Planet Fitness Inc (PLNT) 2016 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Planet Fitness first-quarter 2016 earnings conference call.

(Operator Instructions)

I would like to remind everyone that this conference is being recorded today.

I'll now turn the call over to Brendon Frey, Managing Director of ICR.

Thank you for joining us today to discuss Planet Fitness first-quarter 2016 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's website at www.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's judgment and analysis only as of today and actual results may differ materially from current expectations based on a number of factors affecting Planet Fitness's 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 first-quarter 2016 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. Explanations of these metrics can be found in the earnings release filed earlier today.

With that, I'll turn the call over to Chris Rondeau, President and Chief Executive Officer of Planet Fitness. Chris?

Thanks, Brendon, thanks, everyone, for joining us today.

2016 has gotten off to a strong start. First quarter is busiest time of the year for our industry and member sign-ups at the highest levels of the year following holidays and New Year's resolutions. We've worked hard to ensure Planet Fitness is best positioned to capitalize on our brand throughout the US and our entry last year into Canadian market. We know that we have the best value proposition for the growing number of casual and first-time gym users who are choosing to get more active and improve their health and wellness.

Our strategy is straightforward yet difficult to replicate. We've meaningful increase our awareness of our affordable, non-intimidating fitness offering through our powerful national advertising fund, a significant competitive advantage for our brand, combined with our franchisees accelerated store opening efforts. In fact, in many markets, our franchisees are also the largest operators of fitness centers in those markets.

In 2015, over $26 million was spent to support national marketing campaigns that include running advertising nationally throughout the year, and, for the first time, being the presenting sponsor for Times Square New Year's Eve celebration in New York City. As expected, our New Year's Eve sponsorship proved to be an amazing opportunity to generate increased brand awareness both in the US and overseas.

As I mentioned during our last call, findings from the Brand Health study, conducted early in Q1, indicated strong year-over-year gains of several important metrics. For the first time ever Planet Fitness ranked number one in unaided awareness in the gym category. When asked questions such as, when you think of gyms and other workout facilities, with brands come to mind? The number of consumers polled who said Planet Fitness increased 29% compared to one year ago.

The percentage of people who said they are likely to try or join Planet Fitness also significantly spiked, up 25% from 2015. Finally, those who recall Planet Fitness' presence during the New Year's Eve broadcast have a greater consideration and overall opinion of the brand, with two-thirds saying they feel more positive about Planet Fitness as a result of the partnership.

Our powerful national advertising fund continues to grow as our franchisees open new stores and increase EFT in existing locations. And our franchisees spend between 5% to 7% of their monthly membership dues on local marketing programs to drive increased traffic to their stores. This further increases our brand awareness and reinforces our leadership position. No competitor can come close to matching this level of investment in its brand or business.

On top of our more traditional forms of advertising, we are also getting smarter about how we digitally connect with consumers and drive online joins. For example, we kicked off all of our first national email campaign targeting high-priority prospects, such as individuals who started the online join process who did not complete it, and then we entice them to join. This program has been extremely successful thus far and we look forward to continuing to expand our efforts in this area.

As the result of our combined efforts of our Company and group of well-capitalized franchisees, in Q1 2016, we added more than 1 million net new members to surpass 8.3 million members system-wide at March 31, 2016, an increase of 17% compared with the same date a last year. At the same time, we increased same-store sales system-wide to 6.8%. This included franchise-owned same-store sales of 7% and corporate owned same-store sales comps of 4.9%.

First-quarter pro forma EPS of $0.15 exceeded guidance by $0.02, or 15%. This was driven by strong growth in franchise revenue at our highest margin segment, which was up 27% over the same period last year. While we are certainly pleased with our Q1 performance, I'm definitely excited about the future, as we still have a long runway for growth ahead of us.

Our Planet is only getting stronger as the result of our accelerated store openings, especially in regions of the US where our concept is newer to market, and our commitment to reinvesting in high-visibility brand building initiates like New Year's Eve. For all these reasons and more, I am confident that we have achieved and successfully attract new consumers to Planet Fitness. This is especially true of the large, underserved demographic that doesn't currently belong to a gym because they have found it too intimidating or too cost prohibitive in the past.

Our offering continues to resonate incredibly well with individuals who aspire to take the first steps towards getting healthier. If you haven't already done so, I encourage everyone to visit Planet [of Triumphs], a social platform on our website that enables members to motivate and encourage each other. These real, unsolicited stories show the positive impact that Planet Fitness has had on so many members lives.

I'm also proud to announce that in March, Planet Fitness formally launched the brand's first ever national platform called The Judgement Free Generation. Our work with our nonprofit partners, the Boys and Girls Club of America and STOMP Out Bullying, our goal is to extend our judgment-free zone beyond our stores to help combat bullying and judgment faced by today's teens, an issue we are very excited to support, as giving back is one of the Company's core values.

Most of what I've discussed today pertains to the US. The international markets are virtually untapped at this point and provide the Company significant long-term growth opportunity beyond the 4,000 domestic store potential we firmly believe exists for our concept. We're on our second year of operations in Canada after opening two corporate stores in 2015. We've since added seven franchise stores for a total nine locations at the end of Q1.

The early response to our fitness offering north of the border has been very positive, with over 100 units sold and we continue to sell at area development agreements as demand for Planet Fitness grows across Canada. Based our research and data analytics, we believe this market will support approximately 300 stores over time.

