Good afternoon. My name is Gabriel, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Planet Fitness Fourth Quarter 2018 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. Mr. Brendon Frey, you may begin your conference.

Thank you for joining us today to discuss Planet Fitness’ fourth quarter 2018 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 fourth quarter 2018 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 welcome to Planet Fitness’ Q4 earnings call. 2018 was a banner year for Planet Fitness and I’m extremely pleased with the strong results we delivered. We round out 2018 with a fantastic fourth quarter, highlighted by double-digit same-store sales increase of 10.1% for a 3-year stock comp of 32.2%. This also marks our 40th straight quarter of posting positive same-store sales comps, which is truly incredible. Adjusted net income per diluted share grew 42% to $0.34 compared with $0.24 in the prior year period. And for the quarter, net member growth contributed to over 70% of the increases in system-wide same-store sales. Reinforcing that our differentiated in the form of Planet Fitness continues to resonate with consumers. For the full-year comps increased 10.2% for the second year in a row. And we added approximately 1.9 million net new members to end 2018 with approximately 12.5 million member system-wide. What’s remarkable about these figures is that we believe our affordable and non-intimidating approach to business is expanding the overall health and fitness market evidenced by the fact that 35% of our new member joined identify as first time gym members. Given that tremendous success over the past several years, we’re confident there is still a long runway to growth into the future. We are continuing to thoughtfully and aggressively expand our presence and we still have the opportunity to more than double our domestic store footprint. In 2018, we opened 230 new stores system-wide, which included selling and placing equipment in a record 228 new stores. This growth is led by our passionate and proven well-capitalized franchises who continue to reinvest in their businesses by opening stores in both new and existing markets. Of the 230 new store openings in 2018, 226 were franchise stores and 4…

Thanks, Chris, and good afternoon, everyone. I will begin by reviewing the details of our fourth-quarter results, highlights from 2018 and then discuss our full-year 2019 outlook. For the fourth quarter of 2018, total revenue increased 30.1% to a $174.4 million from $134 million in the prior year period. Total system-wide same-store sales increased 10.1%. From a segment perspective, franchise same-store sales increased 10.1% and our corporate same-store sales increased 9%. Approximately 70% of our Q4 comps increase was driven by net member growth with the balance being rate growth. The rate growth was driven by 30 basis point increase in our Black Card penetration to 60.1% compared to last year, combined with a $2 increase in Black Card pricing for new joins, that was put in place system-wide on October 1, 2017. During the quarter, the increased Black Card pricing drove approximately 300 basis points of the increase in same-store sales. Our franchise segment revenue, which beginning in 2018 now includes national advertising fund revenue with $56.6 million, an increase of 41.4% from $40 million in the prior year period. Let me break down the drivers for the quarter. Royalty revenue was $38.5 million, which consists of royalties on monthly membership dues and annual membership fees. This compares to royalty revenue of $27.1 million in the same quarter of last year, an increase of 41.8%. This year-over-year increase had three drivers. First, we have 210 more franchise stores since the fourth quarter of last year. Second, as I mentioned our franchisee owned same-store sales increased by 10.1% and then third, higher overall average royalty rate. For the fourth quarter the average royalty rate was 5.8%, up from 4.8% in the same period last year driven by more stores at higher royalty rates including stores that amended their existing franchise…

Thank you. [Operator Instructions] Your first question comes from the line of Oliver Chen of Cowen. Your line is open.

Thank you very much. Congratulations. Given the momentum that you’ve seen, how are you thinking about unit growth and the new unit growth opportunity, particularly as you see such great real estate availability, and also there are some clubs that are probably very saturated in terms of number of members. I would just love your thoughts there. And Chris, you mentioned membership segmentation in customer journey mapping as we align that with our financial models. How do you think that will play into the comp-store sales or the shrink in terms of turnover, that would be great to get your views. Thank you.

