Planet Fitness, Inc. (PLNT) Q4 2017 Earnings Report, Transcript and Summary

Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the Planet Fitness Fourth 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 for joining us today to discuss Planet Fitness’ fourth 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 to you the disclaimer regarding forward-looking statements that is included in our fourth 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, and thank you, everyone, for joining us for our fourth quarter earnings call. 2017 marks Planet Fitness’s 25th year in business and I am extremely pleased with the strong results we delivered. We capped off a great year with an outstanding fourth quarter highlighted by system wide same store sales growth of 11.6% on top of a 10.6% comp gain in the same period last year, and adjusted earnings per share of $0.24, both of which exceeded expectations. For the full year added 1.7 million net new members and finished 2017 with approximately 10.6 million members system-wide. At the same time we expanded our footprint domestically and internationally with the opening of a company record 210 Planet Fitness locations bringing the system-wide total store count to 1,518 at the end of December. With many retailers reducing their physical presence due to increasing pressure from online shopping real estate trends continue to be in our favor. Landlords and developers are looking for Planet Fitness more and more as key tenants in their centers giving us the luxury of being selective [Indiscernible] approvals. Of the 210 stores opened in 2017, 206 were franchise locations. These were in existing markets and new markets like and Hawaii and Panama. With the Hawaii store market and Planet Fitness’s presence in all 50 states in the Panama location demonstrating our continued international expansion. We are pleased with the number of new member sign-ups in both Panama and Hawaii and are extremely encouraged by the demand for the brand. And its important to note more than 95% of new stores last year were opened by existing franchisees demonstrating the attractive returns are used to generate in reinforcing their commitment to growing their individual businesses in the planet that is brand. While franchise growth continue to drive our expenses strategy, we took advantage of some attractive real estate opportunities and opened four new corporate locations late in the year and then in early 2018, we acquired six stores in Eastern Long Island, New York from a long-standing Planet Fitness franchisee that decided to retire after 11 years resistance. This acquisition made great strategic sense as the western half of the market is currently all corporate stores giving us the opportunity to leverage our existing infrastructure and drive growth and increase margins. Planet Fitness's long run rate for growth and increasing brand awareness continues to reinforce my confidence for the future, our marketing power only continued to get stronger with each new joining. Starting with our growing national advertising fund, we spent approximately $34 million last year on national market campaigns and high-profile partnership opportunities like our sponsorship of Times Square’s iconic New Year’s Eve celebration, and we estimate that approximately $100 million was spent locally by franchisees in 2017 to highlight our unique judgment free environment that caters to casual or first-time gym goers versus avid exercises like [Indiscernible] typical gyms. Underscoring the reach and effectiveness of our collective marketing efforts, I am pleased to report the findings of our aerial [ph] brand health study in January confirmed that brand and ad awareness levels are at their highest observed level to date. Planet Fitness continues to rank number one in aided and unaided brand awareness in the gym category. Both have 9% [Indiscernible] year-over-year since January 2017. In addition, findings show that consideration for joining Planet Fitness’s is higher when people are aware of our Times Square and New Year’s Eve partnership up six percentage points year-over-year. In addition to being ledger [ph] focused on attracting new members to our brand, we are working hard on enhancing number experience by leveraging the data we have from our 10.6 million members, another huge competitive advantage for us given our size, skill and resources. Looking out over the next few years, we are exploring new ways to delivering more personalized and connected to the journey to our members via our equivalent and advanced mobile app. Our vision is with our equipment to have the ability to provide immersive, entertainment and workout experiences. For example, as a Black Card member, you could have an elevated experience where you are watching Netflix, [Indiscernible] listen to your Spotify, browse your Facebook or run to the Grand Canyon. Want to choose what appeals to you, you get worked running on the treadmill and your progress is track essential to the Planet Fitness app. As you leave the gym that day, you see how far you ran, how many calories you burnt, and how that compares to last week, last month for last year. Perhaps, the most exciting opportunity here is to what I just described but rather having the ability to develop personalized recommendations on what work out to do during your next visit based on your history and progress. By leveraging our data, we could target White Card members and serve them trial opportunities with the goal of getting them to upgrade, and the equipment technology could allow them to easily upgrade to the Black card right on the machine itself, so they can have an instant access to the enhanced user experience of watching their favorite programs running through exotic locations. I’m energized and excited about collaborating with our equipment vendors and franchisees to leverage our size, scale and data to enhance our members experience in years to come. We are currently in dialogue with three of our equipment manufacturers about our next equipment contract and we look forward to sharing more details about the next generation of machines will feature. Looking back on 2017, it was extremely successful year on every front. Financially, we posted double-digit system wide same social growth for the year and achieved record adjusted EBITDA. Strategically, we expanded our brand reach and awareness through the opening up a record 210 new locations and approximately 130 million in national and local advertising and operationally we had some great new talent to our executive team and boosted our franchisee support teams to help further improve execution throughout the system. We began 2018 with a great momentum and I’m confident the Planet Fitness is poised to deliver increased shareholder value over the long term and simultaneously continue to improve millions of people’s lives each and every day. And underscoring their conference and our future, the board of directors recently authorized the increase in our share repurchase program to $100 million. With that, I’ll turn the call over to Dorvin.

