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Edited Transcript of PLNT earnings conference call or presentation 5-May-20 8:30pm GMT

Q1 2020 Planet Fitness Inc Earnings Call

Newington May 12, 2020 (Thomson StreetEvents) -- Edited Transcript of Planet Fitness Inc earnings conference call or presentation Tuesday, May 5, 2020 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher J. Rondeau

Planet Fitness, Inc. - CEO & Director

* Dorvin Donald Lively

Planet Fitness, Inc. - President

* Thomas J. Fitzgerald

Planet Fitness, Inc. - CFO

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Conference Call Participants

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* Alexander Rocco Maroccia

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* John Edward Heinbockel

Guggenheim Securities, LLC, Research Division - Analyst

* John William Ivankoe

JP Morgan Chase & Co, Research Division - Senior Restaurant Analyst

* Jonathan Robert Komp

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Joseph Nicholas Altobello

Raymond James & Associates, Inc., Research Division - MD & Senior Analyst

* Linda Ann Bolton-Weiser

D.A. Davidson & Co., Research Division - Senior Research Analyst

* Oliver Chen

Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst

* Paul Alexander Golding

Macquarie Research - Analyst

* Peter Jacob Keith

Piper Sandler & Co., Research Division - Director & Senior Research Analyst

* Rafe Jason Jadrosich

BofA Merrill Lynch, Research Division - Associate

* Randal J. Konik

Jefferies LLC, Research Division - Equity Analyst

* Sharon Zackfia

William Blair & Company L.L.C., Research Division - Partner & Group Head of Consumer

* Simeon Avram Siegel

BMO Capital Markets Equity Research - Analyst

* Brendon Frey

ICR, LLC - MD

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Presentation

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Operator [1]

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Good afternoon. My name is Jason, and I will be your conference operator today. At this time, I would like to welcome everyone to the Planet Fitness First Quarter 2020 Earnings Call. (Operator Instructions)

I would now like to turn the call over to your speaker today, Brendon Frey. Thank you. Please go ahead, sir.

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Brendon Frey, ICR, LLC - MD [2]

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Thank you for joining us today to discuss Planet Fitness' first quarter 2020 earnings results. On today's call are Chris Rondeau, Chief Executive Officer; Dorvin Lively, President; and Tom Fitzgerald, Chief Financial Officer. Following their prepared remarks, we will open the call up for questions.

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 included in our first quarter 2020 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?

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Christopher J. Rondeau, Planet Fitness, Inc. - CEO & Director [3]

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Thank you, Brendon, and thank you, everyone, for joining us today. Before we dive into our Q1 results, I want to address the unprecedented COVID-19 situation. First and foremost, our thoughts are with the family members of those who have lost loved ones as a result of the pandemic and health care providers, first responders and essential workers on the front lines supporting our communities.

COVID-19 has presented challenging realities for all businesses. On March 17, we have closed all of our 99 corporate stores, and encouraged our franchisees to do the same. By March 22, all of our more than 2,000 locations were closed. Throughout this evolving situation, we have been in constant communication with our franchisees and our team members and have also worked to keep our members informed and engaged with our brand. Upon the closures of our stores in March, all members' accounts were frozen, and we communicated to them that they would not be charged any fees while our stores are closed. This includes monthly membership dues and annual fees.

As a leader in the industry, we and our franchisees believe it is critical that Planet Fitness put our members' interests first and foremost. We believe this message has been extremely well received and may have also helped minimize cancellation requests. In fact, we did not see any material change in our member count due to cancels in the second half of March during the initial closure period.

Our corporate headquarters' employees continue to work remotely to support the business and our franchisees during this time. Given stay-at-home orders still in place in many states, new store developments and equipment placements are on hold at this time.

Our teams and franchisees have been hard at work preparing for our -- reopening of our prospective stores, including developing a COVID-19 operational playbook to address things like enhanced sanitization policies, procedures, reduced contact between team members and members and physical distancing, and more. As of May 1, we began a thoughtful phase reopening approach and opened 3 stores, 2 in Georgia and 1 in Utah, in accordance with local official guidelines and with the safety of our teams and members our top priority. We will continue to monitor these guidelines and reopen additional stores throughout the system, when we believe we can safely do so.

In these first few clubs we have reopened, we are executing our updated operational procedures outlined in our COVID-19 operations playbook. We believe this is an important first step and will allow us to obtain key learnings in advance of a broader reopening rollout.

Now on to our Q1 results. 2020 got off to a strong start. Tom will go over it in more detail on how COVID-19 impacts our first quarter results, but I'm certainly pleased with our system-wide same-store sales increase of 9.8%, on top of a 10.2% increase in a year ago period. In total, we opened 39 new stores in the first 3 months of the year, ended the first quarter with 15.5 million members and 2,039 stores system-wide.

To jump-start 2020, Planet Fitness was the presenting sponsor of Times Square's iconic New Year's Eve celebration once again, which continues to be a great opportunity for us to put brand front and center on a global stage at the time when consumers are thinking about health and wellness and joining a gym. Our partnership with Biggest Loser also kicked off in January. This platform allowed us to reach captive viewers, who are interested in health and fitness and maybe looking to make a lifestyle change, in brand messaging that reinforces how Planet Fitness is different than traditional gyms.

As part of our marketing mix, in Q1, we leaned heavily into TV advertising, debuting a new creative, which we believe resonated with first timers and casual gym goers. As I said, new member sign-ups were strong in the first quarter. It was business as usual with both usage and new member sign-ups' perspective right up until the store started to close due to COVID-19 in mid-March.

Based on the enhancements we've made on our marketing mix, messaging and creative and the strong new join trend in the first quarter leading up to the store closures in mid-March, we are confident that we have the right strategy in place for the future to continue to optimize overall effectiveness in results.

In an effort to keep our members active and engaged with our brand while at home, we've accelerated our number of digital initiatives, including our United We Move marketing campaign. This includes daily live workouts with Facebook that are 20 minutes or less featuring Planet Fitness trainers and special celebrity guests, such as New England Patriots football player, Julian Edelman; Biggest Loser Trainer, Erica Lugo; and Famous Actor and Director, Jerry O'Connell. From the engagement and brand perspective, these workouts have been extremely successful, averaging more than 100,000 views per workout and 4.5 billion media impressions.

We've also encouraged people to download the Planet Fitness app for access to more than 500 exercises that can be done at home, with minimal or no equipment. As a result, we've seen a 173% increase in average daily workout on our mobile app.

Finally, last month, we announced a new partnership with iFit, a leader in streaming home workouts and interactive connected fitness technology, to further accelerate our digital offering. The first step in our collaboration was a series of new streaming workouts available to anyone exclusively on the Planet Fitness app, to be used with minimal or no equipment. The workouts are available for free to both Planet Fitness members and nonmembers. To span a broad range of fitness and wellness categories, including at-home cardio, at-home strength training, stretching and more. We continue to explore possibilities for expanding our partnership with iFit in the future in order to deliver more value to our members.

Looking ahead, our goal is to ensure that we come out of the COVID-19 situation with the same-store count and member count we had when we began. I could not be more proud of the way our team members and franchisees have united to muscle through this together and support one another during this time. Our current focus is on creating and maintaining a healthy, safe environment inside our stores for our team and our members, for when they reopen.

An example, which is a few steps we have taken to ensure this include: providing personal protective equipment for all employees; increased cleaning stations throughout our stores; enabling members to use our cardio equipment, while adhering to physical distancing guidelines; touchless check-in for members via our mobile app and more.

These are difficult times for everyone and impact on our industry and overall economy from COVID-19 is still unclear at this point. However, based on several factors such as the strength of the Planet Fitness brand, our differentiated business model, our attractive price points and welcoming, nonintimidating store environment, our great group of employees and franchisees and an increased focus on the importance of health and wellness, I'm confident we will emerge from this period well positioned to further expand our leadership role in the fitness industry.

