful national advertising strategy, as significant competitive advantages that will continue to fuel our growth for many years to come.

Our national advertising fund will only continue to grow as we open more stores and attract more customers. 2015 contributions to the fund surpassed $24 million which allowed us to execute programs like the Biggest Loser for the fifth season in a row and running advertising nationally throughout the year that does a great job highlighting our differentiated in-store environment and attractive price point. To top it off, we ended the year with a bang, as a presenting sponsor in Times Square New Year's Eve Celebration in New York City. It was an amazing opportunity to generate increased brand awareness, both in the US and internationally, as 1 billion TV viewers worldwide watched as we transformed Times Square into a sea of purple and yellow at a critical time of the year when health, wellness and joining a gym is top of mind for consumers.

I couldn't be more pleased with everything Planet Fitness accomplished in 2015, which has given the entire enterprise great momentum to start 2016. Kicked things off with our annual January sale which, anchored by our lead [sponsorship] of the Time Square Celebration, has fueled significant amount of new interest in our brand. 2016 is shaping up to be another record year for Planet Fitness. We are currently scheduled to open between 210 and 220 locations, including 15 in Canada as we accelerate our brand penetration north of the border. At the same time, our group of well-capitalized franchisees are rapidly increasing the accessibility of our unique fitness offering in new and existing markets throughout the US. This is further strengthening our leadership position in the industry and allowing us to greet reach an even greater percentage of casual or force first-time gym user that want to improve their lives through health and wellness.

Finally, I'm pleased to announce that earlier this week Planet Fitness captured the number-one spot in Franchise Times' annual Fast and Serious ranking of the smartest growing franchise brands. Being acknowledged by the industry's leading publication such as Franchise Times is terrific and only made possible by the commitment our seasoned franchisees and the dedication of our hard-working teams at the corporate headquarters. I share this award with all of our stakeholders. Thank you for their support.

With that, I'll turn it over to Dorvin.

Thanks, Chris, and good afternoon, everyone. I'll begin by reviewing the details of our fourth-quarter results and then I'll provide our full-year outlook for 2016. For the fourth quarter of 2015, total revenue increased 10.2% to $105.8 million from $96 million in the prior-year period. Total system-wide same-store sales increased by 6.2%. By segment, our franchise segment revenue was $24.7 million, an increase of 16.9% from $21.1 million in the prior-year period. Within our franchise segment revenue, our royalty revenues increased 35.5% to $12.1 million, which consists of royalties on our monthly membership dues and annual membership fees. This compares to royalty revenue of $8.9 million in the same quarter of last year.

The increase was driven by three factors. First, royalties from the opening of new franchise stores since the fourth quarter of last year; second, our franchise owned same-store sales growth of 6.6%; and then third, a higher overall royalty rate. For the fourth quarter, the average royalty rate was 3.2%, up from 2.9% for the same period last year, driven by more new stores opening at the current royalty rate of 5%. Remember, we have an annual fee in Q4, it's in October, which brings down the average royalty rate versus Q3 where we do not have an annual fee in that quarter.

Next within our franchise and other fees, which were $4 million versus $4.4 million in the prior-year period. These fees are fees that we receive for processing dues through our point-of-sale system as well as fees paid to us in association with new franchise agreements and area development agreements. In the prior year, there was both a revenue component as well as a cost of component in revenue -- or in cost of revenue, rather, related to our point-of-sale transaction revenue, whereas it is now all reported net in revenues. The year-over-year decline was a result of this change. If not for this change and how we report this revenue under our new point-of-sale system, the source of revenue would have grown by $0.5 million, or 13%.

Also within total franchise segment revenue is our placement revenue, which was flat at $3.9 million. These are fees that we receive for assembly and placement of equipment from our franchisees. The total of new store placements in the quarter was approximately the same as the prior year as we utilized the equipment manufacturer to perform some of the placements in the high-volume month of December 2015, including all of the placements in Canada. While 84 new stores opened in the fourth quarter, 5 were internationally, resulting in 79 domestic store openings compared with 76 new stores in the US last year. And then finally, commission income which are commissions from third-party preferred vendor arrangements used by our franchisees and is included in total franchise revenue, increased 19.5% to $4.7 million from $3.9 million a year ago, due to higher volume of purchases by our franchise stores from these vendors.

Our corporate-owned store segment revenue increased 11.2% to $24.7 million from $22.2 million in the prior-year period. The $2.5 million increase was attributable to contributions from new stores opened since December 31, 2014, and then, to a lesser extent, a 1% increase in corporate same-store sales. Equipment revenue increased 7.2% to $56.5 million from $52.7 million. The year-over-year increase was driven by higher replacement equipment sales, slightly offset by lower new equipment sales as a result of the price decrease that was passed through to our franchisees beginning in July of 2015.

As a percentage of total equipment revenues, our replacement equipment revenues made up approximately 18% of the total equipment revenue during the fourth quarter. Our international franchisees did open five stores in the fourth quarter. I will address this a bit further later, but we recognize equipment revenue differently internationally compared with the US. Within our cost of revenue, which primarily relates to direct cost with equipment sales to new and existing franchisee-owned stores, this amounted to $43.4 million compared to $42.5 million a year ago. Our gross margin increase was primarily driven by an improvement in our equipment margins by approximately 200 basis points, due primarily to higher volume rebates on purchases of equipment during the quarter compared to the prior-year quarter.

Our store operation expenses, which are associated with our corporate-owned stores, was $14.1 million compared to $13.7 million a year ago. The prior-year quarter included pre-opening expenses for two new stores, one that opened in late December and then one that opened in early January of 2015. Excluding these pre-opening expenses, total store operating expenses increased by $1.4 million and it relates to the new stores we opened this year that had full operating expenses in the fourth quarter of 2015 versus little or no expenses in the prior-year quarter.