Last year also marked our entrance to the Dominican Republic, with first franchise opening in November. This store continues to outperform expectations in terms of membership growth and our franchisee's currently looking to add more units. We believe the initial reception of our brand as received in the Dominican, along with the successful history Planet Fitness has enjoyed in Puerto Rico, bodes well for the future expansion in all of Latin America.

To summarize, we're pleased that our first-quarter results. We continue to execute our strategy to build on our momentum and capitalize on many of the opportunities for the growth that will lie ahead.

Now I'll turn the call over to Dorvin.

Thanks, Chris, and good afternoon, everyone.

I'll begin by reviewing the details of our first-quarter results and then discuss our full-year outlook. For the first quarter of 2016, total revenue increased 8.3% to $83.3 million from $76.9 million in the prior year period. Total system-wide same-store sales increased by 6.8%. From a segment perspective, franchise same-store sales increased 7% and corporate same-store sales increased 4.9%. Our franchise segment revenue was $27.7 million, an increase of 27.2% from $21.8 million in the prior-year period.

Let me break down the drivers of our fastest growing segment. Royalty revenue was $14 million, which consists of royalties on monthly membership dues and the annual membership fees. This compares to royalty revenue of $10.5 million in the same quarter of last year, an increase of 33.8%. This year-over-year increase had three drivers. First we opened 194 new franchise stores since first quarter of last year.

Second, as I mentioned, our franchise-owned same-store sales increased by 7%, which was primarily driven by higher members per comp store, as well as a slight higher dues per member increase. Third, a higher overall average royalty rate. For the first quarter, the average royalty rate was 3.59%, up from 3.41% in the same period last year, driven by more stores at our current royalty rate of 5%.

Next, our franchise and other fees were $5.4 million where we had an increase of 19.6%, or $900,000, over the prior-year period. These fees are received from processing dues through our point-of-sale system, fees from online new member sign-ups, as well as fees paid to us in association with new franchise agreements and area development agreements.

In the prior year, there were both a revenue component as well as a cost component in the cost of revenue related to the point-of-sale transaction revenue, whereas it is now reported net in revenues. If not for this change in how we report this revenue under our new point-of-sale system, this source of revenue grew about approximately $1.8 million, or 50.4%.

Also within total franchise segment revenues, placement revenue, which was $2.1 million versus $2 million in the prior-year period. These are fees we receive for assembly and placement of equipment for both our franchise-owned stores and was in line with our expectations as we placed about the same number of new stores in and replacement equipment sales as in the prior-year period.

Finally, commission income, which are commissions from third-party preferred vendor arrangements used by our franchisees, and equipment commissions for international new stores was up $1.4 million to $6.2 million compared to $4.8 million a year ago, an increase of 29.1%. This was driven by additional stores in the current-year period over the prior year, as well as additional purchases from these vendors by franchisees from existing stores.

Our corporate-owned store segment revenue increased 9.1% to $25.7 million from $23.5 million in the prior-year period. The $2.2 million increase was primarily attributable to an increase corporate-owned same-store sales by 4.9%, coupled with revenue from new stores not included in the same-store sales base. In terms of system-wide membership, we had a sharp increase from more than 7.3 million members at the end of 2015 to more than 8.3 million members at the end of Q1.

Turning to our equipment segment, revenue decreased as planned by $1.6 million, or 5.2%, to $30 million from $31.6 million in the prior-year period. The decrease was primarily by a decrease in our equipment pricing in comparison to the prior-year quarter as a result of the pricing reduction that went into effect July 1, 2015, which was profit-neutral to us. This will continue to reduce revenue until we anniversary the new pricing structure midway through the year.

This change in pricing reduced revenue by $1 million, or 3%. The remaining decrease was a result of the planned timing of our 2016 first-quarter new store openings compared to the prior year.

As we said on our last call, our new store openings would be down in the first quarter. We actually opened two more stores than we planned; 48 versus 46, which compares to the strong first quarter in 2015 of 61 stores.

We are confident in our 2016 plans and we are still on track to open between 210 to 220 stores in 2016, compared to 209 stores in 2015 and therefore projecting our equipment sales to accelerate over the back half of the year. These two factors were partially offset by higher replacement equipment sales in the current-year quarter versus the prior-year quarter as franchise stores replaced certain equipment as required.

Cost of revenue, which primarily relates to the direct cost of equipment sales to the new and existing franchisee-owned stores, amounted to $23.6 million compared to $25.9 million a year ago, which is inline with the decrease in equipment sales. Our store operating expenses, which are associated with our corporate-owned stores, was $14.7 million compared $14.3 million a year ago, an increase of $400,000. Adjusting for prior-year pre-opening expenses, store operation expenses increased $1 million, primarily driven by incremental expenses related to two new stores, one opening in late March of 2015, and one opening in April of 2015.

SG&A for the quarter was $11.8 million compared to $14.1 million. The decrease of $2.3 million was primarily related to lower nonrecurring expenses in the quarter in connection with initial public offering and lower cost in connection with the point-of-sale upgrade. The decline in these cost were partially offset by additional expenses incurred to support our growing franchise operations, as well as additional or increased expenses as a result of being a public company that we did not have in the prior-year period when we were a private company, such as higher DNO insurance expense, auditing legal fees, investor relations expenses, et cetera.

