Good afternoon. My name is Heidi, and I will be your conference operator today. At this time, I would like to welcome everyone to the Planet Fitness Second Quarter 2017 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Brendon Frey, Managing Director of ICR, you may begin your conference.

Thank you for joining us today to discuss Planet Fitness' second quarter 2017 earnings results. On today's call are Chris Rondeau, Chief Executive Officer; and Dorvin Lively, President and Chief Financial Officer. A copy of today's press release is available on the Investor Relations section of Planet Fitness' website at planetfitness.com. I would like to remind you that certain statements we will make in this presentation are forward-looking statements. These forward-looking statements reflect Planet Fitness' 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 2017 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 adjusted 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, Chief Executive Officer of Planet Fitness. Chris?

Thank you, Brendon. We had a great second quarter as our business continues to perform very well. Comps increased 9%, marking our 42nd consecutive quarter of positive comparable sales growth. Revenues in each of our three segments were up meaningfully in this quarter. The Franchise, our highest margin segment, increased 28%. This contributed to a 440 basis point increase in adjusted EBITDA margins and our ability to deliver adjusted earnings per share of $0.22, up 29% versus a year ago. I often get asked what the secret to Planet Fitness' success is and why others fitness operators haven't been able to replicate it on our scale. There are several key factors that contribute to our success and why we are so bullish on the future. First, we have a huge head start on the competition. When we first introduced a $10 membership structure, no one in the industry thought it would work. In fact, they pretty much wrote us off. This allowed us to operate under the radar for several years. It wasn't until 2010 when we had approximately 400 stores that anyone really took notice of our success. And thanks to our franchise model, we have been able to scale very fast, doubling the number of stores over the past four years to over 1,400 locations today. Obviously, any operator can sign a lease and sell memberships for $10 a month. The piece of the puzzle that's difficult to replicate is attracting the right membership base and volume of members to make it work financially. And that is where Planet Fitness has significantly outpaced the rest of the industry. It starts with our Judgment Free Zone. Unlike other gym models, we're not about the fit getting fitter. We cater to the 80% of the population that doesn't have a…

Thanks, Chris, and good afternoon, everyone. I'll begin by reviewing the details of our second quarter results and then discuss our full year 2017 outlook. For the second quarter of 2017, total revenue increased 17.3% to $107.3 million from $91.5 million in the prior year period. Total systemwide same-store sales increased 9%. From a segment perspective, franchisee same-store sales increased 9.3%, and our corporate store same-store sales increased 4.3%. Over 90% of our Q2 comp increase was driven by an increase in members. At the same time, our Black Card membership penetration was 60%, up 150 basis points over Q2 last year. Our Franchise segment revenue was $37.8 million, an increase of 28.2% from $29.5 million in the prior period. Let me break down the drivers of our fastest-growing revenue segment. Royalty revenue was $23.6 million, which consists of royalties on monthly membership dues and annual membership fees. This compares to royalty revenue of $18 million in the same quarter of last year, an increase of 31.3%. This year-over-year increase had three drivers: first, we opened 202 new franchise stores since the second quarter of last year; second, as I mentioned, our franchisee-owned same-store sales increased by 9.3%; and then third, a higher overall average royalty rate. For the second quarter, the average royalty rate was 3.93%, up from 3.43% in the same period last year, driven by more stores at the 5% royalty rate. Next, our franchise and other fees were $6.3 million compared to $4.9 million in the same quarter a year ago, an increase of 29.6%. 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 franchise agreements and area development agreements. This increase was driven by additional stores and…

[Operator Instructions] And your first question comes from the line of John Heinbockel with Guggenheim Securities. John, your line is now open. Please go ahead.

Can you guys hear me?

Yes.

Yes.

Good. So two questions. First, what is the latest on the pricing tests on Black Card? And what is the thought on rolling that out as we go through 2017 into 2018?

Yes, I would say, so we had about almost 50 clubs running it starting in about March. And we added, I think in our last call we added additional almost 50 clubs. So about 100 running it as of today. The results continue to be very favorable, I'd say. So long as things continue this direction, we'll probably make our decision by the end of the year.

And just as a follow-up to that, the thought was you were going to grandfather people in. Will it still be the idea that they'd be grandfathered in forever or for some period of time?

