Good day. Thank you for standing by, and welcome to the Planet Fitness, Inc. Second Quarter 2021 Earnings Conference Call. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Ms. Stacey Caravella. The floor is yours.

Thank you, operator, and good afternoon, everyone. Speaking on today's call will be Planet Fitness' Chief Executive Officer, Chris Rondeau; and Chief Financial Officer, Tom Fitzgerald. We also have Dorvin Lively, President of Planet Fitness on the line, who will be available for questions during the Q&A session following the prepared remarks. Today's call is being webcast live and recorded for replay. Before I turn the call over to Chris, I would like to remind everyone that the language on forward-looking statements included in our earnings release also applies to our comments made during this call. Our release can be found on our website, investor.planetfitness.com, along with any reconciliation of non-GAAP financial measures mentioned on the call with their corresponding GAAP measures. Now I will turn the call over to Chris.

Thank you, Stacey, and thank you, everyone, for joining us today for Planet Fitness' Q2 Earnings Call. It's a testament to the strength of our brand that more than 13 million people remain committed members of Planet Fitness in the depth of a global pandemic when most of our gyms were temporarily closed. Our membership momentum continues to defy our historical seasonal patterns. And through July, we had more than 15 million members. We have regained approximately 75% of the members we lost from our peak in Q1 2020 to our low in Q4 2020. I have never seen this type of unseasonable membership growth in my nearly 30 years at Planet. And some of our larger franchisees, who have been with us for a good portion of that time, are also amazed at the positive trends that they're seeing across their portfolios. And today, with nearly all our stores reopened, existing members are reengaging with us and new members are joining at unprecedented rates, as they all realize the importance of fitness to their overall wellness. We're in the business of helping people feel better and get healthy, and that's what they're seeking right now. A community-based support system in a judgment-free environment, combined with an incredible membership value proposition. COVID hit the U.S. hard. The country came into the pandemic with more than 70% of adults over the age of 20 considered overweight or obese. One of the top risk factors for severe illness with COVID. In fact, life expectancy in America fell by 1.5 years in 2020 due to the pandemic and other residual impacts, the largest single-year decline since World War II. A Kaiser health study showed that people who regularly exercise had the best chance of beating COVID while people who were inactive did much…

Thanks, Chris, and good afternoon, everyone. Before I get into the review of our financials, I want to touch on a couple of key topics, starting with store expansion. During the quarter, we opened 24 new stores, bringing our total count to 2,170. As Chris said, we now expect to be at the top end of the 75 to 100 new store range for the year, reflecting the growing confidence of our franchisees to accelerate their development plans. It also reflects the strengthening of their balance sheets. Several franchisee groups are taking advantage of the increased supply of real estate. As a reminder, we don't typically go after the real estate from gyms that have closed. We look for big box retailers that occupy a 20,000 square foot space. We believe we're even more attractive to landlords given that no Planet Fitness locations permanently closed because of the pandemic, which strengthened our position as a tenant of choice. We're not necessarily seeing rents come down yet, but we are hearing from franchisees that landlords are sometimes offering more tenant improvement dollars. In general, we are seeing a more favorable real estate market and historically unseasonable membership trends, which have been the catalyst for some of our franchisees to accelerate their development pipelines. I would categorize franchisee sentiment as bullish as membership levels continue to climb. Next, I want to elaborate on Chris' comments about the state of our business last year in the second quarter. As previously mentioned on last quarter's call, we are not reporting a Q2 system-wide same-store sales growth number due to the fact that the majority of our stores were not billing in the prior year period. We assume we will resume reporting system-wide same-store sales in the third quarter. As a reminder, our same-store sales…

[Operator Instructions]. Your first question comes from the line of John Heinbockel from Guggenheim.

Chris, given what's happening with membership, what do you think about promotional activity that you're going to run between now and year-end? Is it -- are you more inclined to be more promotional because members would respond? Or do we -- can you be less because they're naturally coming back?

That's a good question. Yes. Right now, we have nothing outside of the norm from a marketing standpoint of scheduling. It looks pretty similar to last -- not last year, years in the past, so regular cadence. But what's really interesting is -- you kind of mentioned on your question is that what's more intriguing actually is the -- kind of the natural organic demand we're seeing on off-promo days. It's quite remarkable. Something I've -- we've never seen before. It's -- even off-promo days, the demand is just -- it's just there, regardless. So it's -- so we'll do a normal cadence of marketing, but the membership is extremely strong right now in all generations.