Our SG&A for the quarter was basically flat at $11.7 million compared to $11.8 million in the prior period. Included in SG&A for both quarters are some one-time expenses. In the prior year, they were primarily associated with the point-of-sale system upgrade and then in the current year were associated with the IPO. Excluding these one-time expenses, SG&A increased by approximately $300,000, or about 3%. This was primarily driven by some higher ongoing public company expenses that we did not incur in the prior-year quarter.

Operating income, inclusive of the aforementioned nonrecurring expenses, increased 48.9% to $28.8 million for the quarter compared to operating income of $19.3 million in the prior-year period. On an adjusted basis, taking into account the one-time items, our adjusted operating margins increased by approximately 550 basis points to 28.1% in this quarter versus 22.5% in the prior-year quarter. This was primarily due to revenue growth and higher margins from all three of our business segments as well as leverage of our SG&A expenses.

Our effective income tax rate for the fourth quarter was 29.5% compared to 2.1% in the prior-year period, which is lower than the US statutory federal tax rate of 35%. This was because prior to the IPO, on August 5, Planet Fitness was treated as a past-due entity for US federal income taxes as well as, in most states, for state income taxes. In the periods after the IPO, Planet Fitness incurs federal and state income taxes on its share of income, the portion of income attributable to Planet Fitness, Inc. but not on the income attributable to the non-controlling interest.

Net income for the fourth quarter of FY15 increased by 25.1% to $17.2 million from $13.8 million in the prior-year period. On a pro forma adjusted basis, net income improved to $17 million, or $0.17 per diluted share, from $13.7 million, or $0.14 per diluted share, in the prior-year period. Pro forma adjusted net income has been adjusted to include the impact of the Initial Public Offering, reflect a normalized federal income tax rate as if we were a public company for both periods and then it excludes several nonrecurring costs and gains. We have provided a reconciliation of a pro forma adjusted net income to GAAP net income in today's earnings release.

Adjusted EBITDA, which is defined as net income before interest, taxes, depreciation and amortization, adjusted for the impact of certain non-cash and other items that are not considered in the evaluation of ongoing operating performance, increased 23.9% to $37.5 million from $30.3 million in the prior-year period. Adjusted EBITDA growth across our segments was strong, with our franchise segment increasing 31.8%, our corporate store segment increasing 18%, and our equipment segment increasing 15.7%. A reconciliation of adjusted EBITDA to GAAP net income can also be found in today's press release.

By segment, our franchise segment EBITDA increased 39.5% to $19.3 million, driven by higher royalties than we received from the additional franchisee-owned stores that we opened since December 31, 2014, and an increase in franchisee-owned same-store sales growth of 6.6%. The prior year included some one-time expenses related to the point-of-sale migration, as I mentioned earlier. Adjusting for the nonrecurring items, our franchise segment EBITDA margins increased by approximately 900 basis points. Our corporate store segment EBITDA increased 29.6% to $9.7 million, primarily driven by the new stores not included in the same-store sales base as well as a modest same-store sales increase for mature stores.

Our EBITDA margins increased by approximately 550 basis points to 39.4%, primarily as a result of the prior year, including pre-opening expenses associated with the new stores. If you adjust for these nonrecurring items, then our corporate store EBITDA margins increased by approximately 230 basis points quarter over quarter. And then our equipment segment EBITDA increased 15.7% to $13 million and was driven by higher equipment sales. EBITDA for this segment increased by -- the EBITDA margins increased by approximately 170 basis points, which was primarily driven by the higher volume rebates on our equipment purchases in the current year versus the prior year that I mentioned earlier.

We recognize our revenues on equipment purchases by our international franchisees differently compared to when we sell equipment to franchisees here in the US. Domestically, we take title of the equipment from the equipment manufacturer, ship the equipment to the franchisee location and then we generally assist the franchisee with assembly and placement for this equipment whereby we also recognize a placement fee for those services. In other words we have gross revenue, cost of goods sold and a gross profit.

Internationally, we do not take title to the equipment from the equipment manufacturer but rather the manufacturer sells this equipment directly to the international franchisee and then pays us a commission on this sale that is equal to the gross profit that we would have recognized as if that transaction had occurred here in the US. Another way to think about it is that we have lower revenues for these new stores outside the US but it generates the same gross profit dollars.

Turning to the balance sheet, as of December 31, 2015 we had cash and cash equivalents of $31.4 million and we had borrowing capacity of $40 million under our revolver. Total bank debt at the end of December was $484.9 million, consisting solely of our senior term loan which bears interest at LIBOR plus [3.75%], giving us net debt of $453.4 million. Based on our ability to generate significant cash flows, we feel very comfortable with our current capitalization. During the fourth quarter we prepaid $10 million of our long-term debt with excess cash on our balance sheet.

Before I provide our outlook for 2016 let me make a few comments about our members per store, our end-of-year store count and our mix of Black Card and White Card percentages. First with respect to total members and member growth year over year, we had approximately 7.3 million members at the end of 2015 and approximately 6.1 million members at the end of 2014, representing a growth in members of approximately 20%.

At the same time, our total store count grew by a net of 206 stores, or 22%, to 1,124 stores at the end of 2015, up from 918 at the end of 2014. Based on these figures, our average members per store was approximately 6,500 members at the end of 2015 compared to approximately 6,600 at the end of 2014.

The decrease in number of members per store was driven primarily by the franchisees' change in billing practices, as we've discussed in previous quarters. Many of our stores did not remove non-paying members systemically every month in 2014 and not until after our migration to our new point-of-sale system in the first half of 2015. Therefore the year-over-year comparison is not really apples to apples. With all stores now on our new point-of-sale system, we recently looked at the impact on our prior-year number count -- prior-year member count as a result of not removing these non-paying members.