Yes, they would be grandfathered forever. I think one side note that I'm thinking is that the grandfathered members, it may – time will tell. It may have some retention benefit, that they know if they cancel they'll never get it back. So it could be a side benefit, byproduct of the move, too.

And then just secondly, obviously you're opening in Panama here. So when you think about the broader opportunity, right, across Latin America, you talked about Mexico in the past, where does that sit and how quickly can you move in many of those countries?

Sure. It's a good question. So yes, Panama is in presale mode. It will open later this year. So far the presale has been going great. We're still looking at other countries like Mexico, as we've talked in the past. The bigger hurdle in these countries from what we've seen and we mentioned in the last call is basically the software and banking processing world is very different than it is here in the States. So that's probably the bigger thing that we've investigated in trying to figure out the dynamics around that. So still an opportunity, still looking at it. Panama is in American dollars. It's a little bit easier. But we're still going down that road. I think the more we learn about the States and the better we keep producing here and I think there's so much upside of leveraging our 10 million members and our growth here that we're still definitely extremely focused on making sure that we continue to drive the business and the comps in the clubs here in the States and Canada.

Okay, thank you.

Thanks, John.

The next question comes for the line of Sharon Zackfia with William Blair. Sharon, your line is now open. Please go ahead.

Hi, good afternoon.

Hi, Sharon.

Hi, Sharon.

Hi. A couple questions, I guess. The guidance for the comps kind of implies a 6% to 8% comp in the back half of the year. And I'm just curious, the higher end of that would certainly be an acceleration to your trends. So maybe you could talk about your confidence in raising that comp guidance. And then secondarily, just on the equipment side, could you give us the breakout of replacement versus new build for the quarter?

Sure, Sharon. I think the way we look at it is we're halfway through the year. We've seen how our business has performed in terms of both the franchise side as well as the corporate side. Continue to feel very good about our comps. As I mentioned in my remarks a few minutes ago, about 90% of the comp was driven by member growth. That's been pretty consistent now over the last couple years. We added about 150 basis points from a mix perspective on the Black Card/White Card. But I think with having kind of the six months behind us and looking at our current trends, we feel comfortable with a bit on the higher end as well as kind of narrowing the range. Keep in mind, we're up against both last year's back half, both quarters double-digit comps. So we have some headwinds against us that we're going up against. But we feel pretty good about it. With respect to the equipment business, we had – in the quarter, just a little bit north of 50% of our equipment sales were replacement sales, which makes us feel really good about our business and the brand and our franchisees' willingness, and frankly, I see corporate as well in continuing to invest in that replacement cycle. Because as we said in the past, we believe that's a huge differentiator between us and the competition, to keeping those stores fresh with equipment. So just a little north of 50% for replacement, a little under 50% on the new. I think one thing to keep in mind, the way the flow of our replacement business is happening this year, we probably had a higher percentage of our replacement sales in the back half of last year and this year a bit in the – more so in the front half. And so as we look at our business, we feel real good about it. Came in just, I'd say, slightly ahead of our internal plan, albeit about $0.03 ahead of the consensus. But one of the – I'd say one of the levers, we've probably got more of the replacement piece in the front half this year, certainly, versus the back half of last year.

Great, thank you.

Sure, thanks, Sharon.

Your next question comes from the line of John Ivankoe with JPMorgan. John, your line is now open. Please go ahead.

Yes, thank you. Firstly just a housekeeping question and then a couple of others, if I may. Firstly, how many placements did you have in the second quarter and what might that cadence be for the third quarter and fourth?

We had 34 versus 32 last year, John, in the quarter. And I think the – if you kind of take the midpoint of our range, it's going to be very consistent with the prior year, in the back half, both Q3…

That's great, helpful. And secondly, on the balance sheet, this is really just a point of education, I think, deferred income tax assets has obviously had a pretty big leap here from the beginning of the year to around $738 million, almost entirely offset by that increase in the tax receivable arrangement that you so nicely kind of talked about, just $703 million over that same period of time. Those were obviously two very significant components of both your assets and your liability and potentially influencing your cash flow if timing is different between those two categories. So as we kind of think about the model over the next couple of years, are both of those going to get drawn down at an equivalent rate? Or might one drop before the other where we might have some significant timing issues year to year?