And maybe secondly, right, when you think about the Black Card pricing test, you're going about that pretty deliberately, I think, compared to the last 2 increases, right? Right? I think you tested it for a couple of months and then went with it. Is that because of COVID? Or is that because you're trying to figure out whether people will pay for the digital content and whether you want to include it in the Black Card pricing or do it separately?

I'd say a little bit of both. I mean it's been a pilot for that reason, so we can test whether it's -- is the $22.99 the right number? Is it more? Is it less? Is digital driving some acquisition, higher acquisition or not? Or at least maintaining the same Black Card percentage through the higher increase in rates? So a little bit of all that, John. But I think we'll always have the PF+ digital separate and apart from the Black Card bundle, I think for a few reasons. I think one we've seen that people are doing PF+ and then migrating into bricks and mortar and about 40% of the nonbricks-and-mortar members who have subscribed to the PF+ have gone on to join bricks and mortar after. So it's definitely kind of their dipping the toe in the water and then they're converting to a bricks and mortar after the fact, which is encouraging. It's really a whole other marketing vehicle for us. But it also sets a bar of perceived value so that when you get the bundle, it looks like an even better -- a better deal when it's bundled because you see the off-the-street price. So I think we'll always have both.

Next question is from the line of Randy Konik from Jefferies.

So I have a question -- one for Chris and one for Tom. I guess, Chris, in the press release, you talk about having confidence in meeting and possibly exceeding your long-term target of 4,000 locations in the United States. Can -- so can you elaborate a little bit more because I think you're getting more kind of bullish about the long-term unit potential, especially as your competitors are closing? So just more color there would be super helpful. And I guess, Tom, when I look at the EBITDA dollar guidance at the high end for the year, it implies an EBITDA margin of about 39%, I believe. And your prior peak in EBITDA margin, I believe, was in 2017 at 43%. So I just want to get some color on how we should be thinking about a little bit more into the medium term around where the EBITDA margins should really sit for the business and to know if the elevated SG&A in 2021 will subside in growth rate in 2022, i.e., we should see some EBITDA margin expansion next year. Just curious on that.

Sure. Thanks, Randy. This is Chris. Yes, the 4,000 potential, you probably heard of us talk in the past, even pre-COVID where we were -- most of our new unit sales for franchise development were in existing territories that we had already sold, call it years ago. And we might have sold it for 10 stores in a county, and we know a lot more now than we did back then. And franchisees are coming to us and we thought it holds 10, and now it holds 14 based on what we know today. So we were always already thinking that the 4,000 might be on the lower side of what the potential is now coming out of COVID. I think I -- we have quite a few things going on, on top of the 22% of the industry was shut down, which is amazing. Out of the 41,000 stores, I think 22% have shut down. And that does skew higher in the boutique arena as opposed to full-service gyms. It's about 14% of gyms have closed with about 27% of boutiques have closed, so it does skew higher boutiques. But nonetheless, this 22% of gyms are no longer in business. So you have that on top of -- I think what we're seeing here with the organic growth I mentioned is just -- it's just the demand, I think, coming out of COVID of people realizing -- and everything you see points to the fact through COVID that being overweight or out of shape or not taking care of your health is one of the contributing factors of hospitalization and unfortunate deaths. So I think people are really paying attention to their health and wellness more so coming out of this. So I think the industry has a huge tailwind coming out of this probably for many years ahead. I think it's -- I think we're going to see something that probably the industry hasn't seen before. So I think to your question, I think there's no doubt with gyms closed down, the strength of our model, the fact that we're going after casual first-timers. And if 40% of our joins still today have not gone to a gym in their life, then that holds true too for the second quarter. So we're really getting people off the couch for the first time, and it's mostly people who need the most help. And also, as we all know, in less fortunate neighborhoods, they're also more affected by COVID. And 25% of our gyms are in neighborhood that the government classified as low income. So we're definitely filling a need here. And I believe the 4,000 probably is going to light size. So I think once all the dust settles, it's possible we're going to have to study up on this to see where we think the potential is once the dust settles out of this.