If you adjust for these members that were subsequently removed from the total membership for nonpayment as of December 31, 2014, our average membership per store would have increased approximately 2% from December 2014 to December 2015. Additionally, the timing of new store openings within the year also impacts this statistic. We also continue to see success migrating members towards our more premium Black Card memberships, which as a percentage of total memberships grew 200 basis points to 57% at the end of 2015, up from 55% at the end of 2014.

Before I comment on our 2016 outlook, let me just summarize our fourth quarter. All three segments achieved strong results. Our total revenue growth was 10.2%, with franchise growing at 16.9%, corporate stores 11.2% and equipment coming in at 7.2%. Additionally, our adjusted EBITDA grew by 23.9%, with franchise leading the way at 31.8% growth, our corporate stores at 18% growth and equipment coming in at 15.7% growth. We had a really strong quarter and we're very pleased with our results.

Let me now turn to our outlook. For the year ended December 31, 2016, we expect revenue to be between $355 million and $365 million, with system-wide same-store sales growth in the mid single-digit range. Pro forma adjusted net income is expected to be in the range of $59 million to $62 million, or $0.60 to $0.63 per diluted share.

When looking at our projected net income growth over 2015, please keep in mind that 2016 will include ongoing public company costs for the full year whereas in 2015 we only incurred those expenses in the five months following our IPO in early August. If you adjust 2015 to include a full year of these costs to be on a comparable basis, pro forma net income in 2016 would be growing consistent with our long-term target of 20%. In our reported results for 2016, this headwind will be the strongest in Q1 and Q2 before we get to an apples-to-apples comparison during Q3. For 2016 we plan to open between 210 and 220 new stores, including approximately 15 internationally.

Because we're two-thirds of the way through the current quarter, which is further along than when we normally report because this is our year-end call. Combined with the fact that we're up against an unusually high number of openings in Q1 of 2015, when we opened 61 stores, we wanted to share some thoughts on the first quarter.

We expect first-quarter revenue growth to be low single digits, which is based on a mid single-digit same-store sales increase, with approximately 46 new store openings. Openings in Q1 are expected to be lower than in the prior year as openings in the prior-year period were unusually high on a seasonal basis and we had some openings which we expected in Q1 of this year that opened up in Q4 2015.

We previously guided to opening between 195 to 200 stores last year and we were obviously excited to exceed the expectations coming in at 209 openings. This outstanding performance included a handful of stores that shifted out of Q1 of 2016 into Q4 of 2015, I just mentioned. The fewer store openings will obviously negatively impact our equipment segment in the first quarter, but this trend will reverse over the remainder of the year as we expect to open more stores than last year in Q2 through Q4 based on our pipeline. We expect our Q1 pro forma EPS at approximately $0.13 a share.

Mike, we're now ready to open up the call for questions.

(Operator Instructions)

John Heinbockel, Guggenheim Securities.

Guys, couple of things. How have the one-quarter membership sign-ups been right in light of your stepped-up marketing around New Year's Eve and the Biggest Loser and general brand awareness? What kind of start have you gotten off to with sign-ups?

And then embedded in your first-quarter guidance, what type of growth do you think we get in membership sequentially? Somewhere in the high teens that it would seem to imply? Thoughts on that?

I'd say so far the membership growth has been great I'm pleased with how it's gone so far this year. The New Year's Eve, I imagine if anybody saw it, it was quite spectacular. I think that being mostly around a branding promotion. It wasn't really call to action as much as the January sale is. I think one really important fact, which just came across just this week is we did a -- last January we did the same thing, is a brand health findings summary and we actually just for the first time out beat the legacy brand Gold's, which has been around forever, although they've been a dying brand in a lot of ways. For the first time we've actually taken this spot away, first place from any brand awareness since New Year's Eve.

As well as we actually took over the -- another important thing is unaided advertising awareness. We're first there at 26% and next closest is only 10%. As far as the branding, that definitely made us accelerate quite a bit on a brand awareness role, but as far as hard to push that exactly as attributing to membership growth as opposed to the call to action sale in January.

John, the other thing I think I'd add to Chris's comments is that as part of trying to give you guys some insights into the quarter is I reflected mid single-digit comps. If you will recall last year, in Q1 we were not removing any of those non-paying members during the quarter, and we had talked about this in some previous quarters. So I think that the guidance to that mid single-digit comp range reflects how we feel about the quarter at this stage of the game.

All right. Secondly, how do you get visibility internally on replacement equipment? I'm not sure how you do that, how good that is as you move through the year. And then any thoughts, I know occasionally you've had some general guidance on how that -- what the cadence ought to be quarterly. What would your thoughts be on 2016 in terms of quarterly cadence and equipment?

John, good question.

I think one of the benefits of the fact that they're buying equipment from us is that we're able to track when they originally purchased the equipment so we know how old the equipment is and when it needs to be replaced. That's the easy part. And then if they've already done it once, we know when their second go around is, if it's year 10 now and they've already done the cardio year 5 and they're up against. We're able to document when they bought it and when they need to be replacing it.

We couple that with our brand excellence crews, which are throughout the country that go around and help franchisees operations, and cleanliness, and everything else. So they also look at an inventory. One, to be sure that the equipment is up and running and in good working order and being repaired but also that does not un-approve the equipment being slid in, as well. So it does a little bit of both in that sense, as well.

John, a couple other things on that in terms of cadence and a way to think about it, we had told you back when reported Q2 and Q3 results we expected that we would be in the high teens in terms of the equipment revenue, up close to 20% replacement equipment as the total. It came in at about 24% as far as the replacement equipment as a percent of total equipment revenues.