Yes, the one thing to keep in mind, John, is that the benefit that we get on the tax return from that deduction is then payable in the following year. So, for example, those cash flow numbers that I spoke to a few minutes ago that are hitting in the front half of this year already hit. And then what will hit in late Q3 and Q4, all of that relates to the deduction from the 2016 return. So any deduction that I get this year that will reduce my deferred tax asset doesn't reduce the deferred tax liability, then, until the following year when the cash is paid. So I think that's the only nuance. But you're right; we do have some other deferred tax assets and some other deferred tax liabilities as well. Some of those are actually netted into our deferred tax asset line. The brunt of the deferred tax assets as well as the deferred tax liabilities relates to the point that you raised.

Okay. Thanks for that technical answer. And then finally, the three to four company stores that you'll be opening, I think that was the number in 2017, is that the beginning of a new company store development program? Is it just a one-off thing isolated to that one market? And I ask that question, of course, thinking about the out year CapEx 2018 and 2019, if we should expect some increases relative to the 2017 guide?

Yes, John. This is Chris. As I said, in the past two or so a year. We didn't open any last year. So a lot of it was just timing. We've been working on a lot of leases for a while and they finally all came to fruition at the same time, which is really why it's three to four now. But that's not a new trend. It's the same.

Okay. And as you sat down with your banks and you've redone some of the credit agreements and everyone must be feeling very good about your EBITDA growth, what's the current thought of current long-term leverage ratios, assuming the business continues on the trajectory that it's on?

I think, John, we're still in what we've said in the past. We feel comfortable in that, call it 3x to 5x range. We levered up to, back in Q4 last year, right around 4.5x. We're just slightly under 4x right now. So we'll be under 4x by the end of the year with continued generation of cash flow. But we feel comfortable in that. We've talked about in terms of the long term capital allocation strategy of our management team and our Board is looking at what's that right return of cash to shareholders. And I would say the two things that we're looking the most at are share repurchases and/or quarterly dividends. But we're continuing that discussion with the Board, and within that 3x to 5x range context.

Thank you.

Thanks, John.

Thanks John.

Your next question comes from the line of Oliver Chen with Cowen and Company. Oliver your line is now open. Please go ahead.

[Indiscernible] on for Oliver today. We were wondering if you could provide us your thoughts on the real estate availability going forward and confidence in the 4,000 gym target. Also, could you comment on your demographic mix between higher income and lower income consumers? Is there any strength in any particular end of the spectrum?

Sure. I think we continue to benefit from the environment that we've been in now for a while. If you think about what's going on in the contraction of real estate both in closings as well as a few of the retailers contracting in size and carving off a piece of the box, that benefits us. There's not a lot of retailers out there that's taking down a couple hundred, call it, 20,000 square foot boxes a year. I think one of the benefits we get is we're one of the first ones that get called now when something comes available. And the second piece of that is, because of 1,400 locations in almost every city out there today, we are a very respected brand from a leasee's perspective. So those conversations that maybe four or five years ago or longer that were more difficult with our brand competing with some of the other ones is not the same kind of conversation today as it was then. So I'd say still very, very favorable. Our member mix, it doesn't change much. We've said this before. Gym intimidation is real regardless of ethnicity, income level. We're going after that 80% of the population. And we see our stores that are in, call it the higher side of net income do very, very well and then those that are in the lower end of the channel doing very well. 1/3 of our members make over $100,000 a year; 1/3 of our members make under $50,000 a year. So no real change on that. And again, I think the main point is that our brand and what we offer appeals to all demographics.

Your next question comes the line of Jonathan Komp with Robert W. Baird. Jonathan, your line is now open. Please go ahead.

Yeah, hi. Thank you. I wanted to first ask, just the overall same-store sales momentum over the last few quarters, really the middle part of last year you saw a nice acceleration. I'm just wondering, as you look back to that trend line you've seen continue, any more thoughts on what's driving the strength? And relatedly, as you look forward, what can sustain the momentum?