And hey, Randy, on the P&L question, I think as we come through this with the different puts and takes by segment -- we talked about the Corporate Store segment being in the markets that were affected longer. So that certainly has an impact there. And also the franchise segment, our membership levels, while rebounding, are still -- have been rebounding more recently, where in 2019, they were kind of pretty strong right from the start. So it's a bit of a timing based on the subscription model. But we don't see anything kind of in the near term, longer term that structurally inhibits us from getting back to our 2019 EBITDA margin levels of $43 million. It is a little bit of kind of the depressed revenues in the near term and some of the changes across our 3 segments. I think when you think about SG&A, though, we do -- as Chris mentioned, we have made some incremental investments both in terms of people, systems and marketing to support our app back to our bricks with clicks strategy. I think in the main, we run the business with a pretty frugal mindset. But where we think there's an opportunity to invest in, we're going to do that. So I think it's a balance of being frugal where we should and also being thoughtful about the investments we need to make to really power up what we see as a big opportunity.

Next question is from Oliver Chen from Cowen.

Chris and Tom, it sounded like the membership trends were running better than you expected given your prepared remarks. What drove that upside relative to your expectations? And then second, on the bricks and clicks growth strategy, what are you most excited about? Why was now the right time for a Chief Digital Officer? And how might this impact the models and membership and/or churn? Just what generally is on the road map?

Sure. Thanks, Oliver. I want to share with you. On the growth in membership, what's really driving this today and what we typically see after -- earlier, after the month of April, honestly, mature stores. In a mature store, we typically not grow at all pretty much the rest of the year after the winter growth months. And in a lot of cases, all of our mature stores have actually declined slightly throughout the rest of the year. So what we're seeing now, which is something we've never seen before, is that the mature stores are growing in a time of year that they typically don't, really. So they add a lot of new members in the first quarter, call it, even through April. And then they'll either maintain or retract some over the rest of the year. But for the year, they're ahead. But they lose some throughout the rest of the year, we're not seeing that right now. We're actually seeing that even the mature stores is continuing to grow in months that they typically don't grow. So that's really what's driving that. So that organic demand in the sale periods are extremely strong, which is something they'll see -- I mean, in the month of June or July, to grow like that, it's just something we've never -- would have had. Usually, in this industry, we hold on for dear life in the summertime, honestly. And it's amazing to see something this time of the year. I think with the bricks and clicks -- and it's really still in its infancy, strained stage here, but -- I think as many years to follow. But -- and I've said this in the previous calls, it's -- if you think about this industry, we open our doors and we…

And lastly, usage. How have usage trended? And what are your expectations there and what you're seeing nationally and/or regionally?

Yes. We ended June with about 90% of 2019 levels, so almost back to normal. Many of the generations are back to pre-COVID. The boomers are still lagging some but they're trending in the right direction now, which is great. So we're almost back to what we normally see. And usage is about the same, too. Yes, usage is about the same, too. About -- average members usage is about 6x per month.

Next is from the line of Joe Altobello from Raymond James.

This is actually Adam on for Joe. I know you mentioned that the guidance assumes, I guess, nothing unexpected in the form of like shutdowns or mass mandates, et cetera, all that being quite unpredictable and dynamic. That said, have you seen any impact on membership so far? And I know it's early from Delta in recent weeks, either the pace of new joins or cancels and they have -- maybe too recent to even be able to pick up on those trends, but have you guys seen anything on that regard?

Yes -- no, we haven't been watching it closely as we did see some of that reaction back -- if you remember, if you recall last summer, when some of the things were spiking in August and so we saw some of the market react to that. But we're not seeing that with the Delta virus nationally or regionally.

Okay. That's encouraging. And one more, if I could. I believe New York City posted a rule requiring a proof of vaccination to enter gyms. Do you think that prospect might slow membership or store growth in any way in the near term?

I mean it could. We haven't seen it yet, but it is -- definitely a little bit of a hurdle here for people to work out. But a good question is how long it goes on for you, but we haven't seen it affect things yet. Out of the entire portfolio, we only have about 95 clubs that have masks all the time and about 31 clubs that are masked while -- not while exercising but while walking around. So it's not as broad as you might think, especially in the Northeast is all you hear.

Got it. Congrats on the encouraging membership trends.