We feel good about that. We got a lot of franchisees that certainly are replacing their equipment on a regular basis and schedule. You may also recall that I said that although it had been lumpy in the past, quarter to quarter, we expected somewhere between 65%, 70% of our replacement equipment revenues would happen in Q2 and Q3.

There's a lot of reasons for that. It's a better time of the year. There's sometimes they're doing renovations and they'll do all that at the same time. As an example, it came in, in 2015 about 60% or so was what was in Q2 and Q3. We see that 60% to 70% again as we look towards 2016 as replacement revenue. We think Q1 will probably be the lowest, and then 60% to 70% in Q2 and Q3 and then the balance in Q4.

Randy Konik, Jefferies.

I just have -- first wanted to ask about the Canadian business. It sounded like we've heard some very large membership numbers in the initial stores or doors there. What's the end-all -- I guess the returns are probably better as franchise partners potentially in that market. Just trying to get some perspective there because it sounds like it's going very well. Can you give us some more color on how that Canadian market should start to develop over time?

We have the two corporate stores, as you probably recall, were the first to there that we opened December/January so last year, so those are still doing very well north of 10,000 members apiece. The other franchise locations have just opened in December so they're primary much on average pace of any US store at this point, but again they've on been opened a couple months at this point. I'm still very happy with the results, I'll tell you.

Got it. The other question I had was if we look at the 6,500 members per door, can you give us some perspective on the different densities you see on -- maybe by geography, perhaps in the Northeast market where the Company is founded versus the younger markets out West? What differentials would we be seeing or opportunities from the different geographies, both in members per door but also Black Card penetration? Just curious there.

The Black Card penetration, the reciprocity is one of the -- or it's the biggest sell in that Black Card benefit. People use the most so naturally the more in an area, more in a market, the more of an up-sell that is. As far as density, whether we're Northeast or in California for example, any heavier, dense city happens to generate more membership just pure numbers. Our California stores are doing very well and the brand awareness, there's only about 50-plus stores in California, the brand awareness there is no real different than I would see here in the Northeast, I would say. And the clubs opening there prior to that is exactly what it is here.

Perfect. And then two questions for Dorvin. Dorvin, I think of royalty revenue rates based on mix and so forth was up about 30 bps, it sounded like, year over year.

Yes.

Should we be thinking about a 30 basis point increase in penetration on a quarterly basis going forward? Or how should we think about that? Lastly, from a re-equipment perspective, the average age of the chain is fairly young since you had an explosion of growth in the last four or five years. When should we be thinking about a big year expansion in re-equipment revenues when a majority, a decent portion of the chain hits that five- to seven-year window? Just curious there.

First on the royalty rates, we've said in the past and it was pretty spot on for the fourth quarter that, that rate would grow on an annual basis somewhere around 25 to 30 bps or so, and we grew 30 bps in Q4, as I mentioned. That rate will stay pretty consistent until we start seeing a lot of older franchise stores that have a lower rate expire and start to renew and that's really in 2017, 2018, 2019 is when you start to see a bigger volume of those expiring. I still stick to my guidance to think about our average royalty rate in that 30 bps or so a year.

With respect to the replacement equipment, you're right in that the last three years or so, we've opened up close to half of our stores and that will, on average, really start because of it's the cardio being years four and five and then strength being six, seven, it's kind of in that fourth, fifth year when you start seeing it. So if you go back and try to model it, we've given you what the revenue number is for 2015 and you start looking at stores that we opened back four, five, six years ago and those are the ones that will be replacing their equipment this year and next year, et cetera.

One more point I'll make on that is that, and I say this in the past, that it's a process where they really replace their equipment over a rolling quarterly basis and they don't replace everything all at once. If your strength -- if your cardio comes up and you're halfway through year four, they don't typically go in and replace everything at once.

The way we've talked about it is it's probably a more like a 10- to 12-month quarterly rolling period that some of this will happen. It won't all happen in every quarter but it's during that period of time when ultimately that equipment gets replaced. Then just the final point is, I said, we ended up at about 25% of our -- 24% of our total equipment revenue was replacement this quarter, or for the full year, rather. That's going to stay in that mid-20%s in 2016. That's how we see it.

Sharon Zackfia, William Blair.

Dorvin, I think I may have missed when you talked about what the Black Card penetration ended up being for 2015.

It came in 200 basis points, so it was from 55% up to 57%.

Perfect. Thank you.

I'm just curious, there's been a lot of concern about different regional pockets of the country and obviously you have a pretty big national system out there. Are you seeing any signs of customer reticence in places like Texas? Anything with sign-ups or attrition that would make you any more concerned about the economy. And maybe some perspective, if we were to have a slowing consumer how you think Planet would fair vis-a-vis others in the space?

Yes. A couple things and Chris, I think, will jump in on it, too.

Actually, just because of a lot of the news going on with the oil and gas business, I went back and looked at all of our stores in Texas and I took the period from September of 2014 through February of 2015 and then compared that same six-month period this year, because I think oil was close to $100 a barrel back in September 2014. I compared the same six-month period of the same set of stores and those stores are comping right in line with the rest of the stores. So we don't see, including the last couple of months, January and February, we don't see any trend at all of, call it, the Texas state stores versus the overall chain.

I'd say, Sharon, I'd add that too, if I go back to the 2009/2010, we had great same-store sales growth and also -- even if I go back to 2000, the dot com bomb went off, we only had four stores back then. But I remember back then our stores did extremely and very busy, even in the middle of the day. People didn't have work, but they also had nothing else to do but work out and go to a few interviews. It was actually some good times for us.

People traded down from -- people were trading down from the higher-priced clubs. They weren't working out, they just decided to do a more affordable option.

The other thing, frankly, Sharon, that may come out of it is, there may be some cheaper real estate and more real estate locations down there for us to open up more and more stores.

Okay. Great. Thank you.