Great. Oliver, it's Dorvin. I will take the first part of that and Chris can add to it and then take the segmentation question. I'd say that as we discussed back on the last two to three quarterly conference calls, the trends from a real estate perspective continue to be in our favor as our scale gets bigger, as we get more stores in markets, the presence of the brand, the landlords that are looking at either vacant real estate, we know them, we know the major -- the major landlords regionally end markets, we know the national big landlords, we meet with them regularly and they are looking forward to fill those -- to fill the boxes and then including stores are going to be coming off lease, whether it's in the next 12, 24, 36 months and we've also said that we continue to talk to some of the major retailers that are looking to downsize their real estate some of their boxes. I know we’ve talked about whether we would be close [ph] or someone else like that. And I think that we are the perfect tenant for that, because we do drive the traffic and we drive the traffic early in the week as opposed to the end of the week when maybe some of the other tenants are driving traffic to their centers. So I'd say, if you look -- our results for the quarter came in just slightly ahead of where we had guided the Street to at the end of Q3 based on a full-year and a pretty healthy increase over 2018. And then our guidance reflects very similar number of new units in 2019 as well. So we continue to see really good favorability on the real estate front. And then as Chris made some comments on his first part, our franchisees now are with their size and scale and sophistication are willing to put the capital work when those opportunities come up. And so in the past, maybe they are only going to do three or four a year, where now a real estate comes up, they might do 8 or 10 a year. And so that's what happens when you’ve franchisees that are sophisticated with market planning and have the talent in place to keep their pipeline in development mode. So I guess I'd summarize by saying I think real estate trends are as good as ever been and we are a tenant that a lot of these guys look to. And we see as I made in my prepared remarks, we see good trends coming on into 2019 as well.

Hey, Oliver, it's Chris. With the customer member segment study as well as the journey mapping, it's still too early to tell we just wrapped it up, but for the first time now that we’ve done this now to figure out the segments that our members fall in, what’s the right way to communicate with them, connect with them and the general preference of how we interact with them as well as the customer journey mapping, what each of those segments really like and what’s their experiences that they really want from our brand. So, it's still early to tell, but I can only imagine when we move the needle as we learn how to communicate with these people better.

Okay, very helpful. Just last question. One question we get is your approach to Black Card pricing. You’re really offering a compelling value with Black Card pricing, but what’s your framework for thinking about future potential increases? And Dorvin, as we model the comp in the year ahead, do you expect that ratio of pricing versus member growth to be 70-30 just would love parameters around that. Thank you.

So October of '17 was when we moved it last and that was that $2 increase we’ve talked about. That was the first time we've moved it in essentially forever. So -- and the reason for that one was reciprocity, which we had backed then by 1,500 stores, now we're north of 1,700, so it does bag the question that as we get more stores kind of reciprocity by itself push more price and I think there's some opportunity there for sure as we continue to open more stores. On top of that, as we look at the [indiscernible] experience in the technology, we are rolling out with the new app that’s coming out in second quarter and more functionality for the members, whereas content inside and outside the club maybe some nutrition components in the future. Just more options for them and services to Black Card option could also push price or acquisition or both. So that’s definitely top of mind for us. So I do think there's room probably in the future for movement for sure.

Yes, I think on comps, Oliver, we said in our guidance, high single-digits. I think the pricing impact in '19 ought to be in the -- call it 150 bps range, that we will continue -- we’ve continued to see some of the benefit that we obviously got in 2018. But I'd say, 150 is probably a kind of a good target as to the impact on same-store sales this year.

Thank you very much. Best regards. Congrats.

Thank you.

Thanks, Oliver.

Your next question comes from the line of Jonathan Komp of Baird. Your line is open.

Yes, hi. Thank you. First question, obviously, the comps look good at the system level, but the Company comps acceleration of plus 9 stands out. It might be the highest, I can recall in the model. So any more color on what’s driving the sequential improvement there for the Company comps?