Thank you.

Next is from Jonathan Komp. Please also state your company name.

It's Jon Komp from Baird. I want to follow up maybe a little bit of a bigger picture question, but as you look at the momentum and the membership you're seeing and the bullish town that you cited, how do you think about whether you're doing enough to stay ahead of some of your competition? I know you've cited some of the metrics for gyms that have closed, but there's other of your peers that are seeing similar trends. So maybe just -- do you think you're doing enough to stay ahead? And as you think about plans to stay ahead, how should you share those costs or those investments between Planet and your franchisees?

Yes, good question. We -- you may recall last -- tail end of last year, we actually put in some -- about $10 million of corporate marketing dollars just to reinforce the NAF and to kind of supercharge it to get it going. We don't see the need to do that just yet or right now. Not that we wouldn't. I definitely keep the optionality open there. But I don't see -- right now, with the way the membership trend is heading and how fast it's growing. And as you know, Jon, the NAF and the last spend, the national advertising fund, the local advertising is 9% of the membership dollars. So the faster that the membership increases, the quicker those dollars replenish and get larger. So right now, we see no reason to do that just yet. And there's no doubt that our excitement about the membership growth is definitely shared with the franchisees. The amount of text messages I get and the details about people saying they couldn't believe what they're seeing in the month of July or June. So that's really what -- we've said this all along, that's really what the franchisees need to see to get -- replenish their balance sheets, but also feel confident enough that it's time to start moving here. It's time to start negotiating leases and get clubs open. So -- which -- hence, why we went to the top, high range of our 75 to 100, which as this holds true -- put the Delta virus aside of us for a minute because who knows what happens, and I don't feel that it will go crazy on us. But the longer that holds true, there's no reason why we shouldn't see some really good growth here, unit-wise in the next 2 years here now that franchisees are out looking at real estate.

Yes, that's great. Maybe one follow-up then. As we think about trying to model out the equipment revenue in the years ahead, just thinking -- 2019, I think it was close to $250 million. Any broad stroke thoughts about how we should think about next year for that?

Yes, Jon, it's Tom. We're really not commenting on 2022 at this point, we'll do that on our year-end call. But I think once all these extensions have kind of run their course, we expect that sometime in 2022, we'll be back on kind of a normal rhythm, assuming there's no disruption with COVID. But sometime in 2022, back on a normal rhythm in terms of both store development and reequip cycles.

Next is from John Ivankoe from JPMorgan.

Maybe the increase if -- and/or the top end of the unit development range, to some extent, is the answer. But can you comment on how year 1 volumes are doing? I mean if you were to look at, for example, the stores that are open in the last 12 months, how they've been doing relative to previous years? And I'm especially interested on the 2021 openings, specifically how those have comped relative to the years past.

John, it's Tom. I'll start and maybe others will add. So I think in terms of if we want to clock back, the stores that opened last year were clearly soft to any historical norms. The stores that opened more in Q4 started to get closer to what we would normally expect. And the stores that we opened this year are above expectations when it comes to the first year -- first months in the first year of ramping. So very encouraging. And again, it's yet another kind of green signal that our franchisees are seeing that gets them very bullish.

And above expectations, I mean, would that mean that you're, for example, higher than your 2019 class? Or there's still some drag in the new unit volume?

Higher.

Next is from Simeon Siegel from BMO Capital Markets.

Congrats on the ongoing progress. Chris, sorry if I missed it. I think you touched on it, but can you speak to the composition of the new members? Has it changed versus pre-COVID? I think you mentioned the 40% first-timers. But can you maybe speak to the percent coming from competitive closures or reactivations from your own COVID-lapsed customers? And then, Tom, can you guys gave the average royalty rate? I think you normally give that. So sorry if I missed that.

Yes. Our rejoins are still running as they were in the first quarter. About 30% of our joins are rejoins. Those members of us in the past and have -- are coming back. And that typically runs about 20%, so it's quite a bit higher than we've seen in the years past. About 3% of the joins are coming from closed competition today. And you're right, about 40% of first-timers come to us from the couches essentially. And the Gen Z population is definitely still joining at a rate that we haven't seen ever in the past, quite a bit elevated. The Gen X and millennials are about the same. Boomers are slightly behind.