Thanks, Chris and good afternoon everyone. I’ll begin by reviewing the details of our fourth quarter results, highlights from 2017 and then discuss our full year 2018 outlook. For the fourth quarter of 2017, total revenue increased 15.1% to $134 million from $116.4 million in the prior year period. Total system-wide same-store sales increased 11.6%. From a segment perspective, franchisee same-store sales increased 11.9% and our corporate store, same-store sales increased by 5.6%. Over 90% of our Q4 comp increase was driven by net member growth, with the balance being rate growth. The increase in pricing was driven by 90 basis points increase and our Black Card penetration to 59.8% compared with last year, combined with the $2 increase in Black Card pricing for new joins that would put in place system-wide on October 1. During the quarter, the increase Black Card pricing drove approximately 60 basis points of the increased same-store sales. Our franchise segment revenue was $40 million, an increase of 24.6% from $32.1 million in the prior year period. Let me break down the drivers of our fastest-growing revenue segment. Royalty revenue was $27.1 million, which consists of royalties on monthly membership dues and annual membership fees. This compares to royalty revenue of $17.5 million in the same quarter of last year, an increase of 54.8%. This year-over-year increase had three drivers; first, we opened 206 new franchise stores since the fourth quarter of last year, second, as I mentioned, our franchisee owned same-store sales increased by 11.9% and then third, a higher overall average royalty rate. For the fourth quarter, the average royalty rate was 4.83% up from 3.69% in the same period last year, driven by more stores at our current royalty rates including stores that amended their franchise agreements. As we discussed on our last call, as of the end of Q3, approximately 400 stores had amended their existing franchise agreements to increase their existing royalty rate by an additional 1.59% and at the same time eliminate the commissions they pay to us on certain operational purchases thereby reducing those operating expenses. During Q4, approximately 500 additional stores amended their existing franchise agreements which will further accelerate the increase in our average royalty rate for 2018. However, it is important to remember that the increased royalty revenue that we’ll receive due to the additional 1.59% royalty rate change is being offset by a corresponding decline in commission income as we will no longer receive commission income on operational expense purchases by these stores. I’ll discuss our assumptions for future royalty rate, growth later on in the call when I outline our 2018 guidance. Next, our franchise and other fees were $6.4 million, an increase of 2.5% or $100,000 over the prior year period. These fees are received from processing dues through our point-of-sale system, fees from online new member sign-ups as well as fees paid to us in association with new franchise agreements, area development agreement as well as the sale on transfer of the existing agreements. As many of you are aware there are new gap rules on revenue recognition for contracts with customers which would apply to our area development agreements and franchise agreements that went into effect January 1, 2018. In essence, we now need to recognize these fees related to both, area development agreements and franchise agreements over the life of the related franchise agreement, typically 10 years versus recognizing it all at once at the time a lease is signed for a franchise store location. This not only applies to all future ADA’s and FA’s but also certain existing agreements entered into post-PSG’s acquisition of Planet Fitness in 2012. Under the accounting rules, you cannot go back prior to our acquisition to re-establish a deferred revenue component prior to that date. Similar to the change in royalty rate, I’ll walk you through these changes and how it impacts 2018 later in the call. Back to our Q4 results, also within franchise segment revenue is our placement revenue, which was $4 million versus $3.6 million in the prior year period, an increase of 11.3%. These are fees we receive for placement and assembly of equipment for our franchise owned stores. The increase was driven primarily by higher new store equipment sales during the current year quarter. Finally, our commission incomes which are commissions from third-party preferred vendor arrangements and equipment commissions for international new store openings was $2.5 million compared with $4.8 million a year ago. The decrease is attributable to the number of stores that have amended their existing franchise agreements and increased their royalty rate instead of paying higher cost of goods for operational expenses that I mentioned a few moments ago. Our corporate owned store segment revenue increased 8.7% to $28.2 million from $26 million in the prior year period. The $2.2 million increase was driven by the increase was driven by the increase in corporate owned same-store sales of 5.6% and increased annual fee revenue. Turning to our equipment segment, revenue increased by $7.5 million or 12.8% to $65.8 million from $58.3 million. The increase was driven by higher new store equipment placements versus a year ago and higher replacement equipment sales to existing franchisee owned stores. For 2017, replacement revenue as a percent of total equipment revenue was approximate 38% versus 31% for the prior year. Our cost revenue, which primarily relates to direct cost of equipment sales to new and existing franchisee, owned stores amounted to $50.9 million compared to $45 million a year ago, an increase of 13.2% which was driven by an increase in equipment sales during the quarter. Store operation expenses which are associated with our corporate owned stores increased to $15.3 million compared to $14.4 million a year ago. The increase was primarily driven by cost associated with the opening of four new stores in the quarter, including preopening expenses. Excluding these new store preopening expenses, adjusted store operation expenses would have increased slightly to $14.7 million from $14.4 million, we did not open any new stores in the prior period. SG&A for the quarter was $17.1 million compared to $13.5 million a year ago. This increase was primarily related to higher variable compensation and equity compensation as compared to the prior year. This was also the primary driver of the increase in SG&A compared to the third quarter of 2017. In addition, on a year-over-year basis, we had some incremental payroll to support our growing operations and infrastructure as well as some non-cash expenses related to the write off of some capitalized IT costs. Our operating income increased $17.2 million to $42.3 million for the quarter, compared to operating income of $36.1 million in the prior year period. While operating margins increased approximately 60 basis points to 31.5% in the fourth quarter of 2017, due primarily to the revenue growth and higher margins as we’ve continued to leverage our overall cost infrastructure. As a result of the new tax Reform Act, we were required to make some adjustments to deferred tax assets and are TRA liability as of year-end and those adjustments had to be run through our income statement and affected both our net income for taxes and are GAAP tax rates. Our GAAP effective income tax rate for the quarter was 99.8% compared to 24.6% in the prior period. Our 2017 results include an additional income tax expense of approximately $349.6 million primarily due to the tax Reform Act as a result of a re-evaluation of our deferred tax assets to reflect the new lower corporate tax rate, partially offset by $315.6 million gain from the revaluation of our TRA liability, which is included in other income and expenses. As a result of this, we reported a net loss attributable to Planet Fitness Inc. of $3.5 million or $0.04 per diluted share on a GAAP basis for the quarter of 2017. Compared to net income attributable to planet fitness Inc. of $10.6 million or $0.18 per diluted share in the prior year fourth quarter. Net income was $0.8 million compared to $21.9 million a year ago. As we stated before, because of the income attributable to the non-controlling interest and not tax at the Planet Fitness Inc. corporate level, an appropriate adjusted income tax rate for 2017 would be approximately 39.5% if all the earnings of the company were taxed at the Planet Fitness Inc. level. On an adjusted basis, net income was $23.5 million or $0.24 per diluted share, an increase of 19.1% compared to $19.7 million or $0.20 per diluted share in the prior year period. Adjusted net income has been adjusted to exclude non-recurring expenses, the impact from the tax reform adjustments of our deferred tax assets and liabilities, the associated TRA liabilities, and reflect a normalized tax rate of 39.5%. We have provided a reconciliation of adjusted net income to GAAP net income in today’s earnings release. With the passage of tax reform late last year, we now expect our normalized tax rate which includes federal state and local taxes to be approximately 25% to 26% for 2018. 