Kevin Milota, JPMorgan.

Looking at your mid single-digit same-store sales guidance, obviously last year it was, on the corporate side, it was impacted by the Hudson Valley stores. Hoping you could give us some perspective on what your views on both the franchise and corporate side same-store sales estimate for this year and how those Hudson Valley units are doing, whether it be from a membership perspective or just give an update on that front? Thank you.

When you think about our business and the comps that we gave guidance to for the year back at the end of Q3, we had said that those Hudson Valley stores, there's eight of them there that had been a drag if, you will, on our corporate store base. We continue to see improvements in those stores through the last four or five, six months of last year. There's a couple of them there that we're still working on and we have plans on those.

The other six are -- they've made the turn and we're still working on them, obviously, as well, but that's all embedded into the way we built our guidance for 2016 of saying mid single-digit comps. That's the same guidance it gave for Q1 and so as we get past Q1 and into Q2, we'll try to refine that a bit further for the full year. But we feel pretty comfortable with it right now.

Okay. Great. Just a follow-up on the balance sheet. Obviously your guidance looks good and is obviously growing. As we look at your leverage targets and as we move through 2016 and then into 2017 with the free cash that you're generating, remind us what your priorities are for that free cash flow? Is it purely debt pay down, or should we start potentially thinking about a dividend or other shareholder uses?

Thank you.

I think number one is a good piece of our total corporate CapEx out of our cash flows goes to replace equipment in our existing stores, so that's always a high priority to do that. Second would be we have built a couple stores. We built three last year, corporate new stores. That's something that we'll probably continue to look at one, maybe two stores, but we're not -- we don't plan to do anything more than that, so that's a piece of it. I think that to more of the crux of your question, how do we feel with our leverage? And then what would we do corporately with the free cash flow? I think outside of those, we'll certainly work with our Board as to what's the right way to return cash to our shareholders?

At this time, we're obviously very comfortable with our current debt leverage. We will de-lever over time, and as I made in my prepared remarks, I said we did prepay $10 million in Q4. So it will be a combination of those things. I don't think at the moment outside of the cash needs just to run the business with the CapEx for our replacement stores, I think that, that's something that we'll continue to look at throughout this year.

Okay. Thanks a lot.

Seth Sigman, Credit Suisse.

Nice quarter. One clarification. As we look at the store growth for this year, the guidance seems a little bit higher. I just want to clarify, is that incremental, really just Canada, or were there other incremental opportunities that maybe you're seeing in the US, as well?

I would say we said 210 to 220 and that includes 15 international stores. Most of all those stores will be in Canada. That gets you down to really in the long-term range target that we gave, frankly, back when we went public. We said approximately 200 stores a year for the next three years or so, and we feel pretty good about that.

We are very selective when we put a location in. We want to make sure that we're finding the best locations with our franchisees and we have, as I think you know, we have approval rights on all sites and we turned down a lot of sites, frankly, because we just don't think it's the right place to put the store. I think with that thoughtful growth strategy that we've had for the last couple years, that that 200 range or so plus extra in Canada that we are referring to is -- we think that's a good number to shoot for, for this year.

Okay. Got it.

Just a couple quick questions on pricing. Obviously a lot of focus over the last couple years in driving the Black Card. You sweetened the offer there a bit and seems to be successful. Can you give us a sense of how much that may have contributed to comps in the fourth quarter? And then as you think about the mid single-digit guidance for 2016, the balance of pricing and member growth that may be embedded there?

I think I'd say the same thing for Q4 that I said for Q3, that most of our comp growth is coming from member growth. There's a small piece of that's coming from rate and as I stated, and to Sharon's question, that we went from 55% to 57%.

We still see some rate growth, but not like it was back three or four years ago. I think embedded in our comp guidance is that a major portion of that will come from member growth and then a smaller piece of it will come from rate growth.

As you look ahead, do you feel like there's an opportunity to test a higher price point, maybe even just selectively in certain markets? Are there things that consumers ask for that they would be willing to pay more for?

I think as long as we continue to add more members per store and drive rate that $10 a month is pretty compelling. And because of our national advertising and we're able to advertise one price nationwide, which is extremely powerful, so I'm a little hesitant to start breaking the rate structure separately throughout the country and having all participating locations, you have nothing substantial to go out to the national market with.

Okay. Understood. Thanks.

Sean Naughton, Piper Jaffray.

On the new store opening cadence for 2016, you obviously give us the 46 for Q1. So that's helpful. But just thinking about the balance of the stores, how should we think about those falling out for the remainder of 2016?

I think other than a bit of the headwinds on Q1 to Q1 that I referred to, it will be -- it more than likely will be a very similar to the prior year. Inevitably a lot of franchisees want to get it open in late November, December, right before January. We had a very strong Q4 and a really strong December, with a few of those stores that we originally planned to open up in the first couple weeks in January, sliding into Q4. But I think the cadence outside of a little bit of a Q1 comparison will be very comparable to the prior year.

Okay. That's helpful. I don't know if you gave this. I might have missed it, but CapEx guidance, or what you're thinking about for 2016?

I did not. But it'll probably right in that high teens to $20 million range, something like that. About half of that is our replacement equipment CapEx. And then a little bit in there for some IT-related headquarters type expenses. But a good 50% to 60% plus is replacement equipment for existing stores. I'd say good ballpark number is $18 million to $20 million CapEx.

Okay. If I could sneak one more in here, I think the last question was talking about the drivers of comp in 2016, between mix and members per club. How should we think about in terms of framing it up for people on the contribution potentially from the new store maturity curve on some of these clubs for comp? Thanks.

The way that I explained this model in the past is that I break it into three groups. You've got your brand-new stores, first 12 months, you have the group that's 12 months to 36 months and then you've got the real mature stores. Mature store comps, we've guided to the fact that it's low single digits.