Our operating income, inclusive of the aforementioned nonrecurring expenses, increased 79% to $25.6 million for the quarter compared to operating income of $14.3 million in the prior-year period. On an adjusted basis, taking into account one-time items and expenses related to our prior-year IPO and POS upgrade, our adjusted operating margin was 31.4% in this quarter versus 26.9% in the prior-year quarter, an increase of 450 basis points. This was primarily due to revenue growth and higher margins from our franchise segment where we had leveraged the cost infrastructure in our fastest-growing segment.

Our effective income tax rate for the first quarter was 16.8% compared to 3.1% in the prior-year period. The higher US statutory federal tax rate was due to the fact that, prior to the IPO, on August 5, Planet Fitness was treated as a pass-through 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 non-controlling interest. On a GAAP basis, for the first quarter of FY16, our net income was $16.3 million compared to net income of $8.5 million in the prior-year period.

On a pro forma adjusted basis, net income was $15.2 million, or $0.15 per diluted share, an increase of 21.6% and up from $12.6 million, or $0.13 per diluted share, in the prior-year period. Pro forma adjusted net income has been adjusted to exclude the impact of the Initial Public Offering, reflect the normalized federal income tax rate of 39.4% as if we were a public company for the current and comparable prior-year period and we exclude several nonrecurring costs. We have provided a reconciliation of 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 20.4% to $34.3 million from $28.5 million in the prior-year period. A reconciliation of adjusted EBITDA to GAAP net income can also be found in today's press release.

By segment, our franchise statement EBITDA increased 75.4% to $23.8 million, driven primarily from higher loyalties received from additional franchise-owned stores not included in the same-store sales base and an increase in the franchise-owned same-store sales of 7%, as well as higher commission and other fees. The prior year included certain nonrecurring expenses like the point-of-sale upgrade I mentioned earlier. After adjusting for these nonrecurring items, franchise segment EBITDA margins increased by 600 basis points to 86%.

Corporate-owned store segment EBITDA increased by 31.2% to $10.2 million, driven primarily by a 4.9% increase in corporate same-store sales plus the addition of one new corporate stores opened since March 2015. Our corporate store segment adjusted EBITDA margins, adjusted for the prior-year pre-opening expenses, increased by 390 basis points to 40.3%. Our equipment segment EBITDA decreased 6.6% to $6.3 million, mostly driven by the decrease in new equipment sales and higher administrative expense.

For the quarter, equipment EBITDA margins decreased 30 basis points. Nothing fundamental has changed in the equipment business and we still expect annual EBITDA margins for the equipment segment to be in the 21% to 22% range, although our equipment margins may vary at times during the year due to the timing of new and replacement equipment sales and pricing promotions.

Turning to the balance sheet, as of March 31, 2016, we had cash and cash equivalents of $38.3 million and borrowing capacity of $40 million under our revolving credit facility. Our total bank debt at the end of March was $491 million, excluding deferred financing costs, consisting solely of our senior term loan which bears interest at LIBOR plus 350. And our net debt, excluding deferred financing cost, was $452.7 million at the end of the order.

As the result of our strong balance sheet and EBITDA-to-debt leverage, our debt interest rate decreased from LIBOR plus 375 to LIBOR plus 350. Based on our ability to generate significant cash flow, we feel very comfortable with our current capitalization.

Let me just quickly summarize the highlights of a very strong quarter. Revenue rose by 8.3%; our comps were up 6.8%; our fastest-growing segment, franchise, grew by 27% with adjusted EBITDA of 37% and adjusted EBITDA margins at 86%, up 600 basis point.

Our royalty rate is up 3.6%; our profitable corporate store segment revenues rose at 9%, with adjusted EBITDA up 21% and our adjusted EBITDA margins up 390 basis points to over 40%. We opened two more stores than planned. Our adjusted operating margins were up 450 basis points. Our pro forma net income was up almost 21% and we have a great balance sheet with significant cash flows.

As we announced in today's earnings release, the Board of Directors has authorized the Company to repurchase up to $20 million of common stock. This program reflects the Board's confidence and the strength of the Planet Fitness brand, the significant cash generation of our business model and it underscores our commitment to return the value to shareholders.

The timing and amount of repurchases will be determined by the Company at its discretion based on a variety of factors, such as the market price of the common stock, corporate and legal requirements, general market and economic conditions. Since the start of Q3 of 2015, which was our first full quarter as a public company, we've generated approximately $20 million of cash.

Now to our outlook. Based on our first-quarter performance, we are raising our full-year guidance. We now expect revenue to be in the range of $360 million to $370 million, up from our previous guidance range of $355 million to $365 million.

Pro forma adjusted net income is now projected to range from $61 million to $64 million with pro forma adjusted EPS between $0.62 and $0.65, up from our previous pro forma adjusted EPS guidance of $0.60 to $0.63. Our newly store backline remains strong. We still see new store openings in the range of 210 to 220 this year and comp store sales in the mid-single digits.

Operator, we are now ready questions.

(Operator Instructions)

Oliver Chen, Cowen and Company.

Hi, Chris and Dorvin. Congratulations on a really excellent quarter.

Thank you.

The system-wide same-store sales came in very nicely, above our estimates and guidance. Do you have an idea in terms of characterizing what were the main drivers for how this was a little bit stronger than expected?

Also, as we model this line item going forward, should we expect the combination of the number of members and also dues growth to the factors that drive the comp? How would you characterize major drivers for underlying comp store sales growth going forward?

Yes, Oliver. The majority of our comp was really driven by member growth. Our Black Card percentage was up about a point since year end. Significantly up over last year but when you look at our real growth quarter over quarter, most of that's member growth, which we obviously -- we feel really good about.