I'll now turn the call over to Dorvin.

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Dorvin Donald Lively, Planet Fitness, Inc. - President [4]

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Thanks, Chris.

As Chris said, we continue to be optimistic about the future of Planet Fitness for several reasons, one of the biggest being the overall strength of our franchise system and our size and scale advantage versus our competition.

Our system is comprised of approximately 130 franchise groups, which compares with approximately 190 at the time of the IPO, as there had been some consolidation over the past 5 years. Today, the average franchisee owns approximately 15 stores, with our largest owning 169 stores or approximately 8% of the store base. Of our 130 groups, 13 are majority-owned by private equity and represent some of our largest operators. All in all, we have a very experienced group of seasoned operators that have been operating the Planet Fitness brand for many years.

While franchise stores average EBITDA margin percentages have historically been in the high 30% range, on an adjusted four-wall EBITDA basis, most franchisees have been reinvesting significant cash flows back into the business, growing the store fleet, replacing equipment and remodeling older locations. In the past few years, we've had many franchisees either sell their business to another franchisee or, as I mentioned, taken significant investments from private equity. In the past, some of these private equity firms have indicated to us that they are seeing higher returns on their investment in the Planet Fitness brand than in many of their former or existing portfolio companies and have significant runway to build out more Planet Fitness stores. In fact, several of these private equity firms have indicated to us recently that they remained extremely interested in further investment in our brand.

When it comes to the capital structure of our franchisees and their balance sheet, it varies. Some of these businesses have put on leverage in recent times, while others have focused on increasing their financial flexibility and sustainability. Regardless of their financial condition, all of our franchisees are dealing with the same challenges as other businesses that have had to close due to COVID-19. With no revenue and related cash flows, they have taken actions to reduce their cash burn until these stores can start to reopen.

In general, we're hearing that franchisees are having productive discussions with their landlords about different forms of rent relief. We know many of our groups were also successful in accessing the government assistance through the SBA Payroll Protection Program (sic) [Paycheck Protection Program] to help cover their day-to-day expenses. Some are choosing to continue to pay a portion of their workforce, while others have temporary furloughed many of their employees.

At the same time, we are providing flexibility on replacement equipment and store remodel requirements, and will continue to do so over the near-term as we deem necessary. Finally, we're working closely with our entire system to prepare for when stores are able to reopen to ensure we provide a safe environment for our staff, team members and our members.

In terms of development, as the overall economy went into shutdown mode, this has had a significant impact on both existing and near-term construction projects as well as the overall real estate pipeline activities. As states and communities reopen and our conversations with franchisees continue, we'll be in a better position to evaluate what system-wide new store openings in 2020 will look like.

While we're not providing guidance at this time, due to the high degree of uncertainty created by COVID-19, we anticipate that expansion will ramp slowly once we emerge from this crisis. It's within the realm of possibility that our equipment placements and our replacement equipment sales could be down 50% or more from our record-high in 2019, and this headwind could linger into 2021 as well. This is not a reflection of any change in our market opportunity, rather, it is based on the uncertainty of how the economy will reopen combined with the fact that franchisees are focused on preserving liquidity in the near term.

That said, we believe the impact from COVID-19 on the real estate industry will provide a more favorable real estate environment for the Planet system over the long-term, as we continue to build out toward 4,000 locations in the U.S.

With that, I'll turn it over to Tom, who will review the Q1 financials.

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Thomas J. Fitzgerald, Planet Fitness, Inc. - CFO [5]

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Thanks, Dorvin, and good afternoon, everyone. For the first quarter, total revenue was $127.2 million, compared to $148.8 million in the prior year period. As you've heard, COVID-19 significantly disrupted our business starting in the middle of March. I'll walk through how the shutdown impacted our overall first quarter results and then provide color by segment.

The biggest impact on our Q1 top and bottom line was the deferral of revenue related to monthly membership dues collected in March before stores closed due to COVID-19. As previously announced, members will be credited for any membership dues paid for periods when our stores were closed. We expect to recognize franchise revenue and corporate-owned store revenue associated with those membership dues that were drafted in March once stores reopen.

In addition, due to the outbreak of COVID-19, we were unable to move forward with planned new and replacement equipment sales over the last few weeks of March.

Let me summarize the impacts to our top line results due to COVID-19, which caused total revenues to be down $35.4 million, due to the following 3 drivers: first, there was a $20 million deferral of revenue related to monthly membership dues collected in March before stores closed. That's made up of $14.1 million from franchise royalty and $5.9 million from corporate-owned stores monthly dues. Second, $4.6 million of NAF contributions were deferred. And lastly, in the equipment segment, new and replacement equipment sales were reduced by $10 million, and equipment placement revenues were $0.8 million lower in the franchise segment.

Now with that as context, we're very pleased that first quarter same-store sales increased 9.8%. From a segment perspective, franchise same-store sales increased 10.0%, and our corporate store, same-store sales increased 7.3%. Approximately 3/4 of our Q1 comp increase was driven by net member growth, with the balance being rate growth. The rate growth was driven by a 26 basis point increase in our Black Card penetration to 60.9% compared with the prior year period, combined with higher Black Card pricing for new joins. The rate growth was mostly driven by Black Card pricing increase over the past 2 years. The impact from Black Card pricing drove approximately 210 basis points of the increase in system-wide same-store sales.

Note that when stores are closed and don't draft monthly membership fees or don't execute a full draft upon opening, they are not included in the comp base, and therefore, are not included in the same-store sales calculation for that month. There was a total of 164 stores that were closed prior to March 17 and, therefore, did not draft. Of the 164, 139 would have been in the comp base, including 130 franchise and 9 corporate stores. Due to their closure, they were excluded from the same-store sales calculations for the month of March.

Moving on to a review of our segment's revenue results. Franchise segment revenue was $58.5 million compared to $65.8 million in the prior year period.

Now let me break down the drivers for the quarter. Royalty revenue, which consists of royalties on monthly membership dues and annual membership fees, was $40.6 million compared to $44.7 million in the same quarter of last year. The $40.6 million of revenue excludes $14.1 million of deferred revenue from stores that closed after the March draft as a result of COVID-19. The average royalty rate for the first quarter was 6.3%, up from 5.9% in the same period last year, driven by more stores at higher royalty rates compared to the same period last year.

Next, our franchise and other fees were $6.2 million compared to $5.4 million in the prior year period. These are fees received from online new member sign-ups, the recognition of fees paid to us for franchise agreements, area development agreements and the transfer of existing stores and fees received from processing dues through our point-of-sale system. The increase was primarily driven by higher web join fees due to higher web join acquisition percentage of total joins, and higher join volume compared to the same period last year.

Also, one of the franchise revenue segment is our placement revenue, which was $2.0 million in the first quarter compared to $2.8 million a year ago. These are fees we received for the assembly and placement of equipment sales to our franchisee-owned stores within the U.S. The decrease reflects the lower new store placements we executed in the quarter compared with a year ago, due to a challenging year-over-year comparison and our inability to place equipment late in the quarter due to COVID-19. I'll further discuss the number of new equipment placements later in my script when I discuss equipment revenues.

Finally, national advertising fund revenue was $9.2 million compared to $11.8 million last year. The NAF revenue in the current quarter does not include $4.6 million of deferred NAF revenue that was collected, but not recognized, related to COVID-19.

Our corporate-owned store segment revenue increased 6.5% to $40.5 million from $38 million in the prior year period. The $2.5 million increase was due to higher revenue of $5.5 million from corporate-owned stores opened or acquired since the end of the first quarter of last year, partially offset by lower revenue of $3 million from stores included in the same-store sales base, but whose monthly membership dues were deferred for the month of March.

