Planet Fitness Inc (PLNT) 2016 Q2 法說會逐字稿

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

(Operator Instructions)

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

Thank you for joining us today to discuss Planet Fitness's second-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 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' 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 second-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 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 Rondeau, President and Chief Executive Officer of Planet Fitness. Chris?

Thank you Brendon, and thank you, everyone, for joining us today for our second-quarter earnings call. Following a strong start to the year, our business accelerated during the second quarter, highlighted by system-wide same-store sales growth of 7.6%. Our strong comp performance, coupled with our franchisees' aggressive expansion efforts over the past year, attributed to total revenue growth of 16%.

During the second quarter, we opened 36 new franchisee-owned stores, bringing the total system-wide store count to 1,206 at the end of June, an increase of 19% compared to the same date a year ago. Membership growth at existing and newly opened locations is fueling strong gains in our high margin franchise segment, which helps us achieve adjusted earnings per share of $0.17, $0.02 above consensus. Since going public just over a year ago, we have consistently delivered strong financial results that have exceeded expectations.

At the heart of our success is our ability to attract new members, both casual gym-goers, and our core target, first-time gym members. In fact in a voluntary survey we conducted of nearly 1 million new members, a little over 40% self-reported they have never belonged to a gym before joining Planet Fitness. This powerful statistic demonstrates that our affordable, non-intimidating fitness offering and brand positioning are resonating with a broad consumer audience.

Our mission is to make fitness more accessible in bringing health and wellness to the majority of our population. It's extremely rewarding to learn we are attracting new consumers to the fitness industry and growing the overall market size. This trend reaffirms our confidence in our ability to increase our US footprint to 4,000 locations over time.

A significant driver of new membership growth is our powerful national advertising fund, a key competitive advantage that continues to get stronger as we open new stores and grow EFTs. The national ad fund has allowed us to increase our brand awareness to the highest level in the industry through major programs such as our sponsorship of Time Square's New Year's Eve celebration, and creative TV and digital advertising that run nationally.

The performance of the Company over the past several years underscores that our formula is working to expand Planet Fitness's market share, enrich members' lives, and deliver strong returns for our stakeholders. And with significant runway for future growth, we are confident this trend will continue, especially as we have just started to scratch the surface of our international potential.

The initial results from the nine stores open in Canada and the one store in Dominican Republic show that our affordable, non-intimidating fitness offering can be replicated in other countries; that health and wellness trends are universal. While our international expansion is still in its early days, we are becoming more bullish on our prospects outside the US, and will be stepping up our efforts to open new markets abroad in the coming years.

In closing, I'm very proud of our recent results. Looking ahead, the Company and our franchisees have never been more aligned on our go-forward growth strategies, which is bolstering our confidence in the potential of our business model to drive significant long-term value for our shareholders. With that, I will now turn the call over to Dorvin.

Thanks, Chris, and good afternoon, everyone. I'll begin by reviewing the details of our second-quarter results and then discuss our full-year outlook. For the second quarter of 2016, total revenue increased 15.9% to $91.5 million from $79 million in the prior-year period. Total system-wide same-store sales increased 7.6%.

From a segment perspective, franchisee same-store sales increased 7.8% and our corporate store same-store sales increased 4.7%. About 90% of our Q2 comp increase was driven by volume. At the same time, we grew our Black Card membership penetration to 59%, a 100-basis-point improvement over last year, and this accounted for approximately 10% of our comp growth.

Our franchise segment revenue was $29.5 million, an increase of 34.7% from $21.9 million in the prior-year period. Let me break down the drivers of our fastest-growing segment. Royalty revenue, which was $17.9 million, which consists of royalties on monthly membership dues and the annual membership fees, this compares to royalty revenue of $12.7 million in the same quarter of last year, an increase of 40.9%.

This year-over-year increase had three drivers. First, we opened 194 new franchise stores since the second quarter of last year; second, as I mentioned, our franchisee-owned same-store sales increased by 7.8%, which was primarily driven by higher members per comp store, as well as a slightly higher dues per member; and then third, a higher overall average royalty rate. For the second quarter, the average royalty rate was 3.43%, up from 2.97% in the same period last year, driven by more stores at our current royalty rate of 5%.

Next, our franchise and other fees were $4.9 million, an increase of 34.2%, or $1.2 million 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's now reported net in revenues. If not for this change in how we report this revenue under our point-of-sale system, this source of revenue grew by approximately $1.6 million, or 46.6%.

Also within franchise segment revenue is our placement revenue, which was $2.7 million versus $2.3 million in the prior-year period, an increase of 15.4%. These are fees we receive for assembly and placement of equipment for our franchisee-owned stores, and it was in line with our expectations.

And then finally our commission income, which are commissions from third-party preferred vendor arrangements used by all stores and equipment commissions for international new store openings, was up $800,000 to $4 million compared to $3.2 million a year ago, an increase of 24.6%. This was driven by additional stores in the current year period over the prior year, as well as additional purchases from these vendors by existing stores.

Our corporate-owned store segment revenue increased 5.6% to $26.4 million from $25 million in the prior-year period. The $1.4 million increase was driven by the increase in corporate-owned same-store sales of 4.7%.

Our system-wide total membership increased from more than 8.3 million members at the end of our first quarter of 2016 to more than 8.6 million members at the end of Q2. Cumulative year to date, we've increased our net members by more than 1.3 million.