I think the second factor I would say is that as we have said in the past, it is a significant amount of the comp can be driven by new stores but our older, mature stores continue to perform very similar in the past. The last factor I would say is that we have talked about in it the past in terms of the year-over-year comparison with the prior year where we were not removing the non-paying members. I think that came in a little bit better than originally, when we had kind of planned the quarter but we feel really good about it. I think those are really the drivers for the quarter.

Thank you. Chris, it sounds like the awareness growth has been really encouraging. Are there any tweaks in terms of what you have seen in terms of the success of the programs thus far? Any tactical adjustments that you are making as you engage in the national advertising strategy throughout the year?

I would say it is hard to tie things directly to the -- as far as number of members from the New Year's Eve because it wasn't a call to action more so than a brand building, with is what we saw in the brand study. I think as we look forward and think about what kind of strong dynamic promotions we continue to do that drive that awareness, we have 1 billion people worldwide and almost 200 million -- 135 million roughly see that in the country which is even higher than the Super Bowl. So you're looking at what other dynamic things we can do that really drive that awareness can only help. I think couple that with some of digital work we have the doing, you see some results in that.

Okay. Our final question, a question we do get is regarding the ultimate chain size in terms of what is the large potential in the 4,000 units. What gives you confidence in that as a long-term plan. Has that changed at all in terms of what you are seeing now?

I would say no. What I would leave with you is that we opening stores in the West Coast, which is less saturated with PFs. We're opening stores on the East Coast, which are more saturated, because we had just been here longer. The same ramp-up time is all the same, so I don't see that there is less growth available on either side.

I think the franchisees continue to grow pretty uniformly regardless of where we are at. It's not like we're only able to grow on the West Coast at this point. I think as long as we continue to penetrate the markets we are in and the older stores continue to mature, we continue to tap deeper into the current markets.

I think if I could just add one comment too, Oliver, is that we've said we have had over 1,000 stores committed to be opened under our area development agreements. So as we continue to open stores, we keep selling more so that pipeline continues to remain strong of committed franchisees to build out their areas and buy new areas.

Thank you. Best regards.

Thank you.

Jonathan Komp, Robert W Baird.

Hi. Thanks.

Why don't I start with another question on the system comps? The first quarter the system tracking at the high end of the mid-single digits, which is the guidance for the year. Correct me if I am wrong, but the drag from removing the non-paying members should lesson sequentially each of the first few quarters. Is there anything that you see in the business that would suggest that you could not track at or above the high end of that guidance? Or any other perspective you can give there?

No. You are right. In terms of that cadence of anniversarying the point-of-sale change, the biggest two quarters were Q4 and Q1, and then to Q2, and more of a minor impact in Q3. And then by the time we get to October/November, we will have fully anniversaried that. In terms of the way we think about the balance of the year and looking at this quarter and how we are forecasting here, I don't see any significant change that would cause me to vary with respect to those comps. As you say, we are up on the high end of the guidance we gave.

The two big drivers of that historically has always been that mix of new stores versus mature stores. And obviously as the base gets bigger, we have fewer stores as a percentage that is in the base that are comping greater than 13 months. And so that puts a little bit of pressure in terms of when you're, say, comparing 1,000 stores in the same-store sales base versus 12 to 18 months ago when it was more like 600, 700 stores in the same-sales base. But we feel really good about the comps, and that is why we reiterated that we think for the full year we will be in the mid-single-digit range.

Okay. Great. That's helpful.

Maybe a couple on the unit development front. Chris, I know in the press release you made a pretty positive comment about the new store plan both for this year, which would be a record number of openings, and then also I think you mentioned the pipeline beyond 2016. I was hoping you could just quantify a little bit what you meant in the press release, the pipeline looking ahead.

Yes.

I think we said in the past we still have over -- so although keep opening units each quarter, we continued to backfill the pipeline. It's still over 1,000 units to be developed in the future. That is -- domestically over and above there is still 100 that was sold in Canada alone. They're continuing to back fill the pipeline in both at this point in Canada and the US. And they're all franchisees that are buying them, so it is encouraging that they're continuing put their dollars back to work to grow this business.

Do you think that 210 to 220 target of system openings for this year, is that -- should not be viewed as a ceiling of what the system is capable of? Do you think the number can keep walking up over time? How do you view that pace of openings?

Yes. I think it is a good number.

As I mentioned in the past, we could open more if we just approve. But we disapprove more locations that we do approve, and I just think it waiting -- with the way the retail has been, I've mentioned in the past, retail has been in our favor with the eCommerce compression and now with recently Sports Authority and so on is that we want to hold out for the A side. Instead of taking the B side today, I'd rather wait another six months for the right location to come up than just open stores, open stores. We rather have 210 to 220 great stores than a bunch of B stores.

Understood. Dorvin, maybe one last question, just as you look at the balance 2016 and the timing of openings. I know first quarter had a little bit of that mismatch year over year just the timing of openings. Any meaningful differences year over year as you look to the balance of the year? Or any thoughts of modeling the pace of openings throughout the year?

Sure. Couple things.

One is I think you will see the cadence somewhat similar to last year in terms of how we see the buckets by quarter. I think from a Q2 perspective, last year we opened 38. We feel pretty comfortable in that range for Q2 this year and then the balance of the year. Back half of the year, rather, I think you'll see somewhat very similar to the cadence last year.