The $40.5 million of revenue for the quarter excludes a total of $5.9 million of deferred revenue from stores closed after the March draft due to COVID-19.

Turning to our equipment segment. Revenue decreased by $16.8 million or 37.4% to $28.2 million from $45 million. The decrease was primarily due to lower new store equipment sales as well as lower replacement equipment sales to existing franchisee-owned stores.

Now as we've discussed on our fourth quarter call in February, we were up against a record high number of new store placements in the first quarter of last year and expected this figure to be down year-over-year. In addition to the challenging comparison, the decrease reflects approximately $10 million of lower revenue from new and replacement sales due to COVID-19.

In the first quarter, we had 30 new store equipment placements, including 1 international, which was down 24 from the prior year period and 10 below our expectations due to the COVID-19 impact. Our cost of revenue, which primarily relates to the direct cost of equipment sales to new and existing franchisee-owned stores, amounted to $21.8 million compared to $34.5 million a year ago, a 36.7% decrease and in line with the revenue decrease I previously mentioned.

Store operation expenses, which are associated with our corporate-owned stores, increased to $26.2 million compared to $20.9 million a year ago. The increase was primarily driven by costs associated with the 7 new stores opened and 16 stores acquired since the end of the first quarter of last year.

SG&A for the quarter was $17 million compared to $18.2 million a year ago. The decrease was driven primarily by reductions in variable and equity compensation related to COVID-19.

National advertising fund expense was $15.2 million. The difference between NAF expenses and NAF revenue this quarter primarily reflects the deferral of the NAF revenue associated with the March draft.

Adjusted EBITDA, which is defined as net income before interest, taxes, depreciation and amortization, adjusted for the impact of certain noncash and other items that are not considered in the evaluation of ongoing operating performance, was $46.5 million compared to $63.4 million in the prior year period. A reconciliation of adjusted EBITDA to GAAP net income can also be found in the earnings release.

The overall impact from COVID-19 due to the deferral of revenue discussed previously on our first quarter adjusted EBITDA was approximately $24.6 million. Additionally, as previously mentioned, there was a $10 million decrease in equipment sales, which would equate to $2.5 million decrease in adjusted EBITDA.

Adjusted net income was $14.4 million, down $18.3 million from a year ago, and adjusted net income per diluted share was $0.16, a decrease of $0.19. The declines reflect the $24.6 million impact to adjusted EBITDA due to the deferral of revenue discussed previously, which equates to $18 million of adjusted net income and $0.21 of adjusted net income per share. Our adjusted net income and EPS in the first quarter also includes the $10 million of reduced equipment sales due to the impact of COVID-19.

Now turning to the balance sheet. As of March 31, 2020, we had cash and cash equivalents of $547.5 million compared to $436.3 million on December 31, 2019. The increase in cash and cash equivalents since the end of 2019 was driven by free cash flow generated in the first quarter of approximately $64.1 million, combined with the $75 million we drew down on the variable funding notes during quarter 1.

Based on the current situation and our focus on preserving liquidity, we announced in March that we were halting our share repurchase activity for the time being. Additionally, we took additional measures to reduce our monthly cash burn, including the previously announced compensation reductions for our leadership team and our Board of Directors.

Total long-term debt, excluding deferred financing costs, was $1.81 billion as of March 31, 2020, consisting of our 3 tranches of debt and $75 million related to the fully drawing on our variable funding notes in March of 2020, to preserve liquidity and flexibility.

Our WBS debt structure is covenant-lite. We have 2 maintenance covenants, a debt service coverage ratio and a total system-wide sales threshold. These are both tested at the end of every quarter and calculated on a trailing 12-month basis.

In our most recent debt covenant reporting period of March 5, 2020, our debt service coverage ratio stood at 4.16x, and total system-wide sales was $3.25 billion. Both of these levels are well above a potential triggering event.

For the DSCR, the first trigger would occur when that ratio falls below 1.75x. At which point, 50% of our cash inflows would be automatically trapped to service the principal and interest.

For our other maintenance covenant, the trigger occurs when total system-wide sales, on a trailing 12-month basis, fall below $1.25 billion. If this were to happen, rapid amortization would only kick in if it was declared by the controlled party. At the end of the first quarter, we had a cushion of approximately 50% and 60% to those thresholds for our DSCR and system-wide sales maintenance covenants, respectively.

Finally, we would only be at risk of tripping the rapid amortization DSCR covenant if our stores remain closed through the end of the year. And again, the controlled party would have to declare rapid amort as it does not trigger automatically.

Similar to our liquidity position, we believe we have sufficient headroom for our 2 maintenance covenants. Now as Dorvin alluded to, with respect to guidance, based on the significant near-term disruption to our business caused by COVID-19 and uncertainty around when conditions will normalize, we are not providing an updated financial outlook at this time.

While these are undoubtedly the most difficult operating conditions the company has ever faced, we feel very good about our ability to weather the storm and are confident that Planet Fitness will be able to resume its long track record of delivering growth and delivering increased profitability.

I'll now turn the call back to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Randy Konik from Jefferies.

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Randal J. Konik, Jefferies LLC, Research Division - Equity Analyst [2]

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I guess my first question I wanted to ask of Chris. Chris, you've been a lifelong participant in the industry, and we're starting to see more and more news around bankruptcies. Can you give us your perspective on what this movie looks like right now compared to other movies in the industry in the past? And talk about the market share opportunities that are afforded from that based on your perspective?

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Christopher J. Rondeau, Planet Fitness, Inc. - CEO & Director [3]

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Sure. Thanks, Randy. This is Chris. Yes, I think the silver lining, I think, in all of this, is that it's definitely going to probably accelerate a lot of the -- I guess longevity of a lot of our competition that we've been talking about for a few years now. And I think with the strength of our model and profitability of our model compared to others, and in the recent Gold's Gym bankruptcy and closing of their 30 stores and what you hear about 24 Hour Fitness and others, I think it's -- unfortunately, it's a lot of what they've been, I guess, known for and a lot of what we've been known for as being the opposite of and it's really catered to that casual first-timer. Keeping up on CapEx, which is a big one, Randy, I mean our stores are always fresh. They're always new. We're not build it once and let it sit until it lives a low, slow death. So I think this is definitely accelerating the timing of what it would have probably taken if this pandemic didn't happen. So I guess that's the silver lining here.

And honestly, I do think that with situations like this that people will have and there's some surveys have been done already and so there's definitely a renewed appreciation, I think, for the importance of being healthy and the importance of your health and being fit. And I -- this, longer-term, will help the industry. And -- but you've got to weather the storm to get through it. So I think we're in a good spot. And I think you're right, this will pave the way to widen our moat even more so than it already is, and excited to get back to work here.

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Randal J. Konik, Jefferies LLC, Research Division - Equity Analyst [4]

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Helpful. And then I think a follow-up, you mentioned that, I believe, some of the clubs have started to open a little bit here. In the first few that have kind of opened, any particular learnings about what you're seeing from the members or the club operators? And then related to that, when you have your -- I think you have a franchisee council, what are the topics that are being discussed the most in the franchisee council right now? And kind of how is that -- how are you using that kind of position, the opening plans and other things for the business going forward?

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Christopher J. Rondeau, Planet Fitness, Inc. - CEO & Director [5]

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Sure. Yes, great questions. So the openings has been just 3 clubs right now. We have 2 in Georgia, 1 in Utah. It's only been a few days. So it was the 1st of May, we opened those. And as I mentioned in my opening remarks, it was more. We have about 100-page COVID-19 operations list of all the protocols and policies we've put in place for members and staff and cleaning procedures. So we're using these 5 clubs to make sure we have all our Ts crossed and Is dotted before we roll out to the broader system, which right now, we're planning about 150 stores between May 13 and May 15 to open. So we're filling that bucket for the -- for a broader opening.