The second bucket being those that are in years two and three, they're going to comp in the 20%s to 30%s typically, with first year maybe 40% to 60% comp, depending on how they get out of the gate, et cetera. The model is built that you're going to get that low single-digit comp range for your mature stores, and then if you look at our mix of, call it, roughly 1,000 stores, a little bit less on the franchise side, that, that mix is how you get into that mid single to high single-digit range.

That's the way the model works in terms of what drives comp. The average, when you model out the stores, the average AUV gets you to about $1.5 million, as a second-year run rate, with a comp in that 40% to 60% range.

That's helpful. Thank you, Dorvin.

By the way, I'll just make one other comment related to that, because it relates to comp. Or ramp, rather. We look at how stores perform for the year, brand-new stores. On average, all of our stores that opened in 2015 opened up with about 1,300 members per store, which is very consistent with what it was in 2014. We see newer stores, 2015 stores, performing very similar their very first draft out of the gate on average of about 1,300 members per store.

Jonathan Komp, Robert W Baird.

Maybe a bigger picture question on the marketing side. As you probably now are above 8 million users, or members, for the gym and have a pretty sizable growing national ad budget, can you talk about at that scale what that means in terms of the marketing over the next few years and even in 2016, more specifics on the plan as you sit here today?

After seeing what the NAF accomplished between the biggest loser, again, in was in there five seasons and what recently just happened with brand awareness with the New Year's Eve celebration, I think using the NAF and the larger scale, more impactful opportunities like that, and franchisees bought in just as much as we have with brand awareness and what it did for that brand that evening, I think it sets us apart. Those of the types of things that our closest competitor can't even come close to replicating. And that's really the competitive advantage that we have that we need to capitalize on. I think you'll see a lot of interesting, fun, impactful things in years to come.

The other beauty of it, John, is that not only is the national advertising growing, but locally, as we open up more and more stores in these markets and the co-ops of these franchisees get together, and not only pooling more dollars, but then the dollars go further in buying more marketing in some of these markets. That's another benefit of having the scale that we have, particularly in some of the DMAs where we have more concentration.

I'd probably add to that real quickly. A lot of the areas we have, a lot of different franchisees now, there's regional co-ops that (technical difficulty) put together themselves and doing large stuff. They're even on their own with their sponsoring some of the national sports teams, whether it's, I think it was Louisville, Kentucky, just some stuff in the stadium and I think in San Antonio and Atlanta. I think they're doing stuff that even (technical difficulty) in the local level they can't really replicate as a local competitor because they've just got 30 or 40 stores in the market.

Got it. Great.

Maybe just a couple questions about factors that might drive the Black Card penetration higher, really two things. I know recently you took the annual fee for the White Card up to $39, which is in parity with the Black Card. So wondering if you've had any early signs of what you've seen from that or any expectations of if that could drive higher Black Card penetration. Secondly, I know the test or the pilot of the local affinity in New Hampshire is going on. Any updates on what you're seeing there and thoughts about when you might roll something like that out more broadly across the system?

We have the local affinity still testing here. I think we haven't seen whether or not it's really increasing Black Card, although the members are taking advantage, of it so that's the first sign, right? I think we have to put together a way to allow the franchisees to scale up on a local level and push it on their side so we put the platform together for them.

Locally, we're also testing, which I mentioned on the last call, personalized sauna that we have in the store in Dover New Hampshire and now implementing that in about six or seven other pilot clubs, again, as an amenity. Hoping that does something with the hydromassage we implemented three or four years ago. Hydromassage was a big impact on the Black Card ratio, so be interesting to see if this personal sauna, which early signs seems people really enjoy it. So it'll be interesting to see if we can get that to help that Black Card penetration in the future.

Any early signs from the move for the White Card taking the annual fee up on par with the Black Card?

We haven't seen an impact on pushing more Black Cards but also haven't seen any at all decline on closing percentage on the sales process because it's more money now. The good news is it hasn't slowed down new joins, that's for sure. Just hasn't pushed the Black Card ratio change.

Got it. All right. Thank you very much.

Oliver Chen, Cowen and Company.

Congratulations on a great finish to the year. Chris, generally speaking, where do you see the biggest buckets in terms of the awareness comment in terms of the segments of the world and the consumers where you might have the most incremental opportunity going forward? Dorvin, as we model next year, could you give us the puts and takes as we look at the gross margin? Also, regarding the comp guidance, do you expect it to be somewhat volatile throughout the year? What are some key factors that could help drive upside or downside to comps?

First thing, to the brand awareness question, if I go back a couple, two, three years ago, we been doing the Biggest Loser now since 2010, when we opened a store west of the Mississippi, where we had much fewer stores, the ramp-up or the maturity took a little bit longer. People just didn't know who we were. They didn't know if we were just one-club chain with a creative name or not. Fast-forward to today where we own stores in California now or anywhere west of the Mississippi, we're opening with the same trajectory as we do in the Northeast or in the Southeast. The same awareness and more of a pent-up demand is the easiest way to put it. It's almost like they know us, they've seen us, they're waiting for us to come there so when we open it, it's like, finally you are here. I'd say that's probably the brand awareness, that's the biggest upside I've see.

Oliver, I think a couple of things. Related to gross margin and what the puts and takes may be, I think the way to think about our model is equipment should stay pretty consistent on a gross margin basis, should not vary significantly from quarter to quarter, so that one's pretty easy to model.

Franchise, which is, as you know, is our fastest-growing and most profitable segment, we should be able to continue to lever our structure there and as we open up more and more stores and we get the, call it, 25, 30 bps a year that we talked about in terms of that royalty rate, we should be able to keep levering that. Our corporate stores, we grow comps there and we should be able to lever that a bit, offset by little bit of inflation, maybe, but not significantly. That's how I see thinking about our margins on our segments.