Would that imply limited equipment revenue growth again in the second quarter, and then more of a sharper acceleration in the back half? How do you think about that line?

Yes. I think you will see probably more a stable revenue number on the equipment side in Q2. And then with some accelerated growth in the back half.

Okay. Thank you.

Thank you.

Kevin Milota, JPMorgan.

It's Kevin here. Two quick ones.

One, I think I missed the royalty revenue number. I heard 14, but was there a decimal there being the first question? Second, on balance sheet strategy, I appreciate the buyback authorization. That is great news.

As we look forward and as you guys continue to generate cash, is there any thought, or did the Board put any thought into putting into place a dividend with this conversation, or is that on the come? I appreciate it.

On the revenue side, it was -- the royalty piece was -- it was $14 million this year over about $10.5 million last year, I think, was the number. That was increased on the royalty side.

I think, and Chris can jump in, I think the Board obviously had discussions around our model. It generates a lot of cash, as you know, from a very asset-light perspective. We continued to de-lever with the debt payment last year in Q4 and then with growth.

From a leverage perspective, I think, as I made the comment a few months ago in my prepared remarks that we feel very comfortable with the capitalization. And we look at what is the right way to return cash to shareholders with knowing that we will continue to generate cash for the balance of the year and I think that one of the items was a dividend. We looked at all of our options, and the beauty of what we have I think, is with authorizing this $20 million buyback, it's still gives us flexibility to continue to look at other options, as well, as we go through the balance of this year and on into next year with our -- with the way we generate cash.

We felt like that there have been some recent volatility in our stock; if you go back over the last two or three months and we want to have the opportunity to take advantage of that if that were to rise again. The Board feels very confident in our plans for the year, the guidance we are giving and wanted to have this in place to be able to take advantage of those kinds of opportunities.

Okay. Thanks a lot. Appreciate it.

Thanks, Kevin.

Philip Terpolilli, Wedbush.

Thanks. Good afternoon. Thanks for taking the question.

I wanted to talk a little bit about international. I appreciated all the comments about new store growth. But can you talk about some of those new markets that you are starting to look at a little bit more than you have in the past, the Latin American region. What is the opportunity here? Is it something that we can actually start to see a little bit more of for next year?

From an economics and standpoint when we are looking at the model, is it sort of a similar structure we think about the profitability for you? Anything different we should know there? Are they actually included in the ADA pipeline at this point?

No. Right now our focus is Canada and then -- the DR beach front to get into the Latin America market and it was followed by our Puerto Rico development, which -- with the same franchisee. If I look at just even the US markets, where most of our Hispanic clubs do very, very well and Dominican has performed extremely well and he's now looking for more sites in there.

I think it is a good first start to look at how we scale to go to Latin America, which is intriguing to me. Dorvin, want to talk more on the financials?

Yes. I think the way we would think about it is, the path of structure could vary country by country. We may do, as an example, we might do a direct franchisee in one country but we may decide to do a master franchise. The of the economics of that obviously would vary a lot depending on just the economics of the country itself and the situation country by country. But the type of resources we have to throw at it versus, in my example of a master franchise.

At this point we are continuing to focus on that 1,000-plus locations which does not include, to your question, does not include any locations outside of the US and Canada. I think it is something we will keep looking at, but at this time we are really focused on kind of what is right in front of us.

Okay, and then just one more. We are looking at the guidance raise on the top line for the full-year. Would you say the majority of that is coming from a certain segment versus the others, sort of equipment sales or just a little bit stronger on the membership growth front than you thought? What's the driver there?

Yes. I think it is probably mostly the franchise out of our Business. That has with a majority of our stores are.

As I summarized in the latter part of my comments a while ago, the real growth -- the highest growth segment of our business is franchise. But at the same time, we have good comps on our corporate side of our business. And although our equipment business was basically flattish to just slightly down, we still feel really good in our plans over the whole year. In essence, I think that we feel comfortable in raising the revenue side, and it flows then through bottom line a little bit from the franchise and the corporate side, as well.

Great. Thank you.

Thank you.

Rafe Jadrosich, Bank of America Merrill Lynch.

Good afternoon. Thanks for taking my question.

I just wanted to ask you a little bit on the underlying -- the trends you are seeing in franchisee economics. Have seen any changes there? If you could weave into your answer, I know there has been some announcements around minimum wage and there's I think there is a fair amount of the franchisee employees are paid minimum wage. How does that impact the economics going forward? Is there anything you can do to help offset that?

Sure. I will start and maybe Chris will jump in. We obviously have insight into franchisees' monthly EFTs every month. It goes through our point-of-sale system, which we control. We look at as we looking at our comps and getting that data together to report upon it, and made a couple comments earlier about some of the drivers. We don't see anything fundamentally different in our business through the system. And, obviously, the growth we have had and the positive comps now for I think 36, 37 straight quarters now.

As I look at our business, we have a portfolio of 58 stores in several states and several different demographics. We are now in downtown Boston. We are in some more rural areas, as well, and with some significantly mature stores. We think we have a pretty good example of what a lot of our franchisees are looking at, including some of our stores in California in maybe a higher rent district, et cetera. We don't seem to think fundamentally different as we go down and look at the P&L.

I would just make out comment with respect to the model itself and you heard us say this in the past that the real driver or the real variable of the drivers is typically rent. Because our labor staffing model is anywhere from say 10 to 14 employees per store, we are not impacted as much as some other retail concepts are that operate on a 24/7 or 24/5 model.