It's early. Again, it's been 4 days. But I'd say, so far, really pleased with the joining momentum early on. I think there is a little bit of a pent-up demand. Cancellations aren't really anything surprising or out of whack there, which would be great. Usage is a bit slower, I think, on a CEO roundtable of about 7 gym chains around the world. And one in particular, who's ahead of us in this whole pandemic, and he's been open now 7 weeks with about 170 stores. And a lot of what he's seeing is a pent-up demand. His joins are ahead of last year. His cancellations are on par with last year. So definitely pent-up demand. And the member usage, which is a little bit different, is slow out of the gate. And the 7 weeks in, now they're about 80% of last year's member usage.

So -- but I think the demand is the most encouraging and exciting thing for me, which back to what I just said a minute ago, that I think there is a renewed interest in exercise and being healthier. And I honestly see it, Randy, in my own neighborhood. I mean the people you see walking around. I didn't know I had neighbors until this all happened. So I think people are just paying more attention to that.

The other question was on the franchisee council. The big one there, Randy -- and Dorvin, feel free to jump in here. The big one there really is the opening procedures manual. They -- we use our franchisee committees to help design that 100-page document. And the big one is they all want to -- they're excited to get open and grow. And it's more or less getting through the storm, and how they want to stay on the right side of their ADA schedules and reequip schedules and stuff, but is there any concessions that we can make to give them some leeway, so they're not having to reequip right now when they're not even open. So it's more or less conversations around that and giving them some rope here so they can go and get their feet under them, start drafting again and build up their till here.

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Randal J. Konik, Jefferies LLC, Research Division - Equity Analyst [6]

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Really helpful. It sounds like great partnership with the members and your franchisee partners, so that's really great.

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Operator [7]

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

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John Edward Heinbockel, Guggenheim Securities, LLC, Research Division - Analyst [8]

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Chris, 2 things. How are you sort of -- or plan to communicate with members to get them comfortable to come back in, once that particular gym opens? And then remind us of 2 things: the -- your demographics, which I think skew younger, one; and then two, kind of usage, even at peak times. That would seem to not be an issue, right? Your clubs are not overwhelmed with members, and they're not staying for more than probably 45 minutes, touch on those, please?

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Christopher J. Rondeau, Planet Fitness, Inc. - CEO & Director [9]

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Sure. So members, not unlike when we closed down, is communicating that they weren't going to be billed for time we weren't going to be open. So just like that communication is now communicating when their -- when the club plans to reopen, what your billing process looks like. As Tom had mentioned in his opening remarks, how we -- some members were billed, and then we closed shortly after because of the government regulation, so we owe them credit, so how that credit gets applied to their opening time. So it's a lot of that communication, on top of what they can expect when they see and they walk in. The gyms will definitely be different that first opening compared to when they -- what they saw when we closed. So more cleaning, sanitization stations than we had before, which we've always had them for decades, which is not all that common, unfortunately, in the gym world, but we've always had them, more of those. More signage reiterating our already cleaning policies and procedures, where our -- in our stores, our members are cleaning as much as our staff is. I mean it's -- before and after they use a bench, they're cleaning the treadmill or their workout apparatus that they're on. So reiterating a lot of that. Self-checking in a way, we're now using -- we're forcing app downloads using the bar code there.

There's no more of the staff taking the person's keys or key tag from their hand, scanning it back to them or their phone, they're actually doing them themselves on the way -- their way in. So that's some of the things that we're expressing to the member.

On the age thing, you're right, yes. So we have 15 million members, about 50% of millennial and Gen Z is another big part of that. So I think the other thing on the usage that's a big one there is that the -- as we've always said, we have about 5,000 workouts in the store, about 2/3 of those are Monday through Wednesday. Majority of those are evenings, call it between 4 and 7. So if you do 1,500 workouts on a Monday, that same club on a Friday is doing 700. On a weekend, that's doing 300 or 400 a day. On 1,500 visits, they're probably doing about 600 of those between 5 and 7 or 4 and 8. So it's really condensed in the evening.

Really quick to that one, though, John, it's interesting is with the work from home in those 3 recent clubs that are open, the 9:00 in the morning and 3 in the afternoon hours are busier than I've seen. So I think people are not having to come in the crack of dawn and before work and they're not coming in afterwards, they're just using it throughout the day. So any stipulations on opening, which these first 3 clubs there is where they can't have more than 150 people in a club at one time, which technically, even a Monday night for 1 hour is not that bad. Even in January, it wouldn't be that bad. So this time of the year, on Monday nights, not that bad. But 150 now if they're spreading their usage out throughout the day is even better for us.

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John Edward Heinbockel, Guggenheim Securities, LLC, Research Division - Analyst [10]

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And then lastly, maybe just the mechanics of the deferred revenue, right? So that -- it sounds like that will get realized when each of those clubs opens. So a lot of that would be -- well, I guess it will be spread over 2Q and 3Q. Is that fair?

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Thomas J. Fitzgerald, Planet Fitness, Inc. - CFO [11]

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John, it's Tom. It really depends on when the club reopens. The vast majority, as Chris said and we said in the opening, drafted and then based on the advice of the authorities that gyms closed, that's the -- I think there's 164 clubs who actually closed before the draft. So it just depends on when those clubs open up and the member essentially burns off what is essentially a 30-day credit in most cases.

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Operator [12]

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Your next question comes from the line of Joe Altobello from Raymond James.

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Joseph Nicholas Altobello, Raymond James & Associates, Inc., Research Division - MD & Senior Analyst [13]

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So first question, I want to go back to the notion of communicating with your members. I'm curious, have you guys done any surveys among your members, try to gauge how readily and how quickly they intend to return to the gym? I think Equinox did something like that. So I'm curious if you guys have any sense for, a, once a store opens, how quickly they come into the gym; and b, how long it might take to build back up to normal volume.

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Christopher J. Rondeau, Planet Fitness, Inc. - CEO & Director [14]

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Yes. We've done some. We did do one where we're saying that compared to even our peers where -- who is looking to resume their memberships and continue the membership post. Some were unanswered. And we were skewed higher than our competitors. And on the cancellation, how many want to discontinue after we opened and where our competitors were at about 6% want to discontinue, we were only at about 3%. So that was something there. As far as working out and want to get active, I'm trying to think if I had anything that was -- that pointed that part out exactly. I don't believe so.

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Joseph Nicholas Altobello, Raymond James & Associates, Inc., Research Division - MD & Senior Analyst [15]

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Okay. That's helpful. And just maybe secondly, you guys mentioned earlier that you're still targeting 4,000 stores in the U.S. So it doesn't sound like this has impacted that in any big way. Has this pushed out that target in terms of timing a couple of years or so?

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Christopher J. Rondeau, Planet Fitness, Inc. - CEO & Director [16]

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Hard to really say, I mean drawing out -- but it's really determined on how fast we can fill the pipeline with real estate and get the -- get that opening flywheel moving again. But...

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Thomas J. Fitzgerald, Planet Fitness, Inc. - CFO [17]

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Yes, I think, Joe, the only thing I'd add to that is, in my remarks, a while ago, I said that, obviously, with the shutdown across the country, all the way down to construction crews generally had to shut down as well. And then the working of the pipeline, in essence, came to a halt because no one knew when and how, and how long it would take, et cetera. So -- and I indicated that we would expect total units to be down this year over our high last year, and that could even go into next year just because you got to get the pipeline back up and going again.