Turning to our equipment segment, revenue increased by $3.5 million, or 10.9%, to $35.6 million from $32.1 million. This was driven by an increase in our replacement equipment sales to existing stores in comparison to the prior-year quarter, somewhat offset by a decrease in our new equipment sales as a result of fewer new store openings compared to the prior-year quarter and lower pricing from our new equipment contract that was effective July 1, 2015. This change in pricing reduced revenue by approximately 3.1%; revenue would have been 14.5% higher without this contractual price reduction. Our replacement sales as a percent of our total equipment sales was 51% in Q2, with strong purchases by our franchisees re-equipping their clubs during the quarter. We see this smoothing out over the balance of the year to the mid-20% range on a full-year basis.

Year to date we've opened 84 new stores versus 99 new stores through the first half of last year. We are confident in our 2016 plans, and we're still on track to open between 210 and 220 new stores in 2016 compared to 209 new stores in 2015. And therefore, project equipment sales to accelerate over the back half of the year, with the largest quarter-over-quarter increase in Q3. Cost of revenue, which primarily relates to direct cost of equipment sales and to new and existing franchise-owned stores, amounted to $27.8 million compared to $25.3 million a year ago, an increase of 9.9%, which was primarily driven by the increase in equipment sales during the quarter.

Store operation expenses, which are associated with our corporate-owned stores, was $15.8 million compared to $14.7 million a year ago. The $1.1 million increase was driven by a combination of factors, including some incremental store labor cost at several of our corporate stores, as we increased staffing levels to provide a better member experience, along with some additional marketing investments aimed at driving membership growth. During the second quarter, we also experienced some elevated rent expense related to a catch-up in common area maintenance, or CAM, charges at certain locations.

SG&A for the quarter was $12.4 million, flat with the prior-year quarter; however, both periods include nonrecurring expenses. Last year, these were primarily associated with our initial public offering, and this year, they were in conjunction with the follow-on offering in June. Additionally, the prior-year included expenses in connection with a point-of-sale upgrade.

Excluding these nonrecurring expenses, total SG&A increased by $2.7 million, or 30.7%. As you know, the prior-year quarter did not include normal public Company expenses like the current year, such as higher D&O insurance expense, audit and legal fees, investor relations expenses, et cetera. In the current year quarter, we also had higher expenses to support our growing franchise operations where we had an incremental net 192 additional stores versus this time last year.

Our operating income, inclusive of the aforementioned nonrecurring expenses, increased to $27.8 million for the quarter compared to operating income of $18.7 million in the prior-year period. On an adjusted basis, taking into account the one-time items and expenses related to our public offerings and the point-of-sale upgrade, our adjusted operating margin was 31.9% in this quarter versus 28.9% in the prior-year quarter, an increase of 300 basis points. This was primarily due to revenue growth and higher margins from our franchise segment where we have leveraged the cost infrastructure in our fastest-growing segment.

Our effective income tax rate for the second quarter was 15.9% compared to 3.4% in the prior-year period. The higher federal tax rate was due to the fact that prior to the IPO last year, 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 pretax income, the portion of income attributable to Planet Fitness, Inc., but not on the pretax income attributable to the non-controlling interest.

On a GAAP basis, for the second quarter of FY16, our net income was $18.7 million compared to net income of $11.6 million in the prior-year period. On an adjusted basis, net income was $16.8 million, or $0.17 per diluted share, an increase of 27.5% and up from $13.2 million, or $0.13 per diluted share, in the prior-year period.

Adjusted net income has been adjusted to excluded the impact of the public offerings, reflect a normalized federal income tax rate of 39.5% as if we were a public company for the current and comparable prior-year periods, and excludes several nonrecurring costs. We have provided a reconciliation of adjusted net income to GAAP net income and adjusted net income per share to GAAP net income per share 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 18.6% to $36.8 million from $31 million in the prior-year period. A reconciliation of adjusted EBITDA to GAAP net income can also be found in the press release.

By segment, our franchise segment EBITDA increased 39.4% to $24.7 million, driven by higher royalties received from additional franchisee-owned stores not included in the same-store sales base, and an increase in franchise-owned same-store sales of 7.8%, as well as higher commissions and other fees. The prior year included certain nonrecurring expenses, like the POS upgrade I mentioned earlier. After adjusting for these nonrecurring items, franchise segment EBITDA margins increased by 80 basis points to 83.8%.

Corporate-owned store segment EBITDA increased slightly to $9.5 million, driven primarily by a 4.7% increase in corporate same-store sales. Our corporate store segment adjusted EBITDA margins decreased by 180 basis points, primarily driven by the incremental investments in store labor and marketing and temporary increase in rent and related expenses I mentioned above.

Our equipment segment EBITDA increased 8.5% to $7.9 million, driven by higher equipment sales. For the quarter, equipment adjusted EBITDA margins decreased slightly by 50 basis points to 22.1%, and in line with our stated equipment margin range of 21% to 22%.

Now turning to the balance sheet. As of June 30, 2016, we had cash and cash equivalents of $55.7 million and borrowing capacity of $40 million under our revolving credit facility. Total bank debt at the end of June was $489.7 million, excluding deferred financing costs, consisting solely of our senior term loan, which bears interest at LIBOR plus 350. Based on our ability to generate significant cash flows, we feel very comfortable with our current capitalization.