When you see labor pressures that we read about and hear about, it's certainly something that does not impact us as much as others do. We, on average, we pay our employees a little bit above minimum wage even. So it is one of those things where we certainly feel a bit insulated to that. With that said, I think what I would say is that economically our franchisees are continuing to buy new dirt to continue to open up new stores, and when I look at their top line and I know that the variable components of their P&L, there is no significant change that we have seen.

Great. Thank you.

Randy Konik, Jefferies.

Thanks a lot. My first question is for Chris.

Can you expand upon comments around the Sports Authority, the real estate. Is there any differences in your thought process on future location characteristics, given we are seeing much upheaval in the industry, and there seems to be a lot more space opening up in your favor. Just curious on your thoughts on the future and location characteristics changing or not changing.

Yes. It goes back I'd say to the 2009 area when real estate started to make a turn. It was working out better for us. We had to take the B or C site because we were competing with Old Navy and Best Buys and everybody else previous to that, right?

Fast forward to the last couple years and then even it seems to happen it seems like every 3, 6 months you see or hear of another retail that scaling back. We are now -- we were waiting for that A site, like I mentioned earlier, the old Circuit Cities. Some of it's on Main and Main and front and center and there is not really a better site to take. I think the characteristics have probably the same now for the past two or three years, four years. But continue to wait and hold out for that better site. And that way, there you can't be taken out by somebody else coming in and taking the A or the C site, you know?

Got it. You spoke a little bit about on the call about the success around -- on the email campaign. Are you doing anything on the existing member side, marketing to them, perhaps looking towards increasing the uptake or the penetration of the Black Card memberships from the existing membership? Just curious on any marketing efforts you use around the existing members rather than the nice marketing efforts driving new members?

Good question. We have just barely started in the last couple months now on our welcome email campaign, basically welcoming them back to join and get them to come in and try for a personal training appointment and so on. We're just starting to get into some of that. There is no yet feedback or results on what it is doing or enhancing. And then also upgrade emails are underway as well. We'll probably have more on that the future. That is what the whole digital thing is we didn't really have any of that place a year or two ago.

Got it. For Dorvin, can we -- as a Company just gets bigger and bigger, there's going to be more orders or placements for equipment revenues, seeing that the industry is starting to consolidate little bit. I'm sure you can get more economies of scale on pricing. How do you think about the margins of that business? I'm sure you can get better potential pricing, pass that on to your franchise partners, or potentially share in the savings there. How should we be thinking about the margin characteristics of the equipment business as you get bigger and bigger and bigger?

Yes. As you know, we entered into a new contract last summer and it was a two-year contract -- or three-year contract and we will obviously, with the consolidation they were referring to -- . And then, with just the pure growth we have had, I think we've become more important, obviously. And we'll use that to our advantage. I think the way we handled the last negotiation, where we were very transparent with our franchisees, and I think we've shared this with you that we brought them to the table with us to actually negotiate across the table with those companies that we RFPed. I think we would do that again, go through that same process.

I think we would expect more than likely to pass through savings as well. I think that we have got a really good win/win situation with our partnership today with our franchisees. It is a model that they do quite well and we as well and that is one of the reasons why we pass that through. The net of it is, I think, with growth and scale and consolidation that is favorable to us.

My last question on these strength in the awareness statistics, it seems like they were up very strongly year over year. Any color on awareness changes on a geographic basis, perhaps in the less-penetrated markets versus the more mature markets? Any color you got on a geographic side of things?

I don't have it in particular to that. The sample set was nine different geographic areas throughout the country so it was blended. It wasn't heavy Northeast that skewed it.

Yes. Okay. Fair enough. Very helpful. Thank you.

Thanks, Randy.

Joe Edelstein, Stephens.

Hi. Good afternoon, everyone.

Hey, Joe.

Just wanted to come back to the line of questioning around the return profiles for the franchisees. I know that 30% cash on cash returns, a number you've talk to in the past. I am just curious, how does that look to you really after they have accounted for all of the back office and accounting for the re-equipping needs as those get factored in over the next few years. Secondly, because the returns have looked so high, do you feel like over time there might actually be some more opportunity around your current 5% royalty rate and actually taking that up over time?

Yes. We look at a lot of different franchisee financials. We have to -- we re-approve every new franchise or every franchisee that comes in. We approve again every franchisee that is coming into buy new dirt. We look at their financials, how their existing portfolios of stores are operating, et cetera. If I go back over the last two or three years, that has been a combination of some of our larger groups that do have a back office function and have a CFO, have a CMO, et cetera, all the way down to that have got three, four, five, maybe six or seven stores out of their first ADA and want to buy another ADA for some more stores.

I think it has been a good mix that where we have looked at their financials to give us a sense for how they operate, And then it is very consistent with our corporate stores when you take out the royalties. And yes, you have some markets maybe have a little bit higher rent, et cetera, but we do, as well. That was the reason I made the comment earlier to the question that we don't see any major differences in terms of the typical franchisee level economics.

I think that from a royalty perspective, we are at 5% today on our monthly dues and annual fees. It has been that way for a while. I think that is one thing down the road that we can always look at. But as Chris and I have said in the past, we've used other levers in the past to be able to generate revenue at the store level to the franchisees, as well us for corporate stores, and that is using enrollment fees, using annual fees, et cetera. And those have been some of the tools or leverage we have had in the past. I think at this point we feel pretty comfortable where we are at.