John, this is Chris. I think, as we've talked a lot over the years, I think it's – when you look at our marketing dollars and our marketing spend, and we've introduced digital now probably about two years ago, as we've talked in the past, and if you look at we did our IPO now just barely two years ago, we've added three million incremental members since then. And every incremental member is an incremental spend. I think what we're really enjoying here is just this constant penetration and pounding of the market and more and more people joining. And that stack that we've been watching, just over 40% of our new joins are – have never belonged to a gym in their life. It's just showing that we continue to introduce fitness to people that have just never thought about it. And I think we just, with constant pounding of the market and getting the word out there and people giving it a shot, and I think that, coupled with just the general awareness of wellness and the acceleration between wearables and whole foods and healthy eating, I think it's just everything is in our wheelhouse. We're just pushing a lot of that. I think on a smaller part what's driving it, too, is just what we talked of the efficiencies of our software and our processing and a lot of data that we're using to refine our billing and our membership mix. So I think it's just a lot of things working in our favor.

Great. And maybe related to the in-gym experience, if you will, or the experience in the box, I'm curious if you could talk a little bit more about some of the equipment initiatives you might be looking at, adding some enhanced equipment in a number of different ways, including things like rowing machines and that type of thing. Just curious what initiatives you have in place there.

Yes, we've started to look at adding some rowers as well as some side fit ergometers, basically an upper – but people don't know it's an upper body bike but for your arms. So some equipment there. But I think more customer experience I would say is more enhancements in probably more of the technology piece, where your cardiovascular equipment we're looking at is going to be more interactive, give people a better experience and instead of just generally walking on a treadmill with an LED red light going around a track, it's actually going to be like you're walking though the Grand Canyon or through the streets of Paris. So – and then it will also let you surf your Hulu account or your Netflix account for that matter. And a lot of this we're also working on that will make it an enhanced experience if you're a Black Card member. So working on a lot of different avenues in that sense. So it's – I think a lot of that enhancement stuff will be around technology.

Okay, great. And last one for me. Just wanted to ask a clarification on the guidance update for the year. Just trying to reconcile. I know you raised the comps outlook a little bit for the year, the net income also up slightly and I think in proportion to the interest expense reduction. So I'm just curious, as you look at the moving parts, how you formulated the updated net income guidance, since most of that looks like it's interest expense. Maybe – I know you mentioned, Dorvin, the company store openings carry more expense in the short term, but if you could just reconcile the guidance update.

Sure. So when you think about kind of for the full year, we started the year with about an 8.5% to 9% kind of growth rate on an EPS basis. I think it was $0.75 versus $0.69. Talking top end of the range now. So with our current guidance we're putting out there, we're at about 13%. So I think the headline there is that we came in, as I said a minute ago, just slightly ahead of our internal plan. So on a full year basis, we're higher than where we were when we started the year. Second point is, when we look at our business and how it's performed over the first half of the year, we're going to continue to make some investments in areas where we can really support our operations, not only the corporate stores but franchise stores as well. And one of those is we expanded and moved into our headquarters back in late May. We've got some headcount positions that were not in the numbers last year and not in the first half this year either. So we're looking to do that. We think that will help us to continue to really support the growth of our – primarily our Franchise segment of opening, call it close to a couple hundred stores a year. So we feel very good about that, but we also have six months to go. A big chunk of our equipment business is in the back half of the year, as you know, a lot of it in the last six weeks of the year. But based upon that, we feel very confident in our projections and the guidance we gave in today's release.

Okay. But just maybe a follow-up. It doesn't sound like you're changing factors, like your equipment assumption for the second half, you're just – I just want to clarify that piece.

No, we're not. As I said earlier, the original guidance was $190 million, $200 million a year. We still feel very comfortable we'll be within that range on total equipment sales. I'll go back to that one point I made a while ago; a bit more of the replacement hit in the second quarter, and therefore the first half, versus where we thought it would have been in the back half of the year. So that's a little bit of a difference when you compare that. But otherwise, we're still comfortable with the equipment piece.

Okay, thank you very much.

Thanks, John.

Thanks, John.

[Operator Instructions] And your next question comes the line of Randy Konik with Jefferies. Randy, your line is now open. Please go ahead.

Hi, this is Janine Stichter on for Randy. We just had a couple questions. Just wondering, as your marketing spend builds and your brand awareness is obviously growing, anything you're seeing new change in terms of store productivity or the maturity curve? And also as the marketing fund continues to build as you open more stores, any plans to augment the marketing you're already doing? Any changes to the strategy there?