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 16% to $51.2 million from $44.1 million in the prior year period. A reconciliation of adjusted EBITDA to GAAP net income can also be found in the earnings release. By segment, our franchise segment EBITDA increased 23.4% to $32 million driven by higher royalties received from additional franchisee owned stores not included in the same-store sales base, and an increase in franchise on same-store sales of 11.9%. Our franchise segment adjusted EBITDA margins increased by approximately 20 basis points to 81.1%. Corporate owned store segment EBITDA increased 6.5% to $11.3 million primarily driven by a 5.6% increase in corporate same-store sales and higher annual fees partially offset by preopening expenses associated with the four corporate owned stores that opened up during the quarter. Our corporate store segment adjusted EBITDA margins increased by approximately 110 basis points to 42.6%. Our equipment segment EBITDA was essentially flat year-over-year at $15 million, however, adjusted EBITDA increased by $1.6 million year-over-year and adjusted EBITDA margins were 22.7% as compared to 22.9% in the prior quarter. Turning to the full year, let me quickly summarize the highlights for 2017. Revenue increased 13.7%, system-wide same-store sales were up 10.2% in this March the 11th straight year with positive same-store sales. Our fastest-growing franchise segment grew revenue by 28.9%, our average royalty rate for the year increased 59 basis points to 4.25%. Corporate store segment revenue rose $7.4 million driven by a 4.9% comp gain. Equipment segment revenue increased 6.8% which included 193 new store equipment sales this was towards the lower end of our range of 190 to 200 due to a few franchisees that were unable to complete the construction on a couple locations in time for us to place the equipment prior to year end. Our adjusted EBITDA increased 22.7% to $184.7 million with margins up 315 basis points to 43%. And then lastly our adjusted net income was up 21.8%. Now turning to the balance sheet, as of December 31, 2017 we had cash and cash equivalents of $113.1 million and borrowing capacity under our revolving credit facility stood at $75 million. Total bank debt excluding deferred financing costs was $709.5 million at year end, consisting solely of our senior term loan. As you are aware from the press release, we issued on January 2, of 2018 we utilized approximately $29 million of our year ending cash to complete the six store acquisition from a franchisee stores located on Long Island that Chris mentioned earlier. As we announced today, the Board of Directors has authorized an increase in our share repurchase program to $100 million. Future share purchases could be funded by portion of our current cash position, future cash flows or borrowings under our credit facility. With respect to CapEx, our total spend in 2017 was $37.7 million, which included approximately $6 million for our new corporate offices. Additionally, we incurred approximately $8 million for four new corporate stores as well as $7 million for replacement equipment for our corporate store base, the remaining CapEx was primarily associated with store renovations and IT projects. For 2018, we anticipate CapEx to be approximately $30 million on an apples-to-apples basis with a target of 45 [ph] new corporate stores. We will incur CapEx for replacement equipment similar to the prior year. Now onto our outlook. For the year ended December 31, 2018 we currently expect revenue to increase approximately 20% however, included in this guidance is the impact of additional revenue from the 2% of monthly dues we collect from all of our franchisees for the national ad fund, including our corporate stores and as required by the new GAAP rules beginning January 1 of this year. Prior to 2018, the NAB contributions really only had an impact on our balance sheet as restricted cash or as liability. Due to the recent accounting changes, we must now recognize these contributions as revenue, and book the expenses associated with managing the National Ad Fund as marketing expenses in our SG&A line. While we expect there will be no impact quarterly or for the full year to our bottom line from this change, it is contributing approximately 8% to 10% to our 2018 top line growth rate. Also incorporated in our topline outlook, is the impact from the change in how we recognize ADA and FA fee revenue which will be about a $4 million headwind this year compared with 2017. As I mentioned earlier, we now need to recognize these fees over a ten-year period versus the time the related store and lease is signed. For example, in 2017 we typically recognized $30,000 for each new store location. $10,000 for the ADA and $20,000 for the FA when the store lease is signed. In 2018, under the new rules for each ADA and FA that we sell, we’ll recognize $3000 for the first year of the agreement for each franchise store opening and the remaining $27,000 in equal instalments over the next nine years. Helping to partially offset this headwind is the fact that we need to re-recognize the remaining portion of ADA and FA fees associated with the existing agreements signed since 2012 which were re-established on our balance sheet as deferred revenue. We recognize approximately 6.8 million for these related fees in 2017 under the prior old GAAP rules. If we had been under the current 2018 GAAP rules, we would have recognized $1.2 million. In 2018, under current GAAP, we anticipate to recognize approximately $2.3 million, but as I stated earlier, approximately $4 million less than reported in 2017, which under previous GAAP would have dropped to the bottom line of our P&L. In terms of profitability, we expect adjusted EBITDA growth to increase in the mid-teens percentage range. Adjusted net income and adjusted EPS is projected to increase by approximately 40%/ This guidance assumes an effective tax rate of approximately 25% to 26% which includes the new federal state and local rate following the recent tax reform. As a comparison to the prior year, and before the tax Reform Act rate reductions, adjusted net income and adjusted EPS would have grown by approximately 20%. We plan to reinvest a portion of our tax savings back into the business in 2018, primarily in infrastructure and technology for stores and systems to ensure Planet Fitness is well-positioned to capitalize on the current industry trends in order to benefit our business and enhance the member experience. These investments which are estimated to be in the $7 million to $8 million range are in addition to the CapEx spend already outlined. The following are the assumptions used in developing our full year guidance. First, with respect to sales, system-wide same-store sales are expected to increase in the high single digit percentage range. We are also expecting to sell in place equipment in approximately 190 to 200 new stores again this year, and anticipate replacement equipment sales to be approximately 40% of total equipment sales. I also want to point out that our EPS guidance doesn’t include any potential future share repurchases. Finally, based on the approximately 900 stores that have amended their existing franchise agreements and increased their royalty rate by 1.59% as of December 31, of 2017 coupled with the new stores opening up at the current rate, we expect the average royalty rate to increase approximately 125 basis points in 2018, the majority of this increase being the estimated impact of stores amending their franchise agreement with a corresponding decrease in commission income. I’ll now turn the call back to the operator for questions.