A couple of things, I guess, I would say is, one, we, obviously, still don't know. So we're in that time period as to how the country will reopen and exactly what that will look like. I think a little bit to maybe -- I think it might have been Randy's question earlier that Chris answered in terms of competition, I think that not only from a competitor perspective, the landscape is going to look like -- going to look a lot different, but the whole retail landscape is going to look a lot different coming out of this as well. I just think there's going to be a whole repositioning in the retail world. And I think that also then provides opportunities in the near to even longer term. So we've always said, we believe and have a lot of confidence in that 4,000. Obviously, that's still -- even pre-COVID, it was still a few years down the road. I don't see this impacting that. But at the same time, we got to see what maybe the new norm will look like. But we expect to take advantage of that size and scale in terms of our base of members, our sophisticated franchisees and the ability to continue to grow this brand in all the markets where we're at because we still have considerable pipeline in almost every market, certainly every regional market in the U.S.

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Operator [18]

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Your next question comes from the line of Peter Keith from Piper Sandler.

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Peter Jacob Keith, Piper Sandler & Co., Research Division - Director & Senior Research Analyst [19]

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Wanted to just get a little more detail on the reopening. Chris, you made some interesting comments on CNBC around maybe unplugging half the cardio machines. And so to go back to some of the earlier questions around gym capacity, are you ever at a point where your gyms are well over 50% capacity? I think there's some concern that the members might have issues with gym crowding. And on the other hand, maybe you've never really faced that issue because -- so could you help kind of clarify those comments?

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Christopher J. Rondeau, Planet Fitness, Inc. - CEO & Director [20]

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Sure. Yes. So we have about 120 or so pieces of cardiovascular equipment in the clubs. And how we are -- at least 3 clubs are open now, if there is a social distancing mandated by that area, we're doing every other piece of cardio unplugged, and then signage so that people are spaced out. So for the 120 pieces of cardio, so you have 60 pieces usable.

If it was a Monday night in January, kind of a good way it's -- we're opening here in May and June. So things generally get quieter for the gym world. And then back to what I mentioned with John Heinbockel, with a question where people coming in here with the work-from-home people coming in midday, which is not something you generally see a lot of. So luckily, it'll spread that out quite a bit for us. So I don't really see an issue.

One, time of year; two is people are spacing out their workouts. And also our workout schedules -- because people work out generally Monday, Tuesday, Wednesday, as I mentioned, 1,500 workouts on the club on a Monday, that same club will do 700 Friday. So not unlike January, people want to avoid where the crowds or can't get in, and they just come a different day of the week and spread that usage out. So I don't really see us being a difference.

And the thing about 50% of our members don't use the club in a 30-day period either. So -- I mean, I guess, maybe back a little bit to Joe's question about how many people were wanting to come back to work out, well, half of our members, generally, don't use the club in a 30-day period. So it's a little different customer than a general SoulCycle or Gold's Gym customer that's a 6-, 7-day a week person, hell or high water.

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Peter Jacob Keith, Piper Sandler & Co., Research Division - Director & Senior Research Analyst [21]

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Okay. That's interesting. And then one other question I want to ask was around franchisee concessions. Maybe there were some implied comments in there with regard to equipment replacement. But is there any concessions that you are looking at right now for that reopening process, maybe with ad spending? Curious if you can help us frame up some of the possibilities we might see unfold over the coming months or quarters?

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Dorvin Donald Lively, Planet Fitness, Inc. - President [22]

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Yes. I mean -- this is Dorvin, Peter. One of the things that Chris said earlier, I think, in his remarks, and maybe Tom even referred to it, but I think the franchisees, obviously, are most interested in getting these stores open. And that's not the highest priority to come out and try to reequip clubs. Here, all clubs are down. Or to plan on it in maybe July or August when we don't know when clubs are open, et cetera. So one of the things that we want to make sure because, obviously, our biggest asset, our franchisees out there, is to, in essence, kind of take that worry off their plate in terms of being in default of their franchise agreements for not being in compliance with that. And so what we've done is we -- I have communicated to our franchisee base that we would push out all reequips as well as all new store requirements under the development schedules. Just push everything out a year.

And what that does is a couple of things. Number one is it allows them to focus on their business, focus on getting ready to open the clubs back up, focus on taking care of the members and making sure that we're ready for that, and then not have that issue of losing their territory because, quite frankly, that's -- the pipeline is a huge asset that they have. So we wanted to do that to provide them kind of that level of comfort. So that's number one.

The second thing that we've done is to make sure that we're there to help support them in ways that they need to. And -- but on the flip side of that is -- you've heard Chris say that we're as much an advertising company as anything else. So we're -- we still have the same requirements in terms of the local marketing spend, et cetera, because if we get these clubs back open, we want to make sure that we're out there with the brand and being able to market to prospective members as well.

And I think that, Tom, you had a couple of things you wanted to add there as well?

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Thomas J. Fitzgerald, Planet Fitness, Inc. - CFO [23]

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So we may have mentioned this before, but our development team, led by Ray Miolla, has worked with the franchise groups to really share his best -- his team's best practices on how to really have productive conversations with landlords about abatements and deferrals. And I'd say, as Dorvin touched on earlier, for the most part, those have been very fruitful conversations, the majority of landlords giving deferrals, very few abatements, but deferrals on rent while the clubs -- while the stores are closed. And so if that's for a month or 2 months, that rent that was foregone would get added on to the subsequent 6 or 9 months depending on the situation.

And I'd say the final thing is we've tried to help -- as we think about, to Chris' point, our leadership position in cleanliness and sanitization and taking that to another level, given the situation and people's expectations, we are investing on behalf of the franchisees to secure what is difficult products and tools to secure so we can elevate our ability to enhance our sanitization capabilities at store level. So we're essentially buying that inventory in advance so we make sure we could secure it, and then as they order it and get it in their clubs, they'll pay it off. So that helps with their liquidity.

So I'd say a combination of things that we think -- and that some franchisees are, based on calls we have with them every week, I think appreciative and understand that we're all in this together and all looking to come out stronger, both in terms of how we've treated the customer from a billing standpoint, how we're going to run the clubs going forward and really continue to widen the moat that we have competitively.

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Operator [24]

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Your next question comes from the line of Oliver Chen from Cowen.

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Oliver Chen, Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst [25]

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Based upon your comments, you mentioned equipment replacement sales could be down as much as 50% or more and the headwinds in premium. What does that imply roughly for how you're thinking about what might be possible, more generally with net openings and some things that you're looking at as there are a lot of unknowns with the environment?

And then the second question was around churn and thinking about managing churn in this -- amidst the crisis, and in relation to the marketing or strategies that are underway as you monitor that. And I'm sure the nature of marketing spend is quite different with what's been happening.

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Christopher J. Rondeau, Planet Fitness, Inc. - CEO & Director [26]

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Oliver, you were cutting out a lot there. So I'm going to -- if I didn't get the question exactly right, you can come back. The first part of the question, I think, was on specifically reequips and maybe what the expectation maybe is now versus where we were or where we had in our initial guidance, I think was your question. We withdrew our guidance back earlier this year. And as Tom said a few months ago, we're not providing guidance over the balance of the year. But in terms of kind of that balance of the year -- or full year rather, development of new store openings as well as replacement equipment, I made the comment in my remarks that it could likely be down 50% or more over what it was last year as a result of the fact that stores are closed now, except for the 3 stores that Chris mentioned earlier that have opened, with the uncertainty of when those stores would open back up. And then ultimately, kind of regenerate the pipeline for new sales down the road.

And what we said then -- the comment I made just a couple of minutes ago was to be able to give the franchisees some confidence that we were not going to step in and require them to be putting replacement equipment in -- here in May or June or July or August or something when we're still trying to get clubs open. That's not the highest priority on our list, and we didn't want it to be the highest priority on their list. So that's why I made the comment we were pushing everything out 12 months from its original date.