Let me summarize quickly the highlights of our very strong quarter. Revenue rose by almost 16%. Comps were up a strong 7.6%. Our fastest-growing segment grew by approximately 35%, with adjusted EBITDA margins up 80 basis points. Our average royalty rate for the quarter increased to 3.43%. Corporate store segment revenue rose 5.6%, driven by a 4.7% comp gain. We opened an additional 36 new stores this quarter, which brings us to 84 new stores year to date, and our adjusted EBITDA margins -- our operating margins were up 90 basis points. Our adjusted net income was up over 27%, and we have a very strong balance sheet, and we continue to generate significant cash flows.

Now to our outlook. Based on our second-quarter performance, we are raising our full-year guidance. We now expect revenue to be in the range of $366 million to $372 million, up from our previous guidance range of $360 million to $370 million. Adjusted net income is now projected to range from $62 million to $65 million, with adjusted EPS between $0.63 and $0.66, up from our previous adjusted EPS guidance of $0.62 to $0.65. We still see new store openings in the range of 210 to 220 this year, with a higher degree of confidence toward the lower to midpoint of that range.

With respect to comps, we now expect system-wide comparable sales to increase in the high single-digit range, up from our previous guidance of mid single digits. Factored into our current guidance are some incremental expenses related primarily to higher costs in our corporate stores from additional labor as a result of recent changes in labor law, which we'll start experiencing beginning in Q4.

With respect to our comp performance, we are pleased with the acceleration in growth that we've experienced as the year has progressed, as it indicates that our marketing and our promotional activities aimed at attracting new members to Planet Fitness are working. While we expect this trend to continue during the second half, it is important to note that 95% of our store base, our franchise locations, the impact on our total revenue and even more so on our profitability from each additional point of comp increase is modest, particularly with a number of our stores at a royalty rate below our current royalty rate of 5%.

However, this speaks to the success that our franchisees are having in driving higher four-wall economics at their stores with the incremental flow through to their bottom line. This continues to bode very well for future development of our pipeline in committed locations under existing ADAs. I'll now turn the call back to the operator for questions.

Thank you.

(Operator Instructions)

Randy Konik, Jefferies.

Hi, guys, good afternoon. Can you hear me?

Yes.

Great. Thanks. One thing that sounded very interesting, I think, in the comments is, did you talk about increasing some staff levels in some or all the stores? It just sounds like there is an opportunity here to drive up higher member satisfaction and create more stickiness in those members. Just curious of what you were talking about in the speech?

Yes, Randy, this is Chris. If you remember in the first quarter, we announced that we had hired Jim Esposito, a VP of Corporate Stores. And quite frankly, up until he was there, it was really myself trying to keep a pulse on the corporate stores while running the business. He's come in and looked at where some of the holes were or where some of the things were lacking and had put in some staffing and rejigged some of the schedules here. And I think we see some good stuff come out of what he's looking at to produce out of those locations, and I think you'll see already in the comps where the [corporates wasn't doing], we're staring to see some of that.

Got it. And then when you talk about, I think the black card penetration is up to 59%. Is there any perspective you can give us on terms of the take rate of the black card of existing members versus the take rate of a new member? Meaning, like, are you getting existing conversions from existing members and then also having a higher take rate from new members? Just curious there.

Yes, this is Dorvin. I will just jump in with one thing, then maybe Chris can jump in. I think I said that we were up 100 basis points over last year, actually 100 basis points over Q1, up to 59% from 58%, and we're up 200 basis points over the same quarter last year.

I think we've said in the past that in most cases, we see a prospective member electing for that black card when they come in to join. At times, you'll see some conversions up to the black card when we've been in markets where we didn't have a lot of penetration of the stores in the market. So the reciprocity, which is one of the top two reasons someone will take the black card offering, so when you open more stores and have more opportunities in the market to use other locations, sometimes you will see that conversion up to the black card. But typically, that decision is made at the point-of-sale at the time they join the club.

I think the only thing I would add to that is that toward the end of last year, we started a lot of digital marketing initiatives and going up to white card members and offering to upgrade, so that's a new thing that's been going on as well. So a little bit of existing upgrading, but as Dorvin mentioned, it's usually point of sale.

That's very helpful. And my last question would be it sounds like you're getting even more bullish on the international opportunity. So what I'm interested in is, do you think about the world is flat? Meaning, in your learnings of the stores thus far in Canada and the Dominican Republic, have they been -- the way have to be operated, the way that the customer reacts to pricing, et cetera, is it truly the business model seems to be extremely portable from a geographic standpoint?

So just any learnings that you can share with us on that theme of the world is flat, that this could truly be just transported around the world, would be helpful. Thanks.

Yes. I'd say any of the initial stuff we've seen so far is, in a lot of cases, it is somewhat flat. I think the non-intimidating factor, from what we've seen, applies regardless of where we're looking. But I think some small instances, for example, is credit card, EFT is probably more acceptable than a checking account as we are in the States, but small factors like that.

Got it. Very helpful. Thanks, guys.

Thanks, Randy.

John Heinbockel, Guggenheim.

Hi guys. It's Steve Forbes on for John today. You mentioned in the national advertising fund and increasing brand awareness as a core driver of the membership growth. But given the quarter-over-quarter growth you just delivered, can you expand on what you're seeing as it relates to the membership base? Maybe if you can touch on demographics, income levels, where is the growth coming from? Is it broad-based? Or are you seeing any changes in your attrition levels?

No. Every thing's been the same' there's not any region or market that's working better or worse than the others; it's pretty much uniform throughout the entire country. And I think the beauty of this [NAF] and the local advertising fund is that, as you mentioned, every membership that joins the member growth is just more money put to work. So it's constantly builds up momentum quite a bit.