Dorvin, I'll jump in here as well. The marketing spend, there's no more opening – we're still opening stores with the same pace, [indiscernible] opening with 1,400 or so members on day one. So not really accelerating there and not accelerating on the maturity level either. I would just say it's more of a constant or consistent trend we've seen in the past. As far as anything different, I wouldn't say anything necessarily different. I would just say – the only thing with digital [indiscernible] real-time change and test things so we're able to constantly fine-tune our digital marketing programs. But the trends that have worked in the past, we're staying pretty true to them.

Okay, thank you.

Thanks.

Your next question comes from the line of Rafe Jadrosich with Bank of America Merrill Lynch. Your line is now open. Please go ahead.

Hi, guys. It's Rafe. Thanks for taking my question.

Hi, Rafe.

Hi, Rafe.

So, you had really strong margin expansion in the first half of the year, especially in 2Q, but the guidance sort of implies a slower expansion in the back half of the year. Can you talk about what's driving that? Are there any shifts that are impacting that? Or is that just the lower comp outlook?

Yes, I think, Rafe, obviously from my remarks I made earlier, all three of our segments had really great margin expansions in the quarter, and I would say a bit abnormal in a couple ways. One is – I'll take our Corporate Store segment. It came in at, call it 46% or so margins. That comparison to last year, last year was abnormally low. And that's the reason why I mentioned that I think we were at 37% last year. So we had some unusually large CAM and real estate taxes that hit last year. So that was part of the delta. The Corporate Store team has done a really good job of managing that expense structure. And with same-store sales, we're able to drive some really good comps. I don't think we'll be at that level at the end of the year. I think we will certainly be – if you look at last year's comps, or last year's margins were right around 40. We'll be ahead of that this year. But the back half should be a little bit lower than that, based on just, frankly, some timing of expenses between quarters. On the – our fastest growing and the highest margin piece of our business is the franchise side of the business. That's one of the areas where we are investing in additional headcount. That will hit us in the back half of the year a bit with some open heads that there were not in the first half. Outside of that, nothing too significant would vary. I think we can – as you saw, we continued to leverage our SG&A structure. And we will leverage our SG&A structure, both through the SG&A side as well as operating expense side, on a full year basis. We'll be ahead of last year's margins on both fronts, full year at the end of the year. And then just lastly, our Equipment segment business had higher margins this quarter than it has had historically. And you guys will remember, Rafe, I've said that, that is kind of 21%, 22% margin business, came in, in the high 23s this time. A little bit has to do with just the way our volume rebate structure works with our OEM. And we'll see a slightly lower margin in the back half of this year than we had in Q2. But we'll still be in that 21% to 22% margin range that I have said in the past should be the way to plan that business in the life of this contract that we're in right now today. So I think those are the – I guess the color I'd put on to this quarter versus what we expect to see in the back half of the year.

And as you look at the operating margins for the overall business longer term, do you think – is there opportunity in each one of the segments? Or will the operating margin expansion just continue to be driven by the mix shift to Franchise?

I don't think there'll be a lot on the Equipment side until we get to the point in time that we renegotiate our contract on that one. And we've talked about that – that contract, by the way, expires at the end of June next year. So certainly between now and the middle of next year I don't expect that to vary between that 21% to 22% or so margin which we've talked about historically. With respect to our two operating segments, the store segments of our business, we will be able to continue to leverage our structure if we can keep driving these kind of comps we have. In the guidance I gave of 8% to 9% comps, we will get leverage out of that even with continuing to invest. And as I've said in the past, it's a little bit of a stair step approach. We are starting to put more people in the field from three different aspects of our business. One is in marketing, so that we can work with the local co-ops out in those markets to really leverage this brand to some of the points that Chris made earlier. The second one is really critical on the real estate side. One of the callers earlier asked about that and, frankly, do we still think we can still get to the 4,000 stores. Being really, really close to the brokers and close to the franchisees and working those markets and be able to get the site first before somebody else might be able to get it, that's really critical. So we're starting to – and we will add during the back half of this year some real estate folks out in the field to support that. And we think that is really, really important to help keep the pipeline fresh, not only on finding new sites but then getting stores open as well. And we've said in the past, we still have – we had and we still have over 1,000 locations in our pipeline that are committed to today and we need to find those – the best sites, Main and Main, and then get those approved and open. But I think the net of it is, we are leveraging the structure, both individually by segment as well as including the corporate structure, we will this year, and we can leverage it even further next year.