And yes, I mean, the royalty rate for the quarter was 6.3% versus 6.4% last year, and that's really just mix of stores that were open and billing last year compared to this year. No fundamental structural change or anything.

Perfect. And then any -- just any notable difference in economics for Mexico versus the U.S. as you roll that out?

No. Not really, no. The royalty rates and all that, the development of the 80 stores over 5 years, it's a good group out of Mexico and they partner with 1 of our largest here in U.S. franchisees, who has almost 100 locations. The -- you might have read the press release, but the group there has brought Forever 21, Old Navy as well to Mexico. So I think it will be a great partnership that has a lay of the land there.

Next question is from Peter Keith from Piper Sandler.

My congratulations as well on the continued progress. A quick question, I guess, for the revenue guide that you've provided of $530 million to $540 million, what would you have roughly for a year-end member count to get to that range?

Peter, it's Tom. We actually don't provide guidance on the member outlook. And as you know, things are still kind of fluid. But in a typical year, we've seen very unseasonable trends in membership this year, as Chris alluded to. And on our last call, it was a couple of data points. Now it's more data points as we've gone through the quarter and into July. And typically, a store would lose some members in the back half of the year. So we try to put our best thinking in taking an atypical year versus what typically happens and stir all that together to come up with how we guided revenue, but unfortunately, we don't provide membership outlook.

Okay. Fair enough. And my follow-up question is just on the pace of gym -- new gym openings. You've guided us to the high end of the range for 2021. I know you're not guiding for 2022, but I guess I'm interested in how the conversations with franchisees are evolving. I think in the past, you've talked about franchisees maybe wanted to get through that January selling season before making a go or no-go decisions on '22 openings. Is that changing based on this faster member recovery path that you're seeing? Could we see gyms open up sooner in '22 based on the comments you're getting?

Go ahead, Dorvin. Go ahead.

Yes, Peter, I think the way we look at it is when things shut down back over the last year and when it became apparent this is going to last for a while, as we've mentioned on some previous calls, the franchisees really shut down all their development activities, furloughing even some of the real estate folks on the team because they really weren't -- they didn't know when they'd get back into kind of building new stores. And as you -- as we progress throughout 2021, and quite frankly, coming into -- or 2020 and then coming into 2021, with all the concerns around what would happen after the holidays with respect to COVID-19 and then the vaccination rates were just starting, the vaccines were just becoming available. And it's -- obviously, it's still continuing to increase. Some states better than others in terms of the vaccination rates and people more likely to kind of get out and try to get about their daily lives. And quite frankly, as Chris said earlier, I think it's the reasons we're seeing some of the trends we're having today. So when you take all that into consideration, obviously, franchisees with their own portfolio of stores, they see what's going on with their business. And we obviously give them updates in terms of the system and the encouragement that not only we have a corporate, but they have in their own individual market or markets, they see these trends real time as well. And that's why, as Tom indicated in our guidance that we believe we'll be at the high end of that range that we had previously put out. So franchisees are clearly out there starting to do their deals again. The issue, obviously, is the time frame. Beginning to end in…

Next question is from Paul Golding from Macquarie.

My first question is if you have any update on Australia and the rollout there given the prolonged snap lockdowns that we've seen over the last several weeks.

Yes. Sure. So I think we just have a few stores there, but we get an update from our franchisees. And it is sort of on again, off again, it's tough. But I think, overall, when they're open, the trends that they see are still encouraging them and they're forging ahead with their development plans for the future.

So that 35-unit estimate over the next several years is still the target for now?

Yes.

Yes, yes. I think the -- just -- I think 4 of the 5 is closed right now. It should be open maybe by the end of the month, but it's a moving target.

Yes.

Got it. And then on PF+, were there any other engagement stats you could give with respect to number of workouts in a particular month that are unique, might be doing just to get a sense of the uptake there? And any sense -- I guess, as a follow-on to Oliver's question around is this intended to be top of funnel? Do you see it evolving into more of a stand-alone maybe with its own branding and marketing. How should we think about that in the model?