Yes, John it's -- as we talk about the maturity of the stores that go in comp in the comp base, obviously, we’ve a smaller number of total stores. But we had four new stores that came into comp in Q4 that opened up in the previous year. So that's a good piece of that, but I will say is, if you can go back and look at Q1, Q2, Q3 comps, yes, there's been continued momentum in our kind of corporate fleet base, but a good pickup in Q4 with respect to the four new stores coming in.

Okay. Understood. And then, Dorvin, I want to follow-up on the unit outlook for the year. I can't ever recall a year that’s been front weighted in terms of the openings. So I wanted to maybe dig in a little bit more and understand why you see that as being the case this year. And is there any opportunity, I know there's a fairly short lead time, but as we look to the second half openings, is there any potential to sustain some of the momentum you are projecting in the first half?

Yes, it's -- obviously we got line of sight into the nearer term. I’ve always told you guys that roughly speaking, getting on the lease and negotiating lease, if you take kind of the ups and downs of spectrum out is probably five, six month time period. It depends on turnover from the landlord, but probably a good timeframe is about three months, about 90 days, give or take on, if you get a good plain vanilla box and the town's [ph] not too restrictive on permitting, etcetera. So what we’ve always said is we’ve a pretty good line of sight into call it the next four to six months, knowing there will be some fallout, there will be some delays and then there could even be some that that might hit the stride and come in on the shorter end of the timeline. But I think I will go back to part of my question that -- my answer to the question earlier is that, we’ve got enough of large franchisee groups today where it's not just the franchisee that’s running the store, running the back office, doing real estate deals etcetera. And so, a lot of these franchisees are extremely talented management team and have built out various functions, including the real estate development teams. So -- and as you know, Jon, a lot of the bigger guys have multiple ADAs maybe across different states. So their level of really working their pipelines and the private equity guys that got in there, they are not looking to slow down growth, and so they are obviously working with their teams as well. So, yes, all these larger groups that are working the development side and sometimes it's just pure timing. It's -- you are working on two or three sites and you hope one or two come together and three or four come together at the same time and maybe a market etcetera. So, we got good line of sight into the front end of the pipeline here and the franchisees are very excited and continue to invest their cash flow in the business, lesser into the back end. But when you’ve franchisees that are building a higher percentage of their required number of development stores in the first half of the year, it depends on how they kind of fill out the back-end pipeline as well, but we feel good about that, call it 225 that we mentioned in our guidance. But we see that being more front-end loaded than back-end and especially Q1, which is -- it just shows you that the trends are good and taking advantage of the real estate with our great development franchisees out there.

Okay, excellent. And then maybe last one, just for Chris. I wanted to ask specifically about some of the marketing spend, opportunities that you see. And I guess, first of all, is there anymore initiative to make sure that the local advertising requirements are being spent by the franchisees? And then, secondly, any updated thoughts on, if you might go to the franchisees and look at that national versus local mix at some point?

Yes, we’ve initiated with what we call the spin tracker, I think was earlier last year, which we are now getting the spends from the franchisee. So we now have a visibility on their spending at the club level. So that’s good that we know now what they're doing. So -- but I think to that question, we get that a lot is, if and when we will be able to say, okay, it's at 9% in total, right, 2% national, 10% local. Could we actually flip that in the future and I think we will get economies of scale if we were to do that in the future. I think as we continue to develop stores here in the Northeast, we were almost 6% of the population of the member, but we are lot less penetrated at West. So I think as we get more coverage and more national advertiser can play a bigger part, I think then you're right, I think you start flipping some of that over for sure.

Okay, great. Thank you very much.

Thanks, Jon.

Thanks, Jon.

Your next question comes from the line of John Heinbockel from Guggenheim Securities. Your line is open.

So two things. If you think about the 2019 marketing spend, right, which will be north of $200 million. What will be different this year if anything -- one or two things compared to a year-ago in terms of how you spend that money different focuses, etcetera. And then, Chris, you said, potentially expand the Teen Summer event. Is there anything holding that up or is it, it's just a question of how broadly you want to expand it?