And I think that comes back to that where it's over 40% of first-timers, which I think is right in the wheelhouse of where we're going after that first timer who's never worked out before and that non-intimidating and pushing that. So I think every time we keep pushing those dollars to work we just keep penetrating deeper.

Maybe just one other comment, Steve, I'll add to that is that when we open these stores and we go through our process we call presale, which could be four to six weeks or so before a store opens, we take a look at how those stores perform out of the gate. And I would say -- and one of the key metrics, obviously, is how many members they sign up on the earlier stages.

And we're seeing our newer stores open in Q2, opened up at a higher rate than they did last year in Q2. So I think it speaks to the power of the brand. With more stores and more marketing dollars, to Chris's point, that we're throwing out there to get our brand in front of people, and it's certainly been effective in what we're seeing in some of our stores now.

And then just as a follow-up regarding the growth in replacement equipment this quarter. I know there's a team in place tracking the timetable for the franchisees to replace the equipment. So is the growth a function of their success? Or are you actually seeing some behavioral changes as it relates to the franchisees and their willingness to refresh the clubs?

Yes. I'd say it's both. I'd say if you went back over the last 18 months or so, it was more of a team pushing and having some good conversations direct with franchisees that you need to be taking a look, because here you've got clubs coming up that need to be -- have equipment replaced, et cetera, too. I think in a lot of cases, now, where you have some larger franchisees have got a significant amount of investment in a portfolio of 15, 20, 30 stores. And where they've got a market penetration in that market, they don't want to have one store that is giving a different member experience and showing the wear and tear, et cetera, that some of their newer stores have.

And then in combination to that, certainly, some of the older stores, if you go back four, or five, six years ago, that didn't have the nicer black card spa areas that they are going into some of our newer stores in the last, say, 18 months, 24 months; they are seeing that you get a bigger lift on that black card mix.

And so it's a combination of all of those things, I think, that's going on that's causing them to say, I've got to protect my investment, protect my brand. I want to be first, and I want to be better than competition. I don't want to let anyone else -- we call it, out-new you. And so I think it's all of those that's driving those replacement equipment sales.

Thank you.

Thanks.

Oliver Chen, Cowen and Company.

Hello, Chris and Dorvin. Congratulations on a great quarter.

Thank you.

Thank you.

Dorvin, just had a question on the equipment sales. What do we need to know about the pricing trends that are embedded in your guidance? And what's ahead for how you think about pricing and when you evaluate those decisions with your franchisee partners?

Also, Chris, as you expand into new regions and the West Coast, and you -- what are some learnings from the newer regions that are different or surprises, as some regions have less brand awareness or penetration than others? Just curious about that as we think about momentum toward your long-term target.

Okay. Oliver, I will jump in on the equipment first. I think, as you know, we entered into a new contract last year in July, one, and went almost all exclusive with [life]; there's still a few pieces that we buy outside of that they don't provide in the offering. But the majority of the equipment purchases that a franchisee makes from a dollar perspective is through that life contract. It's a three-year contract.

It's got some thresholds on there on some rebate volumes, et cetera, but we tend to pass that along to the franchisees in the form of -- you've heard us, I think, maybe even in Q1 we talked about some promotions, et cetera. And there's times there where we like to be able to share that back with them, and sometimes it goes to drive the reequip process, frankly. And we found, if you even go back past the last two or three years, you'll see that franchisees tend to, even for a fairly small discount, will tend to make a decision at the time and replace the equipment.

So, the net of your question is that, under this contract we have for two more years now, our pricing will stay consistent. And our margins should stay right in that 21% to 22% range that I mentioned in my prepared comments a few minutes ago.

Hi Oliver, it's Chris. I'd say on the West Coast, those clubs perform really great even out of the gate, and I think it's a couple things going on out there. (Inaudible) West of the Mississippi, luckily our national ad campaigns are hitting everywhere, regardless of our clubs or even there yet.

So we go to these markets as almost a pent-up demand that people have been waiting. They know the brand, they know what we're about, so when we open, they come out of the gate just like a club would here in the East.

I'd say couple that with two other things is that they -- the East -- the West Coast, naturally because the East Coast, we've been here longer. People have seen us grow over the last more than a decade, so they're much more familiar with low cost; there's a lot more low-cost competitors out here, where out there, they're almost three or four years behind -- I'd say the East Coast. So that there's not really much low-cost competition.

The last thing I'd say is the two larger chains under us, LA Fitnesses and 24-hour Fitness, which are in that 500, 600 club range, they also started out on the West Coast and they're also they're more tired clubs. So we come in with brand-new boxes; they see our product and the clubs do very well out of the gate.

Okay, that's really helpful. On the topic of churn, you've had such great numbers here. Has your market research and the variation and the numbers you've been seeing there still trending in the low single-digit rate on a monthly basis? Is there anything different there or any things we should know about that? And is the reality of anyone who turns -- they're going back to the couch, is that still the theme? Thanks.

Yes. I'd say, Oliver, not much changed at all in what we see trend-wise if you go back over the last two, three years. What we've said is that primarily because we go after that 80% that don't belong to a gym, and as Chris made in his comments a few minutes ago, that in the case of almost 1 million members, 40% of them had not ever belonged to a Planet Fitness before. You're going after that segment that, to your point, if they decide to not stick to it, they're going to go back to the couch.