And to add one more quick one. Just to follow up on the TRA for just a clarification, is there any scenario where you'd be obligated to make payments without getting the cash savings benefits that are offsetting your taxable income? Or is there any scenario where the payments from that liability could be accelerated?

There is no chance that I would ever make a TRA payment if I did not get a tax savings on my federal and state tax returns.

Great, thank you.

Your next question comes from the line of Dave King with Roth Capital. Dave, your line is now open. Please go ahead.

Thanks, good afternoon guys.

Hi, Dave.

How are you doing?

Good. It looks like you had a nice sort of acceleration in the non-comp or new store sign-ups this quarter. Chris, I guess can you talk a little about what's driving that? Any specific regions you can point to? I guess I'm most interested in sort of the underpenetrated markets like California. And then separately, is there anything you can share about the overall sign-up versus cancellation trend?

Yes. I'd say the sign-ups and the new joins are – it's not necessarily any particular market. It's pretty much everywhere and it's every class year of clubs; new clubs, old clubs, they're all comp-ing nicely. So it's – I think it's just – back to what I said earlier, I think it's just that compound residual effect of just constantly marketing and getting better at it and with our digital component and just some small upticks on just better processing, the secondary billing which members have on file as a backup billing method and better collections through our software. So I think we get – a few cylinders are all hitting the right way that's making it all work good for us. So nothing really that's driving it besides – any particular market. It's everywhere at this point. Cancellation trends have been normal. I haven't seen anything different there. Except the only difference I'd say was that small uptick as a secondary billing is that, because there's a second billing on file, you are more likely to collect from more people than you have with one billing. So that does add some help there for sure.

Okay. That's good color. And then Dorvin, it sounds like you may have said this already, but in terms of the Franchise EBITDA margins this quarter, were there any onetime items that sort of drove that down? I got a good sense on the other two from some of your other answers to your questions. But in the Franchise segment, anything to point to there on the EBITDA margin?

Not really. I mean, other than, as I mentioned, we keep investing in that and we think it's the appropriate thing to do. We'll have some additional headcount, not a significant amount, but some in the back half of the year. But we're in that – we've said historically we think that margin business is kind of a mid-80s kind of business, slightly higher in Q2 this year. We think full year will be ahead of last year so we'll be able to keep leveraging that business. But nothing – no significant item in terms of onetime type things this year versus last year.

Okay. That helped. And then lastly, any update on existing franchisees adopting the commission structure change, any response to that you can share since last quarter?

Yes, sure. Obviously, it just got announced to the system just a few weeks ago. The franchisees do have that option. It's too early to say right this minute whether they will or will not. But keep in mind that 1.59% incremental royalty is equivalent to the same amount of commission and rebates that we have in the P&L today. So for those franchisees that choose to do that, they'll be able to buy at cost. Therefore, we won't get that markup, that 1.59% in the form of rebates and commissions; we get it in the form of a royalty. So from a kind of a 4-wall store P&L basis, neutral. For us, on a net P&L basis, neutral, but still too early at this point.

Okay, all right. Thanks guys.

Thank you.

Thank you.

Your next question comes from the line of Christian Buss, Credit Suisse. Christian, your line is now open. Please go ahead.

Hi, congratulations on the nice quarter first of all.

Thank you.

I'm wondering if you could provide some perspective on what you're trying to do in the new stores that you're going to be opening? Are you going to be testing out any new initiatives in those locations as they open up?