We think that is the right thing to do for the brand, the right thing to do for our franchisees and we'll, ultimately, pay dividends back to us as a brand and to take care of our members.

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Dorvin Donald Lively, Planet Fitness, Inc. - President [27]

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And I think on your other question on the churn, Oliver, I think in the marketing piece is that -- I think the first and foremost, most important thing is that we notified members we weren't billing them, we froze them. So our cancellations leading up to and then during the closure, a fraction of what we're used to seeing when we're open. So the member base is tracking along pretty solid, even though we're not open and selling memberships per se.

I think as far as the churn piece of it and keeping them active, I think we looked at all the digital stuff we've been doing between Facebook Live. We launched that March 16, as soon as we closed our stores, and we're doing over 100,000 workouts per night on those videos. So it's really unbelievable transaction for both members and nonmembers. So the people that are really watching us and building some brand affinity there is big. And then we post them on YouTube and our YouTube subscribers up 229% since closing, and we have over 10 million views. So this is all happening in real time. So when you go back and think about our digital strategy for a bit that we've been talking about for over a year now and getting the app going and all the content, we were definitely going down the right road, and luckily that we're able to continue to engage our members along the way.

And then the new iFit partnership we did, we launched a bunch of videos there. We were already doing 173% increase in average daily workouts in our mobile app, and then we've launched that, and that's up 122%. So I think keeping them engaged and giving them some value, even though where our four-walls aren't open, is going to keep them engaged in the brand and then hopefully, keep them longer-term, that we're their partner in fitness here.

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Oliver Chen, Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst [28]

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Chris, what are your thoughts with at-home and the long term of changes there that you're making to the customer experience as well as those capabilities that you're building? How are you thinking about the platforms versus your app and what may happen with that digital on-demand side of the business?

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Christopher J. Rondeau, Planet Fitness, Inc. - CEO & Director [29]

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Yes. I think it definitely has caused an acceleration in the adoption of digital content, where people are taking advantage of it at home. And you've seen it, whether -- even the stuff that I was just rattling off in the stats and just even other -- Pelotons and iFit in order to track everything else. So I think your -- I think we've accelerated.

There's also been a recent study that showed, even though it's been a big influx of new customers there, also when their bricks-and-mortar open, they can't wait to get back to that and not maintain necessarily the digital, although they're not going to write-off 100%. But it will never go back to pre-COVID numbers, it will stay ahead of where it was, but will not stay to the level it's at today.

I think like what we've been talking about, I think it's a big part of what we want to do longer-term that we're going to be engaged and be the trusted source in their wellness journey, whether it's in club or at home or running outside. So I think it's proof in the pudding, I think it's really accelerated our point of view on it, just on what we're seeing from consumption and the feedback we get from the members and nonmembers that are doing the Facebook Live at night. And Facebook Live something is -- we're looking at now, it's just -- it's going to be probably something we do forever at this point.

So it's -- I think it's a must have. I don't think it's an end all, be all working out at home by any means, I think the bricks-and-mortar experience of being around others and the camaraderie builds and the motivation it builds is not replaceable. But I think it's a good place to be, and I'm glad we've got the app going last summer.

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Operator [30]

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

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Jonathan Robert Komp, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [31]

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Yes. I want to just follow up on the units, the new units and the reequipment side of things. Just curious, broader question of how you and your franchise partners are thinking about this. But just maybe to be clear, are you thinking kind of the communicated relaxing the requirements for the next year here? Are you thinking after that period, you get back on to something close to the prior trajectory for those? Or are you thinking there's some sort of a catch-up before you then get to more of a normalized level? Just how are you thinking about post everything going on here?

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Dorvin Donald Lively, Planet Fitness, Inc. - President [32]

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Yes. John, what we're doing is we're saying that requirements that exist now in the pipeline, that gets, in essence, pushed out 12 months from its original date. But all replacement equipment when it's done and all new stores when they're open, they still have the same deadline, the same 5 and 7. And Chris mentioned that a little bit earlier as to one of the reasons we are where we are is that we can't be out-newed, and we think that's critical to the brand, and critical to having that high-value, affordable option for what our brand stands for today. So no, that's how we're handling it. So it's the existing requirements as they are being pushed out a year for what's out there today, but then everything new going in place going forward still has the 5 and 7.

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Jonathan Robert Komp, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [33]

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Okay. And maybe one other topic, then. Curious, your thoughts more on as things reopen, more on the behavior of your members. I know, Chris, you've always talked about nonuse as being the biggest driver of voluntary cancellations. I'm just wondering how you're thinking about how far you need to get out. And kind of what the risk is that if there's some contingent of members who don't use the club for a certain period of time, how are you thinking about kind of that extended risk of cancellation?

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Christopher J. Rondeau, Planet Fitness, Inc. - CEO & Director [34]

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Yes. I don't see that. I don't think things are going to really change. When I look at -- even when I go back to '09, when it was more of a banking or recession issue, where our sales -- those sales were great back then. So I don't think coming out of this, people are going to be -- want to be less healthy or less active. And I think we did in one survey -- one of ours that we did said that there was like over 50% of the members who would consider downsizing or downgrading from their higher-priced gym membership to a more affordable option, so -- which is what we saw in '09, where people were downtrading. So I don't think we're going to see -- nothing points to any direction that I would feel any differently than that's -- something we saw in '09.

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Jonathan Robert Komp, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [35]

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And have you seen, during the downturn, any requests or inquiries about downgrading from a Black Card to a White Card membership? Or would you expect to see any of that?

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Christopher J. Rondeau, Planet Fitness, Inc. - CEO & Director [36]

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Possibly, but there wasn't -- I didn't see any real -- I think, kind of like the upgrade situation we've talked about, no one really upgrades necessarily to the Black Card, they join on it. Maybe a slight chance upon joining that maybe more members take a White Card in that example. But we're not talking about a big ticket because even the Black Card is much cheaper than their -- probably where they're coming from.

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Operator [37]

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Your next question comes from the line of Sharon Zackfia from William Blair.

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Sharon Zackfia, William Blair & Company L.L.C., Research Division - Partner & Group Head of Consumer [38]

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I wanted to follow up on the digital dynamics because, obviously, it's important to keep your members engaged, but it's also pretty intriguing in how many nonmembers you've been able to attract via the different classes you've been offering. So can you talk about -- and I don't know if you have this data, but is there any demographic difference at all between what you're seeing in terms of engagement online versus people who come in to the club? Any evidence that it's kind of widening the aperture for Planet? And then how do you follow up once club starts to reopen and trying to engage with these folks to move kind of from the digital realm into the club?

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Christopher J. Rondeau, Planet Fitness, Inc. - CEO & Director [39]

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Yes. Facebook Live is high. We don't really know who those members are or nonmembers are, unfortunately, they're almost 100,000 a night. One thing that will be interesting with our app is a lot of the content that we have on there now is all free for members or nonmembers. So you could download the app, you get to have access to it. We don't have the data yet, but we're going to work on where we'll be able to report on people who have the app, who is actually a member and who's actually just utilizing the content for free. And then with the in-app messaging, which is launching as we speak today, then we'll be able to then message them separately. So it could create a second marketing avenue for us to use -- or not second, another marketing avenue for us to use to kind of -- no different than Teen Summer Challenge. In a lot of ways, it's introduced our brand to a nonmember to give them a taste of what we're like, so that hopefully we can market to them to get them to come in.

So -- and honestly, it could be somebody that is -- we always say we go after the first-timer or casual gym user because it's the -- intimidation is a big piece. There could be a level of intimidation that this breaks through that is something that -- they still can't walk in the gym. But if we can give them some access to some content at home and no plan to be that brand, maybe we can build up some courage to come in.