And so from the way we look at it then, because of that, is we say, what happens after the first 12 months? Because you're going to have a lot of those that are going to try and they're not going to make it. And that single digit, low single-digit range that you were talking about is what we have been seeing in the past and continue to see. So it's no significant change at all in the last couple years or so.

Okay. And our final question is on the topic of national wage growth. We've done a lot of work regarding scenario analysis on national wages increasing over time. How should we interpret that in terms of how we will need to model your business and what are your thoughts about the pressure or the opportunities as wages go up?

Yes. I'd say a couple things, and Chris might jump in on this too. But I made in my comments a few minutes ago in terms of the corporate clubs and some of the things we're doing, and Chris inferred to the investments we're making. And we -- any time you're going after a lower wage earner, you're always going to have staff turnover. And we think that, that member experience is really critically important to our brand of what we do. So we've looked at ways to bring some of those wages up, more so in some markets than in others, frankly, because they're not all exactly consistent.

And then the second thing I would say is that -- and I made this comment on my prepared remarks earlier that with some of the law changes on the FLSA that kick in, we're increasing some of our salaried, our manager salaries will go up a bit in -- starting in Q4.

If you take all of that combined, just to give you a sense though to, I think where you're going in terms of what does this all mean? The combination of our incremental staffing that we've already started making, and then what we'll have to do with respect to the law change, you're talking $2,000 a month per store. So it's -- with the kind of volume that we're doing and the margins that we do in the high 30s to low 40 overall EBITDA margins, $2,000 per store doesn't move the needle much.

Thanks. That's really helpful. Best regards.

Thank you.

John Ivankoe, JPMorgan.

Thank you. I think you said, Dorvin, that we should expect maybe the lower end of your previous development range or lower to mid end, I should say, of your previous development range of 210 to, 220. Did you say that? And was that just an indication that maybe some of the units that were getting built in 2016 are now being pushed to 2017, and 2017 could be higher than 2016? Or do you guys feel that you're beginning to approach an absolute number of club openings every year, where that number may begin to base out as we think about the model from 2017, 2018, 2019?

Sure, John. I did say that our confidence range was higher at the lower end to the middle of that range. We're certainly still sticking to that it could be in there, up to the 220, but just wanted to give you guys a sense, here's we're setting, call it five months or so out.

You're right on your second point, is that the timing issue is always a tricky one quarter by quarter, and frankly, even more so with the December quarter in, because you just have a higher volume of stores that you're cramming into a shorter period of time. And some of those stores, and I think we've talked about this in the past, some of the stores have, at times will slide into the next quarters or the next month, rather. In most cases, it doesn't impact our revenue.

So there's two things. One is it, in some cases, won't impact our revenue number because we'll place the equipment, let's say, in the last day or two or even up to four, five, six gate days in a month. But the punch list and getting the final CEO from the town might not come through so that they can actually open the doors for business. So that's one point. And just the second point of you never know from snowstorms to other things that might happen, and we were in pretty good shape last year because we didn't have that.

But I think the net of it is, is we're -- we upped our revenue number. We feel very confident with that range, and we're still in that 210 to 220. But just to give you a little more flavor on where it could be, I would say that to the extent we are on the lower end of that range, it doesn't really impact the way we think about 2017.

At this stage, obviously, there's a lot of franchisees that are in the market looking for sites for next year. And sometimes, in some really congested markets, you could be talking 12, 18 months of actual working a market to get the sites because we go for main and main. Not only do we push back on franchisees of not taking a site because we don't think it's the optimum site in the markets, they also are -- they get choosy as well.

But with that said, sometimes we turned down two sites for every one we approve; we've done that this year. We've approved significantly less than the total sites that got submitted. We still feel very comfortable with -- we said on the road show that 200 stores a year, and we did 209 last year, and we're in this 210 to 220 this year.

That's the US and Canada and taking international out of the equation. I still feel like that we can do that. But we're also, though, going to be very conscious to make sure we don't just put up a store to put one up and pick an inferior location.

Absolutely. Very helpful. And secondly, you mentioned a few times in your prepared remarks your comfort with the balance sheet, and I wanted to take those comments a little bit further. When you look at other predominately franchise capital-light businesses, you oftentimes see ratios, debt to EBITDA, higher, sometimes a few turns higher than what you currently have.

Do you see a pretty active cash return to equity holders strategy? And you oftentimes don't see companies amortizing their debt really at all? So I would say comfortable means conservative and it might even mean very conservative.

So how are you thinking about the balance sheet now that you have some experience as a public company. You see what the markets are; you see what's available to you. But how should we think about the balance sheet over the next 12 to 18 months in terms of how that could change and how you might make that a friendly use for the equity holder?

Sure. A couple things I would say is that we were as high as 4.5, and on a net basis today we are, call it, 3.25, something like that. I think I've said in the past that I feel very comfortable in that call it, 3 range up to that 4.5 range or so. This business can definitely, based on its cash flow and based on how we see our business, can certainly support a leverage higher than that.

We put in the stock repurchase plan back earlier at the end of Q1. Part of that was we were having some significant volatility in the market. So we have that in our pocket if we ever felt like that was something that we needed to do.

And the last comment on that I'd make is, that I think it with the continued overhang from TSE shares, we did the one follow-on, and I'm sure over time, their plan is to work that down. And I think I've talked to a lot of different investors now over the last 12, 18 months or since the IPO, and I think that utilizing some of that cash maybe for part of the overhang, that could be an option. It could be accretive and it could be the right decision to make.