[Operator Instructions] We will pause for a moment to compile the Q&A roster. Your first question is from Oliver Chen with Cowen and Company.

Hi. Congratulations on a great quarter and outlook. And we had a question generally on the unit economics of the new gyms. As you are building in more markets and you had really impressive unit growth. How are the unit economics trending? And then, as we look ahead with the national marketing budget it’s been a real powerful part of your story. How would you expect that dollar amount to trend on a long-term basis as with some quite an important part of what's been driving a lot of the awareness. Just curious about how we should model that? Thank you.

Sure, Oliver. In terms of new stores, the way we look at our new stores, we look at them by Class year. We look at them in the months they opened. And you see from our same-store sales we’ve talked about in the past that new stores tend to drive fairly high percentage of the comps. The first year in comp kind of a year or two in operation. They’re going comp at call it 40% to 50%. Your second year is going be in kind of that 20%, 25% range. And then once you get into the fourth year and older they tend to be in the kind of the mid-single digit range. Those are still very similar in terms of stores that we opened in 2017. From an EFT perspective, from a same-store sales perspective, very similar to our previous vantage year.

And I think all of this, Chris, I think as far as the marketing standpoint, good news, if you can kick it off. This is a third year. We auto renew from additional two years for that contract. So that's already done on any brand awareness, so as mentioned -- is the all time high. We had dethroned Gold's gym, of course we did that, so ever since that we’ve been number one, which I think is again continuing to drive these comps that we’re seeing is that this marketing budget is static, it continue to grow with each new member. So 1.7 million members added net new last year is all implement to marketing dollars that continues fund this year. So I think as what we’re seeing is the momentum we’re driving. Lot of the data driven decisions that were using to formulate our marketing dictate driver’s comps.

Okay. And lastly, Chris, the digital innovation is really impressive and sounds exciting. How do you expect a lot of the changes there to impact? And how we should think about the model? Do you think it will continue to increase traffic, increase customer satisfaction or decreased churn? What are your thoughts on what digital will plan for the customer experience in the universe?

Yes. You’re talking about the premium consoles and the cardio that we’re testing, right?

Yes.

Yes. Again, first I’ll say, it’s still really early, we just put them in fourth quarter, 15 sites, five of each of the three manufacturer sites, one portion is yet to be put in which will be shortly there’s a delay in construction. Its still early so I – we’re cautious with that, but what I will say and that being said is the early read on the early data is they are driving more white card upgrades than their peers, peer clubs and driving little more usage than their peer club. So and evidently people like running through New Zealand. So its interesting to be able to – I mean if we’re doing this for 25 years all over honestly, and to be able to now actually know the habits of our members and to be able to see an increase and enhanced experiences based on what we learn, it just something that this industry has never seen and we’re in the forefront of figuring that out.

Well, great. Thank you very much. Best regards.

Thank you.

Your next question is from John Heinbockel with Guggenheim Securties.