Appreciate that.

Just speaking of the corporate stores and giving the improvement in the comp in the quarter within that side of the business, is that a scenario where you might actually look to re-franchise some of those locations, go back down into lower 40s or even 30s in terms of the number of stores that you would want to operate just on the corporate side?

No. I don't believe so.

For us it is our little bit of a testing bed for things you want to try and test before we roll it out to the franchisees and for the units we have. We're in eight different states and two Canada, so we pretty much have all ethnicities, all demographics covered. So a lot of us have a good cross-sample of the country to test things. It also ends up being a good farm team, if you will, for our corporate office as a lot of our ops and marketing folk come from people who have grown up in the stores and have learned our operations and the culture that come here so it is a good farm team for us.

We will open another store, so a year, we'll maybe acquire some in the future. But as of now, we're pretty set. We filled it with the 58 stores we have, and not looking to really grow that. We're just looking to focus on the franchise business and service the franchisees, let them expand.

Okay. Thanks for taking the questions and good luck.

Thank you.

Sharon Zackfia, William Blair.

Hi, good afternoon. A couple of questions.

Given the lumpiness with equipment revenue, I was wondering if you would call out any of the upcoming quarters as having disproportionally higher equipment revenue. I know you mentioned the back half of the year, and I think you lap any an easier comparison in the third quarter. I was wondering if we are weighted more towards the third quarter in equipment revenue.

Yes. I go back to the comment I made earlier in terms of the way we see the cadence falling out quarter by quarter. It really, as you know, Sharon, the back half of the year, and particularly Q4 is always a strong quarter, the strongest quarter for us as well. The other piece of that is the replacement side.

In this quarter, I think that was right around 22% of the total equipment revenues, thereabouts. I think when we had talked back at the end of the year I had said that last year we are getting up close to 20% and that in this year it ought to be the low- to mid-20%s as a percent of the revenue. That can be a little bit lumpy, as well. We have had good growth in that in the first quarter of this year, and we will have growth in replacement equipment sales on a full-year basis as well. If you look at -- they way I would say it, if you look at the balance of the year now, Q3 -- or Q2, rather, as I said earlier should be fairly stable with kind of in the past. Q3 will be stronger, and then Q4 will be our strongest quarter from an equipment revenue perspective.

Okay. Maybe a question for Chris. I think there has been some concern over the real estate paradigms that Planet can go into because I think it is a wider bandwidth than traditional retail and you've got into some sites that may be traditional retail would not go into and have done well. Can you compare and contrast maybe how you are doing? I don't know if you'd characterize A, B, or C real estate, or the transferability of Planet in different paradigms.

Yes. I think the retailers, or the REITs, at least, are not liking health clubs, are not like the parking situations and so on. Also tieing up parking because people are there for a long time. They've come to like us. One is we drive traffic, and the other is a part of what Planet is is they're much more of a causal user. They're not in there for 2.5 hours taking juice bar shakes and running the pool and taking jacuzzi so they are clogging the parking lot up, for example.

Also, when I looked at our stores we are busier Monday, Tuesday, Wednesday, quite a bit busier than we are Fridays through the weekend, which is when most retails are busy. We drive a lot of good traffic in the plaza when they are typically empty. So it is come to not really be a burden. It's actually a driver for them. They like that.

I'd say that it's nontraditional stuff that we have done more of recently is enclosed malls as they are being re-purposed. Typically stayed away from them because they were more of a destination shopping place. Once a month you might go there to buy a gift, where we look at enclosed malls that are being re-purposed, putting a Super Walmart in or a grocer, so they are turning into something that somebody goes to three times a week. Those are becoming a little more interesting and extremely aggressive rent, so we drive more traffic. I'd say that something that's not as typical in the past that is becoming more intriguing.

Great. Thank you.

Thank you Sharon.

John Heinbockel, Guggenheim Securities.

Thanks. Black Card percentage looked -- it was up a little bit versus a year ago. Is that fair? I know the focus has been more recently on getting the franchisees to add local outside-the-box benefits, right, as opposed to something that is more corporate. How is that going? Does that by nature, because every franchise has to go out and find that local partner, does that slow the process down of adding outside-the-club benefits to the Black Card?

Yes. We have not really rolled that out nationally to start doing that. More still kind of looking at it locally to see if we could get the traction and if it is really increasing sales of Black Card percentages, for example. Have not seen a huge increase in that locally, so we have not really rolled that part out nationally yet.

Black card percentage is up 1% from year end.

And quarter over quarter. It is up about 1% and that ties into my comment earlier, John, that most of our comp in this quarter was really driven by member growth, and then a small amount driven by the rate.

You had also said, right, that it really wasn't as fertile to get larger corporate partners either regionally or nationally. When you think about that, is there anything that can -- you think about the value of the Black Card. Obviously there is benefits inside the club. But is there anything either inside or outside where you think there is an opportunity to drive that percentage? Or not really? It is just going to tick higher as people kind of get used to reciprocity and stuff like that?

Yes. Reciprocity is always the bigger factor. I think in theory we will look at the local outside of our four walls benefits as in theory makes sense that it would add value to the member and drive more Black Card sales. But actually reciprocity is the number one driver. Second -- that's first. Second one would be guest privileges.

All right. Lastly, when you think creatively about adjacent businesses, right, that might impact your franchisees, obviously you have a good view into their business, their needs, you've got some capital. Where do you think the most -- the best opportunities are, if there are any, to expand into adjacent lines of business that maybe drive the top-line growth runway a little bit more.