We've got options, which is good. And I think longer term, we should look at what's the right way to return to our shareholders, and whether that's in the form of a dividend or some form of stock purchases is something that we'll take very serious when we get a little bit further down the road.

Thank you.

Thanks, John.

Sharon Zackfia, William Blair.

Good afternoon. A couple of questions on the comp for the quarter. I know it was only a modest acceleration, but we haven't seen too many consumer companies show an improvement in the second quarter versus the first quarter. I know you talked a lot about California opening strong and so on, but what do you think is happening where your comps are actually improving somewhat while most people are struggling?

Yes, I think, Sharon, what we're seeing is two or three things that's going on in our business. One is, and I think Chris spoke to it a bit ago, and that is just the ability that we have to get our name out in front, a lot of people with more stores every day. And I think from the New Year's Eve branding opportunity we had there to really showcase our brand in a way we've never done before was huge, and I think there's residual effects of that, that we see.

We go in, and Chris said this a while ago, we go into some of these markets where either the brand is not known or there's only one or two stores in the market. And we see those stores open up with a significant number of members on day one that they open up.

Our stores are performing this year better than last year across the system in terms of vintage years. If go back and look at stores open in 2008, 2009, 2010, et cetera. So not only are the newer stores doing very well out of the gate, but then the vintage years are too. And then you get the impact of having opened more newer stores in the last two to three years, and when those start rolling into comp, that first year or two, you get pretty big lift. But our model is such that from market to market, from vintage to vintage, they are doing very well.

And then a some of the things that we're doing on our social and digital that we just started this year. We'd never really ever done that a lot, including taking it over from our franchisees and doing it more centralized now and doing it more efficiently than what the sum of the parts could do before. So I think it's a combination of all those that gives us a significant amount of confidence in our business right now.

Okay. Another quick question on the royalty rate. It did go up quite a bit this quarter. Dorvin, what are you thinking the right royalty rate is for the full year?

I think in the past, I've said we'd be somewhere in that, call it, 25, 35 BP range, year-over-year increase. And I think we'll be right there, towards the upper end of that range on a full-year basis.

Okay, and then lastly, do you have any range of franchise openings that you would expect in the third quarter? I know usually you weight more heavily to the fourth quarter.

Yes. We talked about, I think on the last call, that when you look at our equipment revenues, which as you know in Q3 and Q4, particularly Q4, can drive a higher percentage of your total revenues. We said we'd probably have a higher increase in Q3 than in Q4 on a percentage basis. So we'll open just a handful more stores this year in Q3 than we did last year.

I think to a certain extent, the way we thought about our guidance is we let a little bit of what we beat Q3 -- or Q2 flow-through. I think the way we're looking at it is there's probably a little bit of that, that was timing from Q3 to Q1, a small piece, and then probably the increase in EPS, if you will, will probably flow through more in Q4. But I think that you'll see if we get into the range that I was just talking with John a while ago about, I think you'll see a small increase in store openings in Q3 and then the balance of that, the total, will hit in Q4.

Great. Thank you.

Sean Naughton, Piper Jaffray.

Good afternoon. A couple questions on the black card. How are -- and I know this was some of your initiatives here. How are you guys doing in terms of trying to enhance the value of that black card? And then, also, any statistics or qualitative comments on whether or not those of black card members are actually stickier than non-black card members?

Thanks, Sean. We've looked at this in the past. The way that members actions are with respect to black card, black card, with respect to different geographies we're in, it really doesn't move much. It's pretty consistent, and it's been that way, to my comment earlier. And so, you typically get them to sign up, as I mentioned, newer stores that have a much bigger and more profiled account of black card spa area will tend to have a higher percentage.

We've said in the past we have number of stores up in the mid to high 60% range on a system basis where it's was 59% now. We have and continue to look at ways we can enhance that to be able to drive that. But still the top two reasons are reciprocity and guest privileges, and you'll see that day in, and day out across the system now with 1,200 stores.

I think it's still just a steady continued push by our franchisees and us or corporate clubs that when members, prospective members come in, do a tour, I think there's ways that you can sell that a little bit better. I think some do better than others. But no major change in the way we see any of the member actions today.

On the black card members though, if you just took that cohort of people, is their attrition any different than the overall chain? Are those people potentially a little bit stickier members? Do they last a little longer?

No, not really. It's pretty consistent with -- between black card, white card.

Okay. Fair. And then I know there's been a few questions on staffing costs and I'm just going to ask one more. Is there any way for you to give us any sensitivity on just potentially the overall impact may be to the margin of a company-owned store from some of the changes that it sounds like that you maybe impacted on from the overtime rule that's starting here in Q4? Just trying to think through some of the dynamics in the modeling changes potential for 2017. Not asking you, obviously, to give any guidance there, but just trying to figure out if there's a sensitivity we can think about.

Yes. I think the run rate, when you get to the end of this year -- so we've added some labor, as we talked about earlier, and for the reasons we addressed. And then, the late -- the incremental salary impact that starts in Q4. On a full run-rate basis, by the end of Q4, it would be about $2,000 a month per store.

So not -- when you think about the economics to the bottom line of a four-wall store, corporate or franchised store for that matter, that gives you a sense of the impact. It's not a huge impact.

Got it. Thank you.

Thank you.

Dave King, ROTH Capital Partners.