Yes. Sure. Yes. So still a lot of testing to be had here. We haven't released any subscription numbers yet, but I think there's a couple of ways to look at it, too, is that there's also a lot of app holders that aren't even PF+ subscribers. So to your comment about being top of funnel, you're exactly right. So there's a lot of people that engage with the app as unpaying members that convert to bricks and mortar and sometimes convert to PF+ first. So it's kind of tough to funnel and it really is a whole other marketing vehicle for us. But we have seen -- of the people that were subscribers to PF+ that were nonbricks-and-mortar members, is 40% now have converted to bricks and mortar. First quarter was 30% and the fourth quarter was 20%. So you'll see how people are engaging with PF+ and then becoming bricks-and-mortar members after the fact. And also, 70% of the members who have PF+ have also used bricks and mortar at the same time, so they're definitely engaged. And about 80% of the subscribers are actually current Planet Fitness members who have gone on to pay more for more. And the majority of those are Black Card members, which is -- hence, why we're doing the test with the bundle as well. See if we can get more price out of just all Black Card members, not just people who opt in for it. So a lot of learnings to be had. But I think it's just how we look at the top of funnel. Out of the -- out of all the app holders, about 9 -- about 12 million downloads, 9 million of them members, the other 3 million are nonmembers or lapsed members that still have the app that were able to engage with or engaging with the app. So a lot more to be had there and be learned from, but we do have a lot of people that just have the app that not even paid subscribers that we can convert as well, so still a lot more engagement to be had and to learn from.

Next question is from Chris O'Cull from Stifel.

Tom, I apologize if I missed this, but how much of the equipment revenue this quarter was reequipped? And how should we think about the ramp in replacement equipment revenue for the balance of the year?

Yes. Hey, Chris, sure thing. So in Q2, it was 60% of revenue, brings the first half to about 45% of total equipment revenue. And so we said that for the full year, we're staying with what we said on the last call, which is the reequips would constitute about 50% of our full year equipment revenue.

Okay. That's helpful. And then is the net off-season growth you're seeing from either -- is it from higher gross sign-ups or lower cancellations or both? And I'm just curious if you've seen retention change at all from the May, June promos after the initial month compared to maybe similar type of promos that you ran prior to COVID.

Yes, it's both, actually. And we're just seeing -- it's almost like the year was upside down. Our May, June was 20x, June of 2019. And our May expiration on our sale was the highest net member growth day even outside of January this year. So definitely, demand is upside down and people are coming in higher now than they did in the first quarter. Certainly, last year, that's for sure. So yes, I think, it's just people are out and about and resurging the business is just totally different than what we've ever seen before. So I think there's a lot of factors, gym closings, people paying more attention to their health and wellness. And I think it's -- time will tell after -- if anything happens crazy in the world with the Delta variant, but I think it could be a long-term trend that we see for the years ahead.

Last question is from Alex Perry from Bank of America.

Chris, I think in the prepared remarks, you made a comment that it's hard to see whether those unseasonal joins will continue. Maybe could you talk through the cancellation rate of new joins within the first few months versus normalized levels, especially with some of the no-commitment promos you guys have been running.

Yes. We haven't seen any change in any kind of retention or attrition or increased attrition without any kind of commitments or anything like that. So nothing there has changed. So that's all good news. And one of the things we've seen in a lot of consumer studies is the no-commitment messaging is almost more important than the actual enrollment fee discount as people just want to know that if they can get out, they can. And a lot of our members -- 40% have not gone to gym in their life, they're already thinking about how do I cancel this thing before I join. And it's unfortunate, but that's kind of the -- this industry has kind of been notoriously bad for cancellation policies, and we want to make it -- breaking all those barriers. So the good news is we haven't seen any increased attrition with those sort of offers.

That ends our question-and-answer session. I'll turn the call back over to the presenters for closing remarks.

Good. Thank you, operator. Thank you, everyone, for joining us today. It's -- as you can tell in our tone, we're -- we couldn't be more excited with the momentum the business has, something that I've never seen in my almost 30 years here. And excited as well that not only our staff here, but our franchisees feel the same sentiment. And I think this is what we are hoping that was going to happen, and quite frankly, higher than we expected it would be. We didn't know when it was going to come back that -- the psyche of the customer, they just want to get back and get back to health and fitness and now more than ever. So all good news. And I look forward to bolster some of the franchisees and getting back to development growth and getting more people off the couch. So thank you all.

That concludes today's conference call. Thank you all for participating. You may now disconnect.