So let me start with the 7 million to 8 million that you’re going to reinvest in the business. Can you go into that little more detail? Where is that going? And I guess it looks like we’re not for that EBITDA growth would be close to 20%, is that about right?

Yes. So the – when it comes to the premium consoles and all the technology side it really comes down to that complete ecosystem which I talked about that in the past that we never had either the industry and I think we work with these manufacturers of the equipment which are in the process of how do enhance members experience to see that data are back to the member. So they know what they did and how to then with algorithms figure what they should do tomorrow. When you think about all the variables and apps out there, lot of them attract, not many recommend and that’s really the missing link is what people need to do tomorrow to get there fitness journey started and to get results. So, and then capturing that data, how to use that with insurance companies and corporations to show that their employees are or subscribers are getting healthier and working out. And then how you we use that for advertising purposes, for other businesses they’ll say we have these members, 10 million members doing over 300 million workouts a year and how do we get them. What they're doing? What they like. What they not like. What their experiences are. How do we get the right products in front of them based on their likes and dislikes for advertising purposes. So as that whole technology ecosystem, John, we’re looking to that building to capture all that and then leverage our 10 million members and growing.

Yes, John, I think you’re question was in terms of our guidance, I think I said we expected our adjusted EBITDA to grow in the mid-teens as a percentage basis year-over-year.

Right. That includes the $7 million to $8 million investment, right?

The $7 million to $8 million is going to be mostly CapEx. It’s going to be a little bit of – it’s going to be OpEx, but a good chunk of it will be CapEx.

All right. And then secondly, if you think about your pace of openings, is there a still the idea here that’s you want to hold to that 200 or so, because what's happening on the real estate market. And is there any – do you need any push back from franchisees who want to grow faster given the performance, their boxes and the brand awareness that’s building, but you think you could go faster and pick up more share. Do the tension exists there or not really?

No. There’s really no tension. And in fact, I mean, there’s number of franchisees that are ahead of the development schedule and we’ll keep building in terms of site availability. And I guess I go back and maybe address a little bit as we’ve talked about the past and I think you alluded to is that we still see significant favorability for us on the real estate site availability front, I mean, you know just the latest is Toys "R" Us and others that are out there. And we don't see that doing anything, but continue to benefit us and given that there's not a lot of retailers particularly with the big REITs that are spread out geographically. There’s not a lot of other retailers that are taking down call it a couple hundred sites. so to me the way we look at it is that, I mean, we’re not holding them back and we do have sites that we will not approve for a couple reasons; One, we think that maybe the market is not developed to an extent that it's ready for that additional club that’s going to be pulling members to that club. Second, we don't think sites kind of Maine in Maine and we want to be at Maine in Maine. And we believe and we’re certainly seeing it that if you just hold on a little bit some of those sites will become available. And then the third element I would say is that more and more franchisees are doing ground-ups and that’s about an 18 month time lag, I mean, we have franchisees right now today that are out there doing ground-ups and couple of them are in the process right now. That won’t open into a probably early in 2019 as an example. But we believe that 200 year is we called it kind of labeled it powerful growth. We still think that’s kind of right number. But if we are franchisees are bringing in more sites in 2018 than they did in the 2017 and their available sites, so we think they should open then we will approve them. But we really go at it from that angle. The last point I will make is we've had now more and more what I’d call top-down approach to whether it's Chris or myself or Rob Sopkin our Chief Development Officer meeting directly with REITs and then taking sites in their portfolio, one, that’s either available now or two that's coming up on lease expiration with the existing tenant in the next like 24 to 36 months and we’re starting to push those sites now down to the franchisees. We didn’t do that 12, 18 months ago and we’re doing much more that today.

Okay. Thank you.

Thanks, John.

Thanks, John.

The next question comes from Jonathan Komp with Baird.

Yes. Hi. Thanks guys. Chris, I want to follow-up on a statement you made in the press release about carrying over significant brand momentum into 2018. And just wanted to ask a broader question what you've seen so far in the key sign-up periods? And then I think that the high single-digit comps guidance for the year is little above what you guided to initially for last year. So could you just talk about the sustainability of what you're currently seeing?

Yes. I think the momentum everything from our comp still high single to low the double-digit comps here for the first quarter. Development pipeline, sites locations everything is filling up nicely for the year, so I see the momentum can carry on for sure as you’ve seen last couple of years.

Yes. Jon, the only think I’d add to that is, we guided full year, obviously we are not talking about the quarter here, but we guided full year in that high single digit range. We think Q1 will be clearly on the high end of that, may be a low-low double-digit, but we have that much visibility into Q1, but we still feel comfortable with that kind of high single digit for the year.

Okay, great. And then, in terms of some of the drivers, I know you talk about some of the technology in the digital component or the app component. Is there potential for loyalty to be included in that. I know it’s something you’ve talked about a little bit over the past year or so but any updates there?

Not heavily, but no doubt with the app and the technology and be able to host, the people are doing, you can see how we could easily tie achievement to some sort of rewards program for partnerships with other brands. The companies will be partnered with our bundling. That would the case too. So that’s why we spent million [ph] in it. And I think one thing with that technology we think about is, it is a – its not something that won and done, its an evolution and it will be as we learn and fine-tune over the years ahead of how we use it and how we enhance members experiencing, I think what it looks like in six, 12 months it will be very different than look like at 36 months.