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Sharon Zackfia, William Blair & Company L.L.C., Research Division - Partner & Group Head of Consumer [40]

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That's helpful. And then I don't think I heard you guys talk about this, but on SG&A, obviously, there's a lot you can't control right now, but you can control the SG&A. So is $17 million of what we saw this quarter, is that kind of the rough -- correct run rate right now for quarterly SG&A?

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Thomas J. Fitzgerald, Planet Fitness, Inc. - CFO [41]

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Yes. Sharon, it's Tom. I think there's some things that hit in Q1 -- or that some of the actions we've taken since Q1 that really weren't reflective, so that rate will continue to come down. But I think when we look at our cash burn rate, we've -- we made the statements we've made about liquidity. And if clubs remain closed through the year, we had enough liquidity to carry us well beyond the year, that's still true, very true. And we've taken our cash burn rate, which we don't disclose. But through the actions we've taken, we've reduced that by about 1/3. So we will continue to monitor the situation and take additional actions, if necessary, to the extent this is prolonged. But short answer is it will come down from where it was in Q1 because some of the actions weren't fully reflected.

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Operator [42]

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

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John William Ivankoe, JP Morgan Chase & Co, Research Division - Senior Restaurant Analyst [43]

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I appreciate the fact that many of your franchisees are in different financial positions from a debt perspective, and some of them are using debt to expand. And I think your business model was the type of one where expecting recurring cash flows was, I mean, all but "guaranteed in normal times," but we're, obviously, not in normal times now. Do you have a sense of how many franchisees, how many stores within that franchise base you think really are financially challenged? And if that's the case, are there other franchisees willing to buy in other franchisees to give them some value for their equity? Or given your own cash balance, is this an opportunity to significantly increase your own company store count?

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Thomas J. Fitzgerald, Planet Fitness, Inc. - CFO [44]

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John, it's Tom. I'll start off and maybe Dorvin will build on it. Yes, I think we've had discussions with some of our lenders of our franchisees. And to your point and what Dorvin said earlier, the business just produces so much cash for a franchisee that lenders were very willing to put some leverage on the business based on the economics and the profitability.

And so I think, basically, no one -- including our own structure, no one ever contemplated a situation where the revenues go to 0. So most of the lenders, as we, I think, communicated on other calls, we assumed that lenders would want to work with our franchisees just because of the fact that they're growing, that they're so profitable. And if, in fact, they have to look across their portfolio as lenders, we would be near the top, if not at the top of the list of folks they'd want to be accommodating to. And that's borne out in the conversations we've had with some of the lenders, who are pretty deep in our system of franchisees. And they basically said they're going to provide -- to the extent it's needed, they would provide waivers while the clubs are closed just until things reopen and they get a better sense of where the trends are, where the key metrics are, as you'd imagine. But all in all, the short answer would be understanding and accommodating, knowing that we're very strong -- they were very strong coming into this, and we'll likely be stronger coming out of it, given what's happening competitively and with the overall strengthening tailwinds for health and wellness.

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Dorvin Donald Lively, Planet Fitness, Inc. - President [45]

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Yes. And John, this is Dorvin. We've had actually inbound calls from some of our franchisees and some of the private equity-backed franchisees that are saying that if there's anybody that would love to sell, we want to buy. And I'm sure they're probably reaching out to some of the franchisees themselves, as they have in the past, to try to build a bigger overall portfolio within the Planet system.

And to your latter point, I mean, we -- corporately, we have 99 stores, and we've stated that although we like the asset-lite model, we're less than 5% of the base. It's not inconceivable that if something came up and we knew a franchisee wanted to sell and needed to sell, we clearly would be there at the table as well. So I think that what you've got here is you've got franchisees that have a varying degree of a capital structure. To Tom's point, we believe, based on just conversations with various banks in the system, they're willing to work with this business and the portfolio that they have. And then we've got guys on the sideline, and we would even be there as well, if need be.

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Operator [46]

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Your next question comes from the line of Simeon Siegel from BMO Capital Markets.

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Simeon Avram Siegel, BMO Capital Markets Equity Research - Analyst [47]

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Dorvin, just for that last point. So looking further out, and maybe what -- yes, just looking further out, do you envision any meaningful changes to just the composition of the franchisee base? Like does the base get further consolidated to a top view? Does it get spread out more? So any thoughts there?

And then, Chris, just coming back to your point you had made. How are you thinking about the value adds from the Black Card post-COVID? Has anything changed there? I don't know if people stay home more, do you think there will be benefits, right?

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Dorvin Donald Lively, Planet Fitness, Inc. - President [48]

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Sure, Simeon. I think that there will be continued consolidation. We don't know what the world is going to look like coming out of this. Obviously, there were deals in the works going into this, where both new potential private equity guys from the outside were looking in as well as guys on the inside that were looking to grow. I think that we'll still be there. We've gone from about 190 down to roughly 130. I don't see that accelerating. I see it probably moderating because we've got a lot of guys that they bleed purple and yellow, and they like the business and they want to stay in the business and want to grow. And then, over time, a few of the smaller guys will probably end up selling out to some of the larger guys. But we think that's fine. We like the composition of where it's at today. We'd be fine with it staying where it's at. But we also don't see it really accelerating to the point that you'd have a significant reduction in the number of franchisees today. I mean quite frankly, we like the partners we have today, that's in the system today.

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Christopher J. Rondeau, Planet Fitness, Inc. - CEO & Director [49]

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Yes. This is Chris. I think on your Black Card amenity, and I think with this -- think what the pandemic has shown us, and like I mentioned earlier, I think it has definitely reinforced our direction with content and the road we were going down, but definitely just reassure that we're going down the right road with all the consumption that we're seeing within our app and then the Facebook Live and YouTube and the others in the industry, our industry, that their consumption or even people that have just -- they're an app company and they're -- what they've seen from a consumption standpoint because of the work from home and this. So I think it just reinforces that it is something that we -- luckily, we're already going down. But, I guess, the big question is the Black Card benefit. Is it a third-tier membership? Is it an add-on to any membership? People are getting this content somewhere anyway. And yes, I see people in the gym all the time, when they go to Planet and they got their phone next to the bench or on the wall and they're following a routine. Why aren't they getting that from us as a benefit? So I think it definitely is the world we'll be in going forward, even more so than before and then figure how to capitalize on that.

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Operator [50]

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Your next question comes from the line of Alex Maroccia from Berenberg.

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Alexander Rocco Maroccia, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [51]

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I'm thinking about competitive bankruptcies, both in the U.S. and abroad. Do you think forced competitor store closures opens up some opportunities in larger U.S. cities that might have been oversaturated previously or even some of the international regions that were previously unattractive to you guys?

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Christopher J. Rondeau, Planet Fitness, Inc. - CEO & Director [52]

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Yes. I think it's definitely something to look at. The bigger -- the -- one of the bigger hurdles we have with those bankruptcies is because our model is very different in the sense that we don't have pools, we don't have basketball courts as one as -- what model is it? So in a lot of ways, it could be strictly a real estate play. If it's somebody who has a big coverage in a city that's hard to find real estate, that's in Boston and New York, for example, and they have a lot of real estate that could be available, it could be more around a real estate play, quite frankly, than necessarily -- it's a perfect box, but it's -- we could just renovate it, and make it look like ours. So there's no doubt that there could -- free up some of that.

But most markets, as -- we always talk about what the real estate weight is with retailers, real estate is not that hard to come by in most rural markets. And probably out of this, will be even better for us longer term. But definitely, I think in some of these really dense markets, it could definitely free up some potential new locations for us that generally are unavailable.

In the international, probably...

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Alexander Rocco Maroccia, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [53]

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I'm sorry. Are you finished?