The only – we have the pilot clubs that we've mentioned in the past that are doing the strength machines that are tracking workouts and stuff. There are only five clubs like that. We started that in the last call. And like the expanded enhancement experience with the cardio which I mentioned, that will be piloted in a few clubs as well to see if it helps the Black Card percentages and members seem to like the experience. Besides that, nothing necessarily new in the new stores besides those couple things, which is, again, back to a Black Card experience enhancement. But as far as the 20,000 square feet, the same box. The spa, the Black Card spas, which we've been doing now for a couple years, those are the ones we continue to make sure they're enhanced, like we've been building in the last couple of years. The members seem to like the Black Card spas better, which drives a higher Black Card percentage, which is the massage beds and chairs and tanning with a little bit of a lounge area to sit and wait for your session. But that's been going on for a couple of years now, a few years.

If you think about it, we're opening stores in virtually all markets where we already have stores. Now there are some smaller markets where you're getting outside of the major metropolitan area where that market might only have one store, as an example. But a lot of the stores are continuing to penetrate existing markets that we're already in and have stores open.

Your next question comes the line of Matthew Brooks of Macquarie. Matthew, your line is now open. Please go ahead.

Good morning. I guess relating to the piece of that industry competition you sort of started off the call with, in the last couple of quarters you've mentioned that some of the other low cost gyms were struggling and even calling your franchisees. Can you give us an update on what's happening there? Are some of your competitors feeling the pressure from your competition?

Yes, we continue to see that same trend. There's a couple real-time in process now that have called. So that trend has continued to be the same and I think will continue as we continue to open more stores and penetrate more markets.

And what's the sort of scenario there? Like if they call you and you're going to provide some sort of assistance, does it mean you want to take over some of their clubs? Or what is the potential option?

There's really three different scenarios where it plays out. It's either, one, that it's a good location, it's a good Planet location and it can be converted to a Planet; or it's maybe even a better location than the current Planet so we move over and take it over and convert it over and bring our members over; and then the third option, which happens probably 50% of the time, is actually they close the club and they just basically inherit the members at the existing Planet location, which is actually the best, because it's all bottom line.

Right. And as a follow-up on your earlier one on capital allocation, would you generally rule out special dividends?

Yes, I mean, I think that the Board today and Chris and I, the management team, we would say that's probably not the preferred way to return cash to shareholders today, based upon our shareholder base. And as I said, I think we'd look at stock repurchases and/or a quarterly dividend.

Right. And are we at a stage yet where you can say anything about how many units you think you might open next year?

No, we haven't given any guidance for 2018.

And last one on the TRA. With the cash flow, cash outflow there, will that cash outflow increase as your earnings and your profitable taxable income rise? Or will that cash outflow sort of amortize the liability sort of equally over the years?

Yes, so it will increase – obviously we have to have taxable income to be able to offset taxable income with a deduction. So that comes back to the caller's question earlier about is there any way that you'd have to make any cash payments. So as long as we have taxable income, reduce income taxes, then we get this tax savings and we make that payment in the following year. These tax deductions which generated the deferred tax asset occurred each time primarily TSG sold their shares, so when these B shares got converted to A shares. And because those were done in tranches, starting with the IPO in August of '15 and then the first secondary in June of '16 and then these follow-on offerings, we haven't built up to the full kind of run rate yet because that deduction gets a straight-line amortization over a period of time. We'll get to that in the next, call it couple years. So it'll increase a bit over the next, call it six to eight quarters. And then it would stay flattish for a period of time, again, as long as we have enough taxable income to offset those – to be offset with these deferred tax asset deductions.

Okay, thank you very much.

Thank you.

Your next question comes from the line of George Kelly with Imperial Capital. Your line is now open. Please go ahead.

Hi guys. I have a couple of questions for you. First, on the technology improvements that you mentioned with your equipment, what are the sort of key features that the Black Card members will be able to utilize?

Yes. It basically will expand from the typical treadmill experience, which is basically calories, time, mileage, kind of just a red LED track on the screen to, as I mentioned, walking through the Grand Canyon, walking through the streets of Paris. You can search your Netflix, your Hulu, shop Amazon. You can stream music, do all kinds of stuff with it. And also, on top of that, we'll be able to capture data on usage, who's using what, for how long. So gathering some data and how to better utilize that and farm that, as well as long term hopefully be able to push data back to the member and give them a tracking of their exercises so that they get data to follow themselves. So it kind of works data in three different ways: one from the treadmill, one to us and one to them. So it kind of enhances their experience. So it's a pretty unique feature and I'm looking forward to seeing how we can expand that and give them more value.