Not too much really holding up, just make sure all our ducks [ph] in a row. I want to see Summer Challenge with all the franchisees. So we’ve all the right levers to push so that we can get the big splash we are intending. And to your first part of the question. Again, that’s another initiative that will be part of that marketing spend increases, how do we launch that, that Teen Summer challenge. If you extrapolate that nationwide compared to result from New Hampshire, it should be over 1 million teams that would be active over the summer. So it is definitely a good way to build a profanity, as well as introduce the younger generation to fitness and wellness hopefully for the first time. More digital this year is also -- we do more digital each year. And I think that in the IPO we've talking about, we really starting to do digitally at all, back 2.5 years, and 3.5 years ago now. So definitely more digital spend as far as the market is concerned.

Secondly, if you think about what we’ve talked about the non-club right Black Card opportunity for a long time. Are you starting to get with 12.5 million members more interest from other potential partners, right? Who see that as big enough, where it's worth their while and yours?

Yes. So we run in Roger Chacko, who is a Chief Commercial Officer last summer, which is a much broader role which is Chief Marketing Officer. So that's part of his plan, and we actually have someone in charge to work under him, that is in charge of just partnerships. Another one on top of like we did the 800Flowers done for couple of years. The Audible -- Amazon's Audible, we did it and recently we just launched with the Black Card members, where they get discount vacations through ILG, the Interval Group. So, again, leveraging our size and scale to gain partnerships to give more value to that Black Card membership, or even all memberships for that matter.

Okay. Thank you.

Thank you, John.

Your next question comes from the line of John Ivankoe of JPMorgan. Your line is open.

Hi. Thank you. Firstly, just like a clarification, if I may. Are the legacy Black Card pricing members or Black Card members still locked in at that 1999 price point or is there some flexibility that's being taken market-by-market?

Yes, they're grandfathered, we let them stay at their older rate. The one thought there also was which we haven't seen an increase just yet, but does that help some stickiness with the older generation members in a sense that, if they cancel that membership, they never get that rate back. So we haven't seen any real significant change there in the retention of those people, yes, but they are grandfathered in the system when they joined.

And I think the percentage of Black Card, it is ticking up maybe a little bit, but year-over-year, I think it's within a 100 basis points or so. Are you surprised at this point in the fourth quarter of '18, that the contribution of comp from Black Card pricing is, I mean, if I heard it correctly, is still up 300 basis points, because that would assume some very large churn in the Black Card Member base year-over-year, if the legacy members are still locked in that that $19.99 original price point?

Yes, John, it's Dorvin. You are right. That was the impact in Q3. I don't think it necessarily surprises us. I mean it's close to what we said back at the beginning of the year that we thought the impact could be and we’ve reported that each quarter. And then I mentioned, it's going to be call it 150 bps in 2019. Our attrition with respect to the two different memberships really hasn't changed in terms of that mix, in the last several years. When you go back and look at the data, because we get the question a lot, there's someone that’s paying the higher price churn at a faster rate, and then the $10 price point, that -- it's not. And any seasonality is pretty consistent across the memberships, but it's a matter of canceling out some members at the $19.99 and picking up slightly more the members at the $21.99. I mean, at the end of the day, that’s the math, but -- no, it really didn't surprise us.

Okay. And so that leads me into the next question and maybe the most important one is what your customer segmentation study is telling you about that churn? It did seem that one point, we were talking about maybe churn that was ticking down, but as you kind of have gone back and understanding at a more data driven level versus what you maybe have believed to be true, a little bit more anecdotally, what can the brand do at this point in terms of reducing churn? I mean at this point, and I guess, for a gym club membership like this, I mean, what do you think the optimal level of churn is, that you would like to achieve over time?