Thanks, good afternoon, guys. First off, Chris, maybe just following up on your prepared remarks around international and the efforts to stepping up the openings there. Maybe can you talk about what's involved in the stepping up or pursuing those openings and give us some thoughts on how we're thinking about it over the course of the next couple of years?

Nothing real strong specifics, but more fact-finding on a handful of countries and which ones would probably be the best to start with. We have some internal and external sources that we're gathering info now, as well as I mentioned the -- some of our vendors, like (inaudible) for example, already does business in a lot of these countries. So we can get a lot of intel from them as well before we [position] to go in.

We'll probably end up probably with a couple franchisees that expressed interest to open a store or two in a couple countries and experiment, much like we did in Dominican, and then from there make our final learnings before we've had the larger strategy to enroll in those particular ones.

Okay. That's helpful, though. And, then maybe Dorvin, do you have any breakdown or do have any color you can add in terms of how we should be thinking about or how the comp, maybe the 7.8 franchise-owned comp that you did this quarter, how did that breakdown between mature stores or newer stores? Or if you prefer maybe you can just talk about vintages, to use some of your earlier commentary? And how did that trend in the quarter and how are you thinking about that shaping up for the year?

It's pretty consistent with how we talked about it in the past, albeit as the results show some improvement. And that's really coming from volume, from member growth, which from our perspective is a healthy measure of what the brand is able to do in these markets by driving more and more people to the stores.

You're still good to see your older vintage stores are going to comp, with a few exceptions, but you're always going to see them comp in very low single digits, 1% to 3%, maybe 4% top comps. That's what you're going to see in those -- let's just say more than three years old or so.

And then your newer stores, so the first year comp, as you guys know, we put them in comp in the 13th month that they draft. You're going to see that month 13, 14, 15, et cetera, that full year they can comp up in the, call it, 40% range or so? It could be a little higher; it could be a little lower. And then its second year of comp -- month -- year three of operation, you're going to see mid to high teens.

So when you -- with our, call it, 1,200 stores now and back out close to 200 that are not in comp, that's the way that you'll see it to fall out in terms of how that gets ultimately to that 7.8 for the franchise stores today. And as I said earlier, the rate growth, the black card percentage was about 10%. That's about what it was in Q1 as well. So that's still running at about the same rate it was. So year to date, most of the volume is driven -- or most of the comp growth is driven by volume.

Okay. That's helpful. And then one last one, if I may. In terms of the current ADAs that you've got for the 1,000 locations, beyond that, can you talk about the pipeline to get to the 4,000 stores and what's been the trend on that front for new ADAs? Is it still the assumption to try to do it -- the bulk of that through existing relationships? Or just how are you feeling there and what's been the recent trends? Thank you.

The same trend has continued where we still have over 1,000 that are committed. So even though we continue to open more stores and continue to backfill the pipeline, in the same trend, where the existing franchisee, about 90% are buying the additional units. So they're just adding more dirt to their territory. They're still just as bullish on the brand and they continue to double down and take down more dirt, which is great.

Okay. And there's no interest in winding out that, broadening that out to a --

We always like to have a little bit new blood, but the existing teams are building great stores and a lot less to handle. So they're great. And they're better competitors in their own right, because they've got 20 stores behind them that are helping them build their stores out faster. So it's a good recipe.

Perfect. Thanks, guys.

Phil Terpolilli, Wedbush.

Thank you. Just wanted to touch briefly, going back to that new store comment. I think earlier you talked about site rejections, and some of the ones that come in, if anything, you reject more than you accept. I would have thought that some of those franchisees, especially if they've been partners with you for a long time, would understand the optimal locations. But is it maybe getting a little bit more challenging for them to find locations? Or any color as to why you think that's the case, if that's happening?

I wouldn't say more challenging. I would just say there's just more locations to look at, even just one more this morning with [Macy's]. There's just more and more open boxes. So it's -- we use Buxton, which I'm not sure if you're aware of, is a [cycle graphics] company that helps us look at market studies and locations and stuff. And we just put them up against each other to pick the best of the best, if you will. So it's always good to go through as many locations and be sure we truly are looking at all the possible viable locations to figure out which is the best.

So they're on the ground and they're driving the sites too. So it's good to get us all on the phone and on email and in the rooms to approve these locations to figure out which is the right one to go with.

And frankly, another -- it's good for us is that in some of these markets, you've got these franchisees that have multiple brokers. So the brokers are always trying to do their deal. And so, with the way we handle the development side out there on the real estate, oftentimes, you'll get multiple sites submitted because, in some cases, you're working the market, working the market, working the market; that's the only one that's available that fits our criteria because we want Maine to Maine.

We want the right kind of demographics around it. We need a certain size box. We want signage. You go down the list that we're looking for, and oftentimes, we'll tell -- a franchisee will say, this is the only when I can get; and we'll just say, hang on and wait a bit. So you can a little bit of that as well.

Got it. That's really helpful. And then just two big picture questions. The first one, you referenced earlier in the prepared remarks about a voluntary new member survey, I think it was 1 million members, and some data from that. I'm just curious if there's anything else you maybe learned coming away from that or insights you're able to gather from surveying new members?

That was the first one of that kind that we've done, and it was a fairly large sample set, which was great. I think the only couple things is it was both online web joined as well as in-house, so a mixture of both and they both trended almost the exact same way of just over 40% have never belonged to a gym before. So it's pretty compelling data, that (inaudible) now that we're really accomplishing what we thought we were heading -- setting out to do. I think it will be interesting as we continue to drive the brand and drive that if we can move that number.