I think, Jon, just to add on to that is that with Craig Miller, our Chief Digital & Information Officer, one of the things we’re doing is, is we’re building that plumbing and that infrastructure to be able to do a lot more things from a technology perspective as Chris has been talking about even prior to this call, but certainly today to have the ability to pretty easily then link our systems into some partnership with somebody on the loyalty program as an example whereas today it would take us months if not years to be able to build something like that. We will have the flexibility down the road to Chris's point whatever the technology is and whatever its evolve to, to be able to have the flexibility to do that with our existing systems and partner up with others whatever that case may be.

Okay, great. And then last one from me. I don't think this was covered, but when you think about the new equipment technology you’re talking about obviously I think that would be incorporated into new equipment sales, but were there also be potential to sell the console as a standalone that could be retrofitted to existing equipment, so is that a incremental opportunity outside of the normal replenishment or re-equipment cycle?

Not necessarily no, but the newer cardio is going in today is retrofitable with these consoles, so of a franchisee, if they buy equipment today and want to retrofit their new stuff. They’re not going to hold out buying stuff because they’re waiting for the consoles to retrofit them which is a good thing. But it would did have to upgrade. But I would see it could push if the trends continue and the data continues to be positive as we see today not early I would see that if there’s a franchisee you may not wait four, five years in cardio.

Okay, great. That’s helpful. Thank you.

Thanks Jon.

Thanks Jon.

The next question comes from John Ivankoe with JPMorgan.

Hi. Thanks. First, the housekeeping question, is there any change to the average equipment package sold for placement in 2018 in your estimates?

I’m sorry, John, say it again, any change in what?

I apologize. Is there any change in the average price per equipment package sold per placement in 2018 or…?

No.

Okay. So same levels of 2017. Great. Thank you. And then secondly, are there any characteristics, defining characteristics that you see in the system, whether in terms of higher than average, volumes are higher than average profitability that you’re seeing for your new stores whether that regional, whether its urban, sub-urban, rural, free standing what have you. Are you really beginning to see a certain type of store really rise to the top maybe in 2016 and 2017? And is the company doing with its franchisees anything to particularly pursue those types of sites in 2018 and 2019. So in other words what I’m getting to is, is there an opportunity for significant change of the trajectory of new unit opening volumes?

Yes. I would say there's always outliers, John, a little bit, I mean, the extremes could be say a high urban area. Ag is an example, corporate store in open California, over indexes and members and monthly EFT and certainly EBITDA to more rural markets or markets outside of a metropolitan area that might they sell down a bit. We build a few more smaller stores in the last 12 months then we did the previous 12 months and when I say smaller, smaller on square footage basis, not significantly but little bit smaller. Sometime that’s because the only space you can get and sometimes it's because, it’s a little bit of a smaller market. But in terms of the way I look at it John is how our franchisees portfolio doing, knowing they’re not going to hit a grand slam on every single one and knowing they might to certain extent maybe do what we kind of call a fill-in to get a store into a market. You want to get one in there maybe get it before the competition might get there, but it might be a smaller store. It might be one that you might not even expect to be up at your kind of average. But from talking to our franchisees, looking at our corporate store portfolio, we open four stores in Q4 last year, there's no major outliers out there, with our Black Card percentage being slightly higher with the $2 price point being higher, albeit it just started October 1 with new member sign-ups on the Black Card perspective. We continue to see very good profitabilities at four-wall basis.

I think one thing I’ll add John is the, we have seen in the past 12 months a slight uptick in better attrition which is been promising.

That’s okay. That’s great. And certainly, lot of systems that I covered, you have some different economic performance across geographies. So lot of different reasons that market can perform materially different from -- its not an average unit volume perspective, but from a profitability perspective, have you seen any real surprises whether on the high side or on the low side that you are seeing you really, you kind of continuing this fully national expansion?

John, there really isn't any. I mean, there are -- the ends of the spectrum could be a high urban area with higher rent that for some reason might not draw the higher volume to offset it. Many do. But whether you're in Dallas, Chicago, Orlando, Phoenix, Denver you go across these different geographies where you might say the ethnicities you're in the market might be different, you might say the income levels might be different, you know the weather might be – you can go through all those and John we really don't see that. Now as I said earlier there's always outliers that might perform a bit different, but not in the kinds of percentages that ever warriors [ph] whatsoever. So what we see is that you will have some more rural markets or smaller population markets, but then they typically have very low rents and so you might have 10%, 15% less members, but you may be paying instead of your high-teens or $28 square foot rent all in, you maybe paying five or six or seven. And so, there’s some those markets that will actually a higher EBITDA in dollar wise than a store in another market that have more members and more EFT. So it's not like what you're referring to where you kind of see where a particular portfolio operates differently and the southeast of the West or something. Our model -- model doesn’t work that way.

Real time I’d say, John, I’d say Hawaii for example off to a bang of start that club.

And we open up a corporate store in Berlin, Vermont. And it’s a very, very small town, rural area that frankly people in the places like this, they use to grabbing 30 to 45 minutes to go to grocery store or to a dentist and so it pulls -- the club pulls from that kind of a range. And that club is exceptional well.

Let’s say, inside an enclosed mall, actually, we're the Walmart..

That’s great, guys. Thanks.

Thanks John.

The next question comes from Rafe Jadrosich with Bank of American Merrill Lynch.

Hi. Good afternoon. Thanks for taking my question.

Hi, Rafe.

You finished with the low end of your historical leverage range, can you talk about how you’re thinking about a potential debt recap for in 2018?