I think the thing that I looked at which is interesting to me is, when we launched the premium consoles, for example, with the manufacturers and they had the Netflix, and the Hulu's and the Spotify's, it was an assumption that the members would have wanted that. And the interesting thing that we found is, they wanted more education around fitness and wellness and nutrition. And that they want to be able to collect their data back on their app, that -- which is kind of the -- [indiscernible] role we're going down to begin with that, they want to leave the gym and have their data there to be able to compare how they did last week or last month. And also challenges with their fellow and friend, Planet Fitness members to see how they stack up against their friends. So it's interesting that they really wanted more fitness component and not distraction, I guess is the way to put it from the fitness or exercise they were doing. So I think that was not what I --- what we expected to see. So now how we act on that, which you think if that's what they're into that should only help with their results longer term as opposed to watching TV. So that was probably good learnings.

And in terms of where you think churn level could be. I mean, are there any really distinct differences regionally, for example, that’s different in churn or maybe even on DMA or city basis where there really are differences or is that something that's a more common level across the system?

It's very consistent across the system. There may be minor outliers, John, but you can go back and look at our business for several years and the trends are pretty consistent. I think it's because we are going after the 80% of the population. And I mean, people work out about the same number of times they’ve always worked out and we’ve people that will take off couple of weeks or take off a month and then they come back. So -- and we’ve talked about that publicly in the past that it's affordable and it allows for people to be able to do that and we are working out is not the highest priority amongst a lot of our members. And so it's family, it's kids activities and things like that, but we haven't seen a regional based issue, and we haven't seen anything in terms of any major trends looking back over the last three years or so.

Thank you.

Thanks, John.

Thanks, John.

Your next question comes from the line of Peter Keith of Piper Jaffray. Your line is open. Peter Keith of Piper Jaffray. Your line is open.

Sorry about that. Thanks for taking my question and congrats on the great results, guys.

Thanks, Peter.

I wanted to follow-up on some of the technology oriented questions. Chris, could you help us understand maybe what the roadmap looks like with the app integration you are launching Version 1.0. Do we’ve to wait, maybe a full-year until 2.0 and we are going to wait a full-year to see how that plays out and see if you expand it. And following on it, is it just Black Card members that will be able to use the app and use the fitness collection data? Thank you.

Sure. Yes, so 1.0 will not necessarily have that, but it gives us the opportunity to pipe in all that data. Our current app is a off the shelf, third-party app product that doesn't give us any flexibility, which is the reason why we had to move to a new platform here. But it really does give us the platform to be able to pipe in, anything we want to do. And I think that back to that customer segmentations and what they want data for and they want to track what they did and how they recommend with you tomorrow as well as a challenge their friends. So I think it's definitely what the app will do in the future as well, connect with the cardiovascular equipment and wearable. So right now, unlike your wearable that tracks steps, you get off a treadmill, it doesn't go anywhere it with anybody, it doesn't follow -- following, where it just goes away and disappear. So in time as the premium consoles and all that data collection works and we can pipe that back to the member makes lot of sense. It's not going to be first quarter, it will probably 2.0 or 3.0, but it gives us the ability. As well I think content, which is important in that education piece that we learned that they want to learn and they want content. So how we can pipe in that whether it's through a third-party partnership with a different brand, that's pipe in into them, so they get better experience whether it's in the club or outside the club. And that will be also interesting for us to see is that some of these equipments are three months old, because they're not working out because they’re doing something at home or running outside. So I think that's all good for us to be able to watch and monitored, so that we are providing value to the member and hopefully drive retention longer term.

Okay. Thank you. Just make sure I understand or just to maybe put a little timing around it. The data collection for Version 2.0 or 3.0, do you see that as a 2019 event? And again, are you envisioning that would just before Black Card members, or is this for all members?

Yes, Black Card members probably to begin with, but again, if we can show better retention, you can make a case that you open it up to everybody if it pushes enough, it's not just price that's actually driving [indiscernible] 10 years, but I would say 2019, I see longer term next two, three years. It depends on where it's coming from, because the cardio components stay longer, because it's only in 15 clubs today and it's going to be retrofitted over time. So -- but as far as wearable data is concerned or other app collection, the pipes into it could be sooner than the cardio piece.