From a comp perspective, I think that we've talked a lot about it and I've said it a couple times this evening that the comparisons to the prior year makes it a little bit difficult, particularly now Q1 to Q1, whereas last year we were not removing those non-paying members and we had comps on the 10% range. And then you've seen how that has gone down over the subsequent three quarters.

We guided you here to saying full-year comps in the mid single-digit range. I think as you -- if you think about it from a comparable to the prior year, that's where it gets a little difficult with what was going on in those. But when you sit back and say what are the other drivers to that comp, as I said earlier, most of our comp in 2015 was coming from member growth as opposed to rate. We believe we'll continue to be able to get a little bit of rate this coming year in 2016. We do still see most of our comp-store growth continuing to be from member growth.

To the point that I mentioned just a few minutes ago where all of our stores that opened up in 2015 that haven't gotten into comp yet, they opened up with basically the same average members per store as all the stores that did back in 2014, which are now in comp. Some of those in 2015 will come in comp after they hit their 13th month. Those are the things that I see that come into play when I think about that mid single-digit range of comps for 2016 and then for Q1, as I said earlier.

Okay.

That's super helpful. On the members per store, could you brief us on the long-term evolution of that in terms of if there's an overall target or saturation level, or not, in terms of that number? Chris, would you highlight anything with respect to competition as you've been so successful and you have unique marketing scale and capabilities and branding and experience? What are your thoughts on how competition is evolving and what other concepts are members interested in as you think about different risk factors and making sure you attract new members to the concept and grow comps consistently?

Sure. I'll handle the competition side of things.

I see not, I'd say, increasing trend, but I'd say probably the same consistent trend I've seen over the last handful of years is -- naturally there's the four or five years that there was no one charging $10 a month and there's not a market in we're in that doesn't have a low-cost competitor trying to replicate us. I'd say that the best part about it is I'd say replicating the rate structure, not necessarily the model, right?

They're a typical club with heavy free weights or catering to the avid exerciser, just happen to be charging $10 per month, which is great. They're not really copying the model.

I think the other thing, too, is a lot of times I always say they're more of economy fitness in a lot of cases, where they're charging $10 a month, but they're either smaller club size or they've got lesser expensive equipment, or a second-tier, a third tier equipment manufacturer, where we have big club, nice locker rooms, light fitness, some of the best equipment money can buy. So we just give it a lot more value.

I would say we're building a $50 a month club, just happen to sell it for $10. I think that's probably one of the true differentiating factors. As I mentioned earlier, when you put the size of our advertising scale in the national average fund, as well as our local advertising fund, even our -- a lot of our franchisees at this point are much larger than even the local competitors are, or even the regional competitors are.

The beauty of it is we've got a really big head start opening 84 in the last quarter, and most of our competitors in this space don't even have close to that. We're just, at this point, we're a franchise company so we're growing much faster, so that's probably a good piece there.

I'll have Dorvin add to anything.

I think in terms of thinking of member growth and how our stores are performing and more importantly, how they will perform down the road, if you look at the typical store today, we are building a 20,000 square foot box. You go back for five years ago, there were a bit smaller.

But what I see and the way I look at our business is, it's important to see member growth and rate growth, as we've been talking, about but it's also important to see that in your older, your more mature stores because it's one thing to get those high comps in that first, second year that I was referring to earlier, but you want to continue to see those older stores perform.

Many of you guys will recall as we've had some meetings in the past, we've talked about some of our corporate stores, which happen to be, obviously, some of the oldest. Our Dover, New Hampshire, store as an example, had a good to year this year. It comped mid single-digit comps and it's been open 20-plus years.

So we believe that we can continue to do that and to drive member growth even in the mature stores. To the point I just made a minute ago is that our brand-new stores opened up in 2015 very, very consistent with the ones opened up in 2015. I see us being able to continue to drive those -- a bigger number now as we get bigger and bigger with our store count, even in those older stores. I go back and look -- we look at it by class year, whether you're looking at the 2008, 2009, 2010 class year stores, where now we're starting to get more and more into these class years because we've opened more. We still see some pretty consistent patterns in terms of average members.

And yes, we got in our high-dense markets, Chris was referring this to an earlier question, whether it's New York City or certainly up in Toronto with our two corporate stores there and in Oakland, we've got a lot of stores north of 10,000 members, and we see the ability to be able to handle that volume even in a 20,000 square foot box. It's not a matter of we've got to increase the size of the store and increase the investment to be able to handle that. But we believe with the power of the advertising and some of the brand recognition data that Chris is talking about, that we can continue to drive these comps even in our older mature stores.

Dave King, Roth Capital Partners.

First off, Dorvin, just a point of clarification. It sounds like you said re-equips as a percentage of the total in 2015, I think, were 24% of revenue, I want to say. Where did you say you would think that would shake out in 2016?

The reason I ask is because embedded in your guidance I'm coming up with it decelerating a little bit. Is that a fair assessment?

And then for Chris, can you talk a little bit about how you're thinking about the international opportunity somewhat, beyond Canada that is? What's needed to develop interest from franchisees in Latin America and in what year would you think we might start to see some of these openings?

Thanks.

I'll take that first question, the second question there. Back to the Puerto Rico market, since 2010 or 2011 we went there was been a very well performing chain of clubs there. That same franchisee went on to do Dominican and also as well has been probably one of the record openings in the Company's history. And when I look at even the states where I look at heavy Hispanic markets like Miami and Southern California, for example, El Paso, San Antonio, all those markets are very well for us, so led you to believe that -- I believe that the Latin America market is pretty interesting to me and a lot less, let's say, a lot less clubs for -- a lot less affordable clubs, I guess.