Sure. We talked about this I think in Q4 when we did our Q3, when we did that release and as you guys know, we’ve stated that our kind of range has always been kind of that three to five range. We are at the low -- getting towards the low into that range. By the end of this year we would certainly be down at the low end or not below that. And we have had and are having conversations with our board about what the right refinancing option should be. And that's we said before that something we would do sometime early in 2018 and we still expect to do so.

Okay. And then when you look at the comp acceleration are you seeing that in newer clubs ramping fasteners or is it in mature clubs that are seeing the uptick. And what you think is driving – what’s driving that it's different now than it was maybe earlier, this year and same question for your clubs that you’re seen the comps accelerating, those are all mature. What’s the change that you are seeing?

It’s pretty much across the board whether it's a mature clubs, all-age clubs, the every model in there and we have reequips in there and lot of more stores doing that. Lot of [Indiscernible] lot of it quite is driven to by the annual fee timing is driving some as well as the secondary billing option is driving some, which is a backup billing method for the members?

I think the one thing which we've said in the past a bit is that – and I think some of this has to do with clubs, expanding putting in an older clubs expanding putting a buy card area or maybe clubs that came up on lease expiration, they relocated across the street or down to the next shopping center. Things like that, I think our operators are much better today than they've ever been. And I think that as they've gotten larger they have gotten more sophisticated with their operations team and their marketing teams in real estate. I mean, you go by four; five years ago we didn't have hardly any of our franchisees that had a real estate, a CMO, a CFO and frankly probably an operator outside of the franchisee. Today many of our larger groups have that talent and I think they're just dialing it in a lot more than they used to. So the net that is mature clubs are doing much better too.

And last question. I was surprised to see the Black Card penetration went up in the quarter that you increase the pricing. I think the last quarter you talk about is you are expecting a 70 basis points benefit. Can you talk about after like having in place for a quarter what’s your expectation going forward and what you're seeing in terms of the penetration?

Yes. As I said it was about a 60 basis point impact in Q4, it began January 1, it was for the new Black Card members. We said when we did the pilot that we saw little to know negative impact in the acquisition side of it. So it wasn’t unexpected as to how that kind of came out, but its about 70 basis points. I think that as we look at 2018 the pricing should have probably 175, 200 basis points embedded into our guidance.

Great. Thank you.

Thanks, Rafe.

Your next question comes from James Hardiman with Wedbush Securities.

Hi, good evening. Thanks for taking my call here. I wanted to touch on the cash impact of tax reform. You gave us the impact that’s going to have on your income statement non-GAAP of 39.5 to maybe 25.5. Maybe walk us through how your cash tax rate changes before and after tax reform? And then the TRA impact if there is any, I know that’s a delayed impact. But to give us the schedule just curious how that schedule is going to change as a result of different tax rates? And then maybe talk a little bit about your franchisees. How tax reform is affecting them I guess I don’t even know if they’re mainly paying the corporate rate or for lot of these guys are paying the pass-through rate, but ultimately what do you expect them to do with those savings and does any of that benefit you?

Sure. So previous to the tax reform our adjusted tax rate of call it 39% to 40% was based upon assuming all of our shares were Class A shares and all those shares, so therefore all of the income was tax at the Planet Fitness Inc. level. And today we’re roughly about call it 90% -- 89%, 90% of our of our income is taxed at Planet Fitness Inc. because we still have about call it 10%, 11% of our shares are Class B shares. So at a 39% to 40% tax rate we were getting a tax deduction from the step-up basis from those stock sales most of which were from TSC as they sold-out. And we were getting that benefit at call it $0.40 on the dollar. And of that $0.40 on the dollar then which reduce our cash taxes to the government, 85% of those savings of that benefit went to the TRA holders and then 15% of the state in the company. So the way I've always talked about it is think about that our 39% tax rate was roughly because of the step-up -- we got about a 15% reduction off of that. So that was kind of the benefit for the company by having this [Indiscernible] structure in place. So now if you fast-forward to call it 25%, 26% tax rate now with our federal state and local tax rate that were estimating will be our full rate for 2018. Now then those deductions which that’s why there were that huge deferred tax expense which I talked about that went through our P&L is that we in essence then we re-measured that future benefit because it's no longer worth $0.40 on the dollar, it's only worth call it $0.25 on the dollar. But we’ll be paying a lower cash tax rate using that 25%, 26%. So, the way to think about it then is because that we will with the taxable income we have albeit it reduced by this tax basis deduction that we get at a 25% rate we will pay significantly less in cash taxes to the IRS, but we will still pay 85% of those savings at that 25% tax rate we’ll pay those to the TRA holders. So again it's about a 15% benefit to Planet Fitness Inc, off all of that 25% to 26% tax rate. So let me pause there and see if that is clear in the way that kind of in essence cash taxes in the adjusted tax rates as I just walk through if that make sense.

It does. And I guess bottom line it for me from a free cash flow after tax free cash flow how is that being affected by the new rates?

Yes. So if you look at our free cash flow what you still have to look at is that TRA payment because it's not in your P&L, because your only tax, they call it a 25% tax rate on lower income because of the tax deduction, but you’ll go to the cash flow statement and you'll see a payment that goes to the TRA holders albeit in the following year. So for example, in 2018 when we take a tax deduction that's only worth $0.25 on the dollar, I'll reduce my taxes that I pay throughout this year, because you have to make quarterly payments, I’ll pay less taxes to the IRS, so less cash taxes. And then in 2019 I'll pay 85% of those savings out to the TRA holders. But that will go to the cash flow statement and so you'll need to look in essence at free cash flow less the taxes paid under the tax benefit arrangement i.e. the TRA.