Yes. I don't -- it is always that question on pro shops or retail or vitamins, right? I think the one thing we have always been disciplined though is just staying focused on health and wellness and keeping member -- keeping the gyms clean, keeping the hellos and goodbyes to the members. I think it is focus, focus, focus on the member and the cleanliness and try not get too refocused and divert time and energy into something that is not in the gym space.

Okay. Thanks.

Thanks John.

Seth Sigman, Credit Suisse.

Hello. Thanks for squeezing me in here. Just a couple quick follow-ups.

First on the new store models, just a follow-up here. Dorvin, you discussed some of the economics. My question is, as you've accelerate your growth in the last few years and you continue to drive awareness, are you seeing any change in how the new stores are opening and how they are ramping from a sales perspective and how they contribute to comps?

Not significantly. I would say that we are -- we go back and look at how many members they have on the first draft, those kinds of metrics. It is going to vary by market. If you are in a high urban area versus a less, more of a suburb or more of a ruraler market, I guess, but not really.

Our stores continue to perform pretty consistently. I look at the 2015 class versus the 2014 class. There's not a lot of major differences there. I think that the issues that we continue to focus on internally, obviously, it is supporting them, going through their presale with them. We send people out there to help them with it to make sure they operate to the play book and I think we are seeing the results of that.

Got it. Okay.

On the corporate-owned stores, I have may have missed this, but can you elaborate on the strong movement there that you saw in margins and where you think those can ultimately go?

Can you say that again? I'm sorry, I missed that.

On the corporate-owned stores, I'm not sure if you talked about this earlier, but very strong margin improvement this quarter. Can you elaborate on what was driving that and how do you think about margins for your corporate-owned stores going forward?

One thing to keep in mind, and you are right, we certainly had a nice improvement. We have opened up -- you go back and think about it, we have opened up about five stores now in the last, call it, 18 to 24 months or so and some good performing stores.

Two stores in Canada, the first two we planted of their have done very well. We opened a store in Oakland, our second one out there that has done very well. Our Boston store is doing well, went into comp in April of this year, so it is not in our first-quarter comp. And then we did have a store out on Long Island that opened back in, I think, it was June of 2014.

So as having a higher number of newer stores in the mix as we have talked about in the past certainly helps do that. On a pure GAAP basis, last year we had some pre-opening expenses that would have been in the P&L and that's why I gave some adjusted metrics when I went through my prepared remarks a few minutes ago. I think we -- as we had nice comps and have some higher performing stores, we are seeing some leverage down to the bottom line.

Okay. Thank you.

George Kelly, Imperial Capital.

Hello. A few questions for you.

First on marketing, wondering if there is any major new partnerships or campaign that you can talk about that are coming in 2016?

Yes. Right now no, but we do have four national campaigns that we do one per quarter. Currently in one now and then one later this summer. But nothing that is dynamic or different than we have planned just yet.

Okay. And then couple questions on the franchise side. First, the royalty rate grew 20 basis points in the first quarter. Is that a good number to use for the remaining quarters this year?

Yes. I think we have talked about this in the past of how that matures over time. I think, George, when we've talked that the mix of our stores that we open -- we are still openings some stores that are not at that current rate. It is weighted, though, to more and more stores opening at the 5% rate, and that is where you are seen some of the increase. From a modeling perspective, what I have said in the past still pretty much holds and that is to think about somewhere around 25 BPs a year growth, year over year, it should be a pretty good number. Until we get to about 2018-ish time period and 2019, and that is when you will start having more and more franchise agreements expire, and then they renew at the current rate.

Okay, helpful. Last question on the franchise business. I am going through the math and you mentioned that the EBITDA last year, the margin was impacted by the point-of-sale changes you were making. If I do that math and adjust for that, I am getting a near 100% flow through and 100% incremental margin. Is that normal, or were there other costs that affected you last year? Anything unique that would impact (multiple speakers) go forward?

Yes. There are some other costs.

I think we break out in the press release and the GAAP to non-GAAP reconciliations. Last year we had point-of-sale system upgrade. That hit the franchise side of the business. We had some other items related to the IPO that hit the corporate side. But I think we need to review your math, because as it is not 100% flow through as you are calculating.

Okay. I'll go back through that. I do have one question, too, just on modeling. CapEx expectations for the year, and can you split that between owned clubs, and the core business?

Yes. We should be in the high teens to the low 20%s on a CapEx perspective. I think as we have said in the past that probably half to two-thirds of that is replacement equipment for our own stores, our 58 stores as well as, as Chris said a while ago, we probably do one to maybe two stores, new stores, a year. That's kind of the next component. And then just miscellaneous corporate, IT, infrastructure type of CapEx. So high teens to low-20%s.

Okay. Thank you.

Thank you.

With that, I'll turn the call back over to the presenters.

Thank you, everybody, for joining us today and sorry for the technical difficulties early on. As you can see, we are pleased with our first quarter results and I am proud of our strong relationship with our franchisees. It's something that is truly important to us. In fact, in the next two weeks we're going to spend time personally with them at two regional huddles that we are holding.

It is important to us that we keep them motivated, excited and continuing to open these stores. We're very confident in the future of the Company. Together with our fantasies we'll continue to execute our growth strategy in the US and internationally and attract new customers to our brand. Thank you for attending the call today and we'll talk soon.

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