That's one of the benefits of Dominican and Puerto Rico is there's only clubs for the really wealthy and nothing else for anybody else. In Dominican, for example, where the states are 80% of the population doesn't have a health club membership, well, in Dominican it is 98% doesn't have a membership. And that is holds pretty true for a lot of the parts of Latin America, so I believe there's some good upside there. Super focus, though, back again on the states, we have a potential of 4,000 here and focus now in Canada, which we've into a potential of north of 300 there, so want to make sure we really get that right and go that direction first. But Latin America is probably something that'll you see down the road.

Okay. Before you go, Dorvin, it sounded like that's further down the road, several years out and then it sounds like you haven't necessarily thought through the plans in terms of how to approach the franchisees there. Because I would say, typically, it feels like you don't really need to advertise in terms of drumming up interest from franchisees? I would think that in Latin America it might be a little different, but maybe you have some thoughts.

Yes, some of those might be more master agreements, or master (inaudible) development agreements as opposed to just onsie/twosies in those areas.

Okay. Okay. That helps. Thank you.

Probably companies have other franchise brands. A lot of them down there. They have other franchise concepts of US, looking more towards more being master developers.

Regarding your question on replacement equipment, you're right. I said was about 24% in 2015. We think it's going to be about the same in 2016 but it'll be a little bit bigger as our total equipment revenue grows. But we see that still pretty consistent this year, 2016, than it was in 2015.

Rafe Jadrosich, Bank of America Merrill Lynch.

Can you talk about the growth in web joins in 2015 and then remind us of how big your website is as a percent of overall joins?

Our overall join percentage online is about low 20% range, 20% of all total joins.

Okay. Can you talk about the real estate availability for your franchisees and what is allowing them to open up stores at a faster pace than you were initially expecting?

I'd say that real estate continues to be, ever since the 2009/2010 era, has been great for us. Pre-that it was -- we were competing with the Old Navy's and Dick's Sporting Goods and the Best Buys, for example, where you fast-forward to today, even just this past week with Sports Authority's announced closing stores and Walmart able to market and just closing stores a bunch of stores. So it continues to be really good for us.

The struggle, our struggle but I guess thing we really want to wait for is to be sure that we maybe wait for that A-plus spot and not take the B today. That's probably the discipline, because if we have a B spot and then somebody comes there and takes us out because the owner takes us out and makes our life miserable today, because they waited for the A-plus location. It's just being disciplined to not just open something because it's available, make sure it's really the spot we really want to be for the next 10, 20 years.

Have you seen any changes in credit availability to your franchisees? Thank you.

No. I haven't seen anything. It's been actually probably easier if anything and then as we've said in the past, a lot of these franchisees now, some multi-club operators that not only is it easier to get financing, but a lot of them are paying cash for a lot of the build outs, or increasing equipment at this point.

Great. Thank you.

Joe Edelstein, Stephens.

Appreciate the year-end membership number that you gave earlier. It is a net number, though, and I still get a lot of questions about the attrition rate. I was hoping you could address that.

My general hunch is it's something north of 30% but maybe it's not quite that high. Just want you to take a minute and talk to that. Also related to that, have you seen any major shifts within the attrition rates by region? Specifically here thinking around some of the news we've seen out of Texas.

Joe, couple things on that.

One is, we haven't seen anything out of Texas. I think as I said earlier, the stores down there are performing right in line with the rest of the system, even in January and February of this year, so no unusual trend there.

We take -- the way we look at our member mix is, we always offer a noncommittal membership. Every day of the week you can come in, join, try us out. You want to cancel a month later, you can cancel a month later. Because of that, and that's who we go after and target, it's that 80% of the population that do not belong to -- have a health club membership.

So what you're going to get, you're going to get a lot of people who are going to try it and they're not going to make it, or certainly not make it for a long time. But if we make the experience a good experience in coming in and a good experience in leaving, when they are at a point in time that they want to try to work out, get healthy again, we want them to be the place to come. In fact, there was some studies done back three or four years ago when members canceled from us, where would you join if you joined another club? It was Planet Fitness.

So because of that we will look at what our stickiness is to members that have been here more than 12 months, because we think that they've made a commitment. We hope they've done a great job of making them a happy member and then what happens after that? That's the way we measure it.

So two points. Number one, the trend hasn't changed and number two, it's low single digits. 1% to 2%, maybe get up to 3% a month at some times during the year, but it's been very consistent for the last two, three years.

That's helpful, Dorvin.

If you were to capture some of those members that do come in that are more of the short-lived, just from an annual perspective, what does that total attrition rate look like?

We don't disclose that and we don't even measure it that way, because we actually look at if you've been with us 12 months, what happens? It's embedded, obviously, in our comps.

If members are in a store that's been in there for 12 months or longer it's in our comp. And so you've got, obviously, a lot of members coming in. And by default you're going to have members that are going to cancel. We've talked about the members that we've removed from the system, from our point-of-sale system, so that we got a good member experience across the brand now, where we are removing all non-paying members now on a systemic basis. But that's not a number that we pay any attention to nor do we disclose.

I will now turn the call back over to Chris for closing comments.

Thank you. Thank you, everybody, for joining us today for our fourth-quarter earnings call.

I want to reiterate my satisfaction, great satisfaction, I should say, with our Q4 numbers and everything we accomplished in 2015. I've been here, as many of you probably know, over 20 years and most if not my entire career at this point building this great brand and honestly more confident now the future of the brand than ever. Our strong relationship with the franchisee partners, who are just excited about the brand as myself and the Company, and it gives us a much clearer lens, I'd say, on executing our growth strategy into the future and continuing to bring fitness to millions of people here.

Thanks again for the call. I look forward to discussing Q1 with you shortly and have a good evening. Thank you.

This concludes today's conference call. You may now disconnect.