Okay. Great. And then understanding you go after a different consumer, but any competitive changes you're seeing out there, maybe in some of the newer markets for you, more aggressive pricing or any responses from some of the other chains? That would be helpful.

Not that. I mentioned in the last call and it's a recent trend that's continuing again, and I thought this would happen years ago. But some of our lower-cost knockoffs, if you will, in our markets have approached our franchisees to essentially take them out of the game, to try to make them go at it, and they can't compete with our marketing and our boxes. So they've approached our guys to take them out. And even this quarter a couple more recent ones approached us. It's an interesting trend, I feel, that probably will continue.

Okay. Helpful. Thanks, guys.

Thank you.

Benjamin Bray, Robert W. Baird.

Thanks for taking our question. I just wanted to know if you could give some detail on some of the digital and email marketing efforts. How is that impacting member sign-ups and are you seeing more digital sign-ups than you saw in the past? We always had web joins, but we never really had promotions digitally. Some of the things we're doing, which is really low-hanging fruit, quite honestly, we never really focused on it is -- one example is our black card members are allowed to bring a free guest to work out with them every day. It could be the same guest or a different guest.

We, in previous times, believe it or not, never really went after them to see if we could convert them to join. So we're trying different methods to try to get them to actually join as a member as opposed to coming as a free guest. Coupled with that one, another one would be something where we're targeting or retargeting people who have attempted to join online, but somehow through the process, got cold feet or the doorbell rang and they stopped, they didn't join. So we're now retargeting, going after those people as well.

20% of our membership joins each month are web joins, so to produce that kind of number, you can imagine how many are actually dropping off too. So it's a lot of -- big pool we go after. Even the guest privileges, for example, on a typical Monday night, these clubs are doing 50 to 100 free guests in a night, so it's a big number. So it's interesting to now look at trying out different methods of ways to entice them to get them to join, so it's pretty interesting stuff. Thanks. That's helpful. Are then you seeing any more opportunity within real estate markets in terms of finding attractive potential units with the sporting goods bankruptcies and a number of other retail closures in the market?

Yes. The landlords, in today's day and age, they love what we are and do and implies that we drive traffic. We drive traffic on the off days. Our busy days are Mondays, Tuesday, Wednesday. A decade ago, they didn't like the health clubs as a whole, where nowadays, they look for us to drive the traffic, and we're the largest brand out there. So the [REITs] and the [KimCos] for example, of the world, are looking for us to come fill these boxes, because there's not many big-box retailers that are looking to grow.

All right. Thanks. That's helpful.

George Kelly, Imperial Capital.

A couple questions. First to start on Canada. Wondering how many units you've sold there and how big is the longer-term opportunity?

Buxton, [their site north of] Canada, we have just over 300 locations in Canada. We sold just over 100 locations for development. We currently have nine open.

Okay. That's helpful and then second question on marketing for the major initiatives for the second half of this year. Wondering if there's any impact to your spending from the elections or Olympics. And can you give an update on your plans with the Biggest Loser, if everything has been announced regarding that?

Yes, sure. We had another promotion this quarter and next. The election, for example, we usually do an October promotion; this year its going to be November so we're not competing for that. And the Biggest Loser, we're still in for it, but NBC hasn't picked it up yet. So it's still up for discussion what Biggest Loser is going to do.

Okay. When would you expect that to be finalized?

Hard to really say. It's up to -- they shopped at NBC. They haven't picked it up yet, so we're not going to shop at other networks for now so we don't really know. Okay. That's helpful. Thank you.

Rafe Jadrosich, Bank of America Merrill Lynch.

Thanks for taking my question. Just one quick one. Dorvin, what level of comps do you have to run in your corporate stores or do your franchisees have to run to leverage occupancy and labor costs?

Occupancy is a little bit of a tough one for me to be able to answer exactly what the franchisees do, other than I can use the corporate stores as a measure. In some cases, you have some rent escalation clauses in there. On a GAAP basis, that doesn't tend to be a lot.

So, that one, other than when you're renewing a lease and you're in a market that's turned hot from maybe where it was not in the past, then you might could see a big increase. We have not seen huge increases across our corporate store chain in that regard.

And then from a -- more from a labor perspective, if you go back to the comment I made earlier of, we've stepped up and are paying some of our team members a bit more starting in Q2, and then we'll do some more in Q4; and I think that to get to those staffing levels of where we're trying to get to, as well as the FLSA requirements, you're talking $2,000 a month.

And if you -- when you start to trying to then triangulate that back to what kind of growth you'd need, you can back into that pretty easily by taking what a typical, average club will do and how many members you need. And so, one of the things that we think we can do is offset some of that by just our normal member growth that we get. Because it's not a huge hit to the bottom line.

Got you. Thank you. That's very helpful.

There are no further questions at this time. Mr. Chris Rondeau, I turn the call back over to you.

Thanks, Christine. Just like to reiterate quickly how pleased I am with our second-quarter results. Since going public just over a year ago, we've continued to deliver strong financial results, we exceeded our expectations. Thanks, everyone, for the hard work here at the corporate office and the passionate franchisees we have.

I'm also extremely proud that in June, Planet Fitness ranked number four on Forbes annual list of best franchise investments America. In closing, I'm extremely confident in the future of the Company, and together with our franchisees, we continue to execute our growth strategy in the US and internationally. Thanks again, everybody, for your time.

Thank you, ladies and gentlemen. This concludes today's conference call. You may now disconnect.