Okay. And maybe, then it's a good segue to the cardio piece on the new technology equipment. So it's 15 gyms right now. Is there a thought to then opening that up to all new gyms or allowing those that want to replace it at a faster rate begin to get some of that more advanced equipment?

Yes, we are going to launch a next section, the next group of pilot clubs this year, later this year with what we learned about all that data collection and challenges and stuff and get rid of -- or spleen up against some of the other apps and Facebook and other things where they run it, that weren't getting any traction. So we are going to retool the interface that is on the cardio today and the new clubs going forward to see how that interaction is with the numbers. And then after that depending how that plays out would be, how do we start rolling it out to the system and/or retrofitting to the current cardio that we are selling today can be retrofitted. So you don't get to replace old treadmill, you just replace a screen. So that’s better -- it's what’s waiting for the re-equip timing.

Okay. Thank you very much and good luck.

Thanks, Peter.

Thanks, Peter.

Your last question comes from the line of Dave King of Roth Capital. Your line is open.

Thanks. Good afternoon guys. First on the high single-digit comp guidance. How should we think about the comp or just the corporate owned piece, if you can. And then with the growth in corporate owned Greenfields and acquired locations, what do you see as the optimum mix of system-wide revenue longer term?

What was the last part of your question, Dave?

With the growth in the corporate owned Greenfields and the acquired locations that you had over the last year or so, what do you see as the optimal mix of that longer term?

Got it, got it. We don’t break out our guidance in terms of breakdown between franchise and corporate stores. I will go back to kind of the earlier question and then historically, our corporate same-store sales has always been lower because we have a much more mature fleet of stores. We opened four last year, it will be probably in that four or five this year. So a lot of it depends on timing and just back to my earlier comment on real estate and when deals come to fruition, but kind of in that five range. I think, five to six, four to six a year is probably where we would be at least, let's just say in the next call it, two, three years or so. We will -- we have the opportunity on a roll for when any of the transactions come about, and we usually look at it strategically does it fit within our existing current fleet synergies, geographical synergies etcetera. And I think if you go back and look what we've done, all the transactions we've done fit within that. So I don't know -- I doubt that we would get to a point where it's going to be a meaningful percentage change in total development, whether it's our own corporate store development or even an acquisition here or there just because our franchisees are building at such a faster rate than we are. So we are predominantly a franchise model. I think we will continue to be there in the near-term, albeit our corporate store segment is a significant driver of both our revenues and profits and a very important piece of our business, but it's, we don't look to really accelerate a faster growth of that than we’ve had in the past.

Understood. I guess that last comment is the reason for the question. Just, it feels like with your opening more corporate owned stores even though it's small as a piece of the overall development, it feels like that could be a material driver of revenue in terms of comps. The fact that you can do a 9% comp there versus mid single digits historically, it feels like that could be driver going forward. But in terms of Chris, just question for you real quick. In terms of the New Year's promotion, any effect on sign ups versus prior years anything to share in terms of significant success of that this year, anything to share on California versus the New Year piece? Thanks.

Yes, nothing really is surprising. I mean, constantly it's a big splash for us. I mean it's not really a call to action, per se, so it's hard to really directly tie membership sales that night to the New Year's Eve, but we continually to remain number one in unaided brand awareness and that started when we first did New Year's Eve and it's maintained at status of the sense. So I think it's a great splash for us to get all the highlight. I mean it's so many viewers, it blows the Super Bowl away and it's all us for four hours. So it's a great thing that we plan on doing hopefully for many years to come.

Okay. Sounds great. Thanks for taking my question. Good luck with '19.

Thanks, Dave.

Thank you.

We have no further questions at this time. I will now turn the conference back over to the presenters.

Well, thank you everybody for joining us today for our Q4 and 2018 year-end earnings. We had a great year, looking forward to continue this momentum in 2019 and a lot of good initiatives and learnings today in this past year from a customer segmentation member journey and technology that’s coming up in our app launch. So lot of good stuff happening and looking forward to 2019 in the first quarter earnings. Thank you.

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