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Christopher J. Rondeau, Planet Fitness, Inc. - CEO & Director [54]

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No. I think in the international front, I don't know anything off the top of my head yet, but there's something -- as I said, if we go in some of these countries where there's already some pretty large players that -- I don't know if I'd want to go in onesie-twosie at a time, but if there was an opportunity to come in and make a bigger presence at one time, might make some sense for sure.

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Alexander Rocco Maroccia, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [55]

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Okay. And then the second one is on the SBA loans. I know that labor cost is the main metric for how much some of the small businesses were able to get. Can you give us a general sense of what labor costs are as a percentage of total OpEx for the franchisees?

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Thomas J. Fitzgerald, Planet Fitness, Inc. - CFO [56]

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Yes. It's Tom. Between labor and occupancy combined, they're kind of mid-30 -- sorry, 30-ish. It depends on the location, but -- and it's generally 50-50 between labor and occupancy, might be a little more in some circumstances, a little less in others, but that's pretty close.

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Operator [57]

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Your next question comes from the line of Rafe Jadrosich from Bank of America.

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Rafe Jason Jadrosich, BofA Merrill Lynch, Research Division - Associate [58]

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It's Rafe. I just wanted to clarify. The revenue deferrals from the store closures, would you expect to recognize that in the second quarter as the stores start to -- the club starts to reopen?

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Thomas J. Fitzgerald, Planet Fitness, Inc. - CFO [59]

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Yes. Ray, it's Tom. It really depends on when they reopen. And so as soon as the clubs reopen, and that membership clock starts ticking where we're burning off the 3 days that folks -- roughly 30 days folks paid for, then we can recognize the revenue. So yes, if that's inside the quarter, then we're good. And some clubs, which we've heard different things from different states, if that extends, it could be Q3. So it really is a club-by-club basis, which is how we'll recognize it.

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Rafe Jason Jadrosich, BofA Merrill Lynch, Research Division - Associate [60]

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Got it. And then, Chris, you mentioned that the membership has stayed steady, and you didn't see an uptick in cancellations in the second half of March. Just in prior periods where you've seen an individual club maybe closed for an extended period of time, when that club reopened, did you see an uptick in churn? Or can you just talk about what's happened in the past when you've had club closures and how it reopened? And how long it takes to return to prior productivity?

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Christopher J. Rondeau, Planet Fitness, Inc. - CEO & Director [61]

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Yes. I think nothing that would probably be -- anything somewhat close to this would be Puerto Rico in 2017 when Hurricane Maria devastated the island and they had -- there was 11 stores at that time that were completely closed. Probably half of those, I would say, were closed for 3 to 6 months, and they completely rebuild. Those stores were reopened and continue to build the EFT once they rebuilt the store, and it was -- essentially, it was business as usual. And within a year, those stores were doing better than they were prehurricane. And that franchisee went on to build another store in that market. So they recovered and pretty resilient.

And if you remember, back then, they were saying that about 30% of the island may move off the island at that point because there's no work or housing, so we were really pleasantly surprised with how it turned out when they reopened the stores from being closed. So that's probably the only one that's similar. We have our closures in Florida, but they're really a week at best.

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Rafe Jason Jadrosich, BofA Merrill Lynch, Research Division - Associate [62]

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And then if you look at some of the clubs that are a little bit more expensive, some of your competitors, when you've seen them close clubs in the past, has that -- have you picked up new members from them? Is there a crossover in membership where you guys can gain share if they exit the market?

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Christopher J. Rondeau, Planet Fitness, Inc. - CEO & Director [63]

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Bigger clubs that may have 1,000 or 2,000 members, you start to see an uptick when they cancel. But all these boutiques, too, where they have 300 or 400 members, you almost don't see the -- it's such a small number of members when they close. And we just see a lot of those, too. And I think we'll see a lot more of those when this comes out. But you don't -- there's such a few members at the store, you don't really see the uptick. I think, longer term, you just see new joins, not having really any other place to really shop, but we're the only option at the end of the day.

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Operator [64]

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Your next question comes from the line of Paul Golding from Macquarie.

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Paul Alexander Golding, Macquarie Research - Analyst [65]

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I was hoping you could give us some color around the mechanics of the resumption and around membership dues turning back on. If I think about a Black Card member and reciprocity there, is this turned on when the home gym turns back on? Or -- I mean is there the ability to -- because if we look at urban versus suburban, I could see there being some differential there and when members may have access and the membership dues turn back on. So any light you could shed on that?

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Christopher J. Rondeau, Planet Fitness, Inc. - CEO & Director [66]

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Yes. That's a good question, actually. I'd probably say that we probably would let them use the club closed buy if their club wasn't open as we do when there's a flood or a small hurricane in certain clubs or even -- we even do that during presale and construction, where if somebody joins a club during the construction presale period and they're a Black Card member, we allow them to use a -- one of the other locations nearby. While we're not open yet, we're not even billing them yet. So that would probably be something that I'll -- now that you've mentioned that, that's a great idea. I think we'll look at that for sure.

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Paul Alexander Golding, Macquarie Research - Analyst [67]

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Great. I appreciate the color on that, Chris. And then on understanding contactless and virtual uptake looking out into the future and sort of offset with the increased physical cleanliness protocols. Anything you can say on what the stickiness of any margin improvement or decrement could look like going forward on a longer-term basis from this?

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Christopher J. Rondeau, Planet Fitness, Inc. - CEO & Director [68]

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Yes. I don't see this -- there's really no more or less payroll. We don't need more people to -- doing a lot of our protocols, as I mentioned, is just, I guess, reinforcing what we've already done and just, I guess, taking credit for it and calling it out. We've always done it and always have, but we never really took credit for the fact that we have sanitization stages throughout the entire gym with paper towels, probably within 30, 40 feet of any -- at any given machine and that actually happens to be, luckily, one of the approved disinfectants and always was for this virus. So I think a lot of it's just taking credit for where credit's due and just reinforcing with the members that's proper gym etiquette. I mean in our club, our members are -- I mean if you don't wipe equipment down, you're -- our members are going to call you out. It's not even the staff that has to do it.

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Paul Alexander Golding, Macquarie Research - Analyst [69]

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Understood. So then potentially contactless and having more virtual consumption of your fitness content, whether it's through iFit or whatever, could potentially benefit margins longer term, would you say, less need to maintain certain things from usage? Just trying to get a picture of how the environment could look from a cost side.

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Christopher J. Rondeau, Planet Fitness, Inc. - CEO & Director [70]

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Yes. Well, I think one thing is -- the unknown is will it create some retention benefit. As I mentioned, 50% of our members don't use the gym. We don't know. And the app will tell us now is -- well, we don't know that because they're working out at home and they're not using the gym. And if they're using our content, then maybe they'll keep the membership longer because they're not using somebody else's. So that would be probably the bigger upside, I think, I'd look to track and try to watch is that we're providing them values and maybe people stay a little longer because they're not getting value somewhere else.

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Operator [71]

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Your last question comes from the line of Linda Bolton-Weiser from D.A. Davidson.

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Linda Ann Bolton-Weiser, D.A. Davidson & Co., Research Division - Senior Research Analyst [72]

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Actually, my question has been asked and answered.

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Operator [73]

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There are no further questions at this time. I turn the call back to Chris Rondeau for closing remarks.

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Christopher J. Rondeau, Planet Fitness, Inc. - CEO & Director [74]

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Great. Well, thank you, everybody, for attending the call today for our first quarter release, under pretty different times for all of us. We're still happy to see the business and franchisees excited about getting these things open, excited about the future. I really think that there's a silver lining and all this will, as I mentioned, widen our moat longer term and being the trusted source for wellness for our members in the future and nonmembers that we don't have just yet.

So I look forward to our second quarter call, and give you an update at that time. Thank you.

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Operator [75]

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That concludes today's conference call. You may now disconnect.