And that significant. It sounds good. At then end of day the net of all that, I don’t know if you want to give us a dollar number, but it sounds like its going to be pretty significant?

Well, the next of it I think is the point I made a minute ago and that is that in essence we’ll be paying basically about a 15% -- we’ll get about a 15% benefit off of the 25% tax rate year when you get right down to it. Because if you take my lower taxes to the government and then when you add in the 85% of the TRA, so you're in essence getting about 15% benefit off of your statutory tax rate.

That’s helpful. And then on the franchisee side, any thoughts there?

Yes. I think a couple of things is and obviously we’ll get this on a corporate basis as well where capital assets outside of the leaseholds you’ll get a 100% deduction if you are placed in service and so we’ll get that as a cooperate entity and then a franchisee whether there a LLC entity or a corporate entity will get immediate deduction of their of their CapEx assets less leasehold. And then in addition, there’s about 20% of their income that is if they are an LLC entity, that gets passed through at a zero tax rate subject to a limitation that 50% of their W-2 wages. So the there, if you go back and you think about what the Trump Tax Reform Act did, is it basically said, we’re going to incent you to invest and building assets and generating jobs, in essence that’s what I believe they are doing by this immediate write-off of an asset. But they are saying that you know that you -- what you gotta do is you got to be employing people. So if you employ people, you’re paying them wages, so we’re going to give you a zero tax on 20% of your income, but only if you have W-2 wages, and so they put that limitation of 50% of your W-2 wages in there. So that’s why I don’t know what percentage of these have LLC, I’d say a fairly high percentage do, particularly the smaller guys. So I think the net of it is there is going to be incentive to build stores, there’s going to be incentive to replace equipment, you know with the stores that are coming up to that need to have their re-equips done, and they’ll be able to save taxes at the end of the day by doing. So I -- net net to our business from a franchisee perspective, I think it’s positive you win-win.

That makes a lot of sense, I appreciate it. Good luck to you guys.

Thanks, thank you.

The next question comes from George Kelly with Imperial Capital.

Hi guys, just a couple of questions for you. So first, I wanted to follow up on the equipment, Chris [ph] you’ve talked about the enhanced equipment coming soon, the question is how important is it for you to internally develop parts of that? And will you own a lot of the enhanced software?

Yes, a lot of what – that’s kind of has a debt investment and the plumbing that Dorvin talked about, we want to be sure that a lot of what’s captured and learn from his internal us, so regardless of what manufacturer we use today or in five years, it’s our [Indiscernible] that we can built on to wherever we use in the future, not to mention it’s a proprietary to us to which is important.

Okay, and so that relates to the data, but also the sort of interaction that you tie to the media stuff you are offering and everything else?

Some of the, like the Netflix is Netflix, all right. That’s how we learn from what male or female or age range is, what they are doing, what they are using, how they are using it, what their duration is, so how we drive their experience going forward and stuff that we use, and we know that we can then have these cardio react and change accordingly. So some of that will be us, but naturally there’s a [Indiscernible] Netflix. It’s how we manipulate the -- data remind it that we change our experience in the future, not unlike the that people run to New Zealand or LA and how we change that going forward.

And work ago George is that you know with our plans from a technology perspective of having this infrastructure and plumbing in place so speak would be that we would then have the ability to just link up from an API perspective into if it’s another app. If it’s a loyalty company program we wanted to link into, you know things like that, that would be a plug-and-play so to speak. We’d had the ability to do that very easily and not time consuming.

Okay, thanks. And then just one last question from me, it seems like your expansion into where you’ve gone international in other countries it’s been successful. I know it’s early in places, but what do you think about Europe? I know, you know you’re not going to, whatever you can see there, what is the competitive dynamic if you could say anything on that, that would be great? Thank you.

Sure, yes. We’re really mostly focused on Latin America as far as to this point except for Canada. We’ve done, we’ve looked at Europe briefly. It seems like each country over there kind of has their low cost chain. There’s a basic fit, there’s a mix fit and each country kind of has their own gym, a pure gym in U.K. And I think in some of the instance, they are priced more of low price, that not necessarily our model meaning judgment free and so on and so forth, you [Indiscernible] for the first time but they are low cost. You know the big question is if you look at pure gym, it’s got a 180 stores in the U.K. it probably like to having 500 or 600 here in the states. So, the question is do we look to acquire or do we try to go in there one at a time and compete that way. You know I think we get there when they get decision, but again they might be more of a role of strategy in Europe just because there each country has got a pretty significant player.

Okay, thanks.

Thanks, George.

The last question is from Matthew Brooks with Macquarie. Matthew Brooks, your line is open.

And there are no further questions at this time. I will turn the call back over to the presenters.

Great, thank you. This is Chris, thanks everybody for joining us today for the fourth quarter call and year end. As you it was a great 2017, lot of good stuff happening here as a brand, with this technology front, granted it’s going to be a few years to fine tune and work through it , but it’s a I’d say in 25 years doing this, this is for me, it’s some really exciting times of how we look to leverage it just in the future which is something that to be able to know what people are actually doing in a club is pretty substantial so it’s look forward to working on this in the future and thanks for the call.

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