Very cool. Do you think that will lead to a sort of sped up replenishment of equipment across the base, then, in the next couple years if tests go well?

I mean, I guess it's going to depend. If we were able to drive higher Black Card acquisition through it, then my inclination would be that I would – for my corporate stores I'd want to replace it sooner to drive the Black Card percentage. So I would think yes. But until we can prove that out, it's going to be hard to sell.

Sure. And then one other technology question. Some of these at-home streaming fitness services continue to really grow like crazy. Is that something you would explore offering as part of a Black Card membership or some other plan at any point? Have you looked much in depth at that?

Not too in depth, though we have had discussions on some sort of feature like that on our app or somewhere they could get it for a feature. So it's something we've thought about, not in depth, but thinking about it.

Okay. And then last question for me is about the number of members. It's fun to watch the growth there. Can you talk about the usage you're seeing on a per club level? Like what does it look like? How has that grown in usage? And do you think you're nearing any kind of limit where the experience is starting to change? Is there any kind of deterioration that is worth commenting on?

It seems the trend is about the same. I'd say we average about 5,000 workouts a week per store. I think the beauty with our model, one is open 24/7, so that helps expand the busy hours that a lot of clubs experience in the evenings. But one of the bigger features is, because we don't have certain classes like most clubs do where you're demanding that people, your members have to come in at a specific time to work out, then you have these big, giant balloon periods where class starts at 5:00, a spinning, and then also maybe a Group X class and you have 200 people trying to take the same hour classes, you have these giant logjams that happen, not only in the classrooms but in the locker rooms and the parking lot, right? So because basically everybody is coming on their own time schedule, it just spreads out these periods and you don't have this huge logjam. Our clubs, we have a lot – many clubs that have 10,000 members. When you get to about 12,000 it tends to get a little bit dicey, which, easily enough, we just open another store and the right distance away to help alleviate some of that flow. But I wouldn't say in the customer experience thing there's anything that's being hindered at all.

Okay, okay, thank you. Good luck and thank you.

Thank you.

Your next question comes from the line of John Ivankoe with JPMorgan. John, your line is now open. Please go ahead.

Hi, thank you for the follow up. The question was on the effective royalty rate in the quarter. I mean, if my math is right, I think we saw a 50 basis point or so step up year-over-year. Is that what you guys see? And what's the trajectory of that as we finish up 2017 and into 2018 and 2019? It's always kind of hard to model that from the outside, but what are you kind of seeing as that rate continues to grow?

Sure, John. It was up 50 bps in Q2, a little bit higher than what we had had in the past. I think it's going to end up full year in that, call it 35 to 40 basis points range for this year. I think earlier in the year I said probably 30 to 35. So it's going to come in a little bit higher. I guess one thing that we'll see, we won't see any impact this year. We should start to see some impact down the road as franchise agreements expire and renew. That would be that extra 41 basis points on our current royalty rate of 7. So remember from the last call, that 7% royalty rate we have now in the FDD includes that incremental 1.59%, reducing the rebates and commissions that get paid to us from the vendors. And then the incremental 41 basis points. I don't think it will be a lot next year. But as we get into 2019, 2020, 2021, 2022, that's when we'll have a higher number of franchise agreements that expire and renew. So I'm not ready to give any guidance for next year. A significant number of our stores today are at the 5% rate. Out of our 1,000-plus pipeline to be opened, a very high percentage of those will open at the 5% rate. There's still a few that will open at a lower rate, but the far majority at the 5. So I think the way I guess I would think about it is, we've said that we ought to be able to do that, call it close to 200 stores a year. So if it's 200 stores next year, a majority of those would open at the 5% rate. Probably a small handful might open at the 7%, which would give you the incremental 41 basis points. But we'll give clearly more guidance when we get our Q4 release as to what next year's royalty rate increase will look like.

Helpful, thank you.

Thanks, John.

There are no further questions at this time. I'll turn the call back over to management for closing remarks.

Thank you. In closing, I'd just like to reiterate my happiness in the great quarter we had as well as marking our 42nd consecutive quarter of positive comps. I think it really just displays our confidence in this brand and confidence in our model and the confidence of our marketing power, and look forward to the future. So thank you for joining us today; talk soon.

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