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Edited Transcript of PLNT earnings conference call or presentation 1-Mar-17 9:30pm GMT

Thomson Reuters StreetEvents

Q4 2016 Planet Fitness Inc Earnings Call

Newington Mar 2, 2017 (Thomson StreetEvents) -- Edited Transcript of Planet Fitness Inc earnings conference call or presentation Wednesday, March 1, 2017 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brendon Frey

Planet Fitness, Inc. - ICR - Managing Director

* Chris Rondeau

Planet Fitness, Inc. - CEO

* Dorvin Lively

Planet Fitness, Inc. - CFO

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Conference Call Participants

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* John Heinbockle

Guggenheim Securities - Analyst

* Randy Konic

Jefferies - Analyst

* Sean Naughton

Piper Jaffray - Analyst

* Oliver Chen

Cowen and Company - Analyst

* Jonathan Comp

Robert W. Baird & Co. - Analyst

* Rafe Jadrosich

BofA Merrill Lynch - Analyst

* George Kelly

Imperial Capital - Analyst

* Tania Anderson

William Blair & Company - Analyst

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Presentation

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Operator [1]

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Welcome to the Planet Fitness Inc earnings conference call. (Operator instructions). Following the presentation we will conduct a question-and-answer session. Instructions will

be provided at that time for you to queue up for questions.I would like to remind everyone that this conference call is being recorded. Brendon Frey, Managing Director of ICR you may begin your conference.

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Brendon Frey, Planet Fitness, Inc. - ICR - Managing Director [2]

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Thank you for joining us today to discuss Planet Fitness's fourth quarter 2016 earnings results. On today's calling are Chris Rondeau, CEO, and Dorvin Lively, Chief Financial Officer. A copy of today's press release is available on the Investor Relations section of Planet Fitness's website at www.planetfitness.com. I would like to remind you that certain statements we will make in this presentation are forward-looking statements.

These forward-looking statements reflect Planet Fitness's 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's 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 web cast we refer you to the disclaimer regarding forward-looking statements that is included in our fourth quarter and year end 2016 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 their earnings release filed earlier today. With that I will turn the call over to Chris Rondeau, Chief Executive Officer of Planet Fitness. Chris?

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Chris Rondeau, Planet Fitness, Inc. - CEO [3]

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Thank you Brendon and thank you for joining us today. I am very pleased with the momentum we built throughout 2016 which concluded with a very strong fourth quarter marking ten years with consecutive quarterly same-store sales growth. In the fourth quarter system wide same-store sales continue to accelerate increasing 10.6% on top of a 6.2% gain on the same quarter last year. The vast majority of this comp performance was driven by membership growth as an increasing number of consumers including a large percentage of first time gym users are joining Planet Fitness. In 2016 we added 1.6 million net new members to the end of the year approximately 8.9 million a milestone that the fitness industry has never come close to seeing.

We also expanded our presence through the opening of 195 franchise locations this year including seven in Canada. Bringing the total store count to 1,313 at the end of December. while the Planet Fitness universe has expanded considerably in recent years our 2016 performance added to our confidence that there is still a long runway for future growth. Previously shared we pulled almost one million new members in 2016 and 43% indicated they have never belonged to a gym prior to joining Planet Fitness. We are clearly growing the overall market by successfully targeting the approximately 80% of the population of the US and Canada that currently does not belong to a gym. Our ability to market to this large demographic continues to improve as we grow. Each net new join 1.6 million in 2016 adds incremental dollars to the national advertising fund as 2% of monthly dues are contributed to its system wide.

In 2016 over 30 million was spent on supporting national marketing campaigns that included running advertising nationally throughout the year that reinforced the differences between Planet Fitness and stereotypical gyms. National advertising campaigns also allows us to participate in high profile brand building events. Highlighted by our second year as the lead sponsor of the Times Square New Years Eve celebration. The timing of the global event is ideal for us with health and wellness top of mind for consumers reach is incredible. Over 175 million viewers in the US and over 1 billion worldwide. For this reason we debuted our new national creative campaign on ABC during the New Year's Eve broadcast and at the celebration in Times Square.

New campaign the world judges we don't at Planet Fitness, be free is an evolution of our brand messaging pushed judgement free in the larger context of society. The world and not just other gyms can be very intimidating and judgmental place. But Planet Fitness is a place where you can be yourself and be free without being judged. This is critical to Planet Fitness's brand DNA and is also very culturally relevant today. I can't think of a better way to kick off our busiest selling season of the year.

Also I am pleased to report that findings from our buy annual brand health study conducted in January shows that Planet Fitness continues to rank number one in unaided brand awareness in the gym category and number one in terms of the gym's respondents that said that were elected to try or join. On top of more than $30 million spent in supporting actual marketing programs in 2016 franchisee's were generally required to spend 7% of monthly dues on local advertising. Between national and local programs we estimate almost $100 million was spent marketing our brand and highlighted our welcoming non-intimidating environment in 2016. This level of investment was is a huge competitive edge that continues to get stronger year after year.

In addition to our strong comp performance our new stores are performing very well out of the gate. This includes areas of the country where Planet Fitness is still specifically under penetrated. Not only are our pre opening marketing activities creating pent up demand prior to store openings by our improved access and better real estate is also helping drive our robust new store performance. Real estate trends are certainly in our favor. As of year end system wide we had over 25 million square feet in leased real estate and approximately 4 million square feet of that will open in 2016 alone. With numerous stores closing across the retail industry over the last few years and ongoing shift to online shopping putting added pressure on bricks and mortar business.

Developers are increasingly looking to Planet Fitness as key tenets for their centers. This has given us the luxury to be much more selective in reviewing and improving a site as we believe it is in the best interest of our brand for franchisees to wait for an "A" location versus settling for a sub optional "B" or "C" location especially in the current environment. We are confident this will be a long term benefit to store performance. As we look back to 2016 it was an incredibly successful year.

Financially our high margin recurring revenue stream coming from our fast growing franchise segment combined with our asset light model turned 14% revenue growth into adjusted net income growth of 27% and generated $94 million in free cash flow, a portion of which we utilized along with our expanding credit facility to return $271 million to our shareholders through a special cash dividend paid in December. At the same time awareness of Planet Fitness reached new heights as a result of our commitment to continually invest in marketing and brand building initiatives.

We continue to enrich millions of members lives with our (inaudible) non intimidating atmosphere. And last but not least we continue to expand our judgement free philosophy beyond our stores into our communities through our national philanthropic, judgement free generation which is aimed at combating judgment and bullying (inaudible) by creating a climate of kindness and encouragement. In November our system rallied together in a national membership sale to raise more than $1 million for Boys and Girls Clubs of America and stop all bullying to support anti-bullying initiatives and resources.

Franchisee, staff , new and existing members united around this cause and I look forward to continuing to make an impact on this important issue in the years to come. As we enter our 25th anniversary year in 2017 I couldn't be more pleased with how 2016 turned out. With revenue up 14.4% , adjusted EBITDA up 22% and same-store sales for the year increasing 8.8% this continues to reinforce my confidence in Planet Fitness model and the future of our brand.

With that I'll turn over to Dorvin.

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Dorvin Lively, Planet Fitness, Inc. - CFO [4]

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Thanks, Chris and good afternoon every one. I will begin by reviewing the details of our fourth quarter results, highlights from 2016 and then discuss our full year 2017 outlook. For the fourth quarter of 2016 total revenue increased 10% to $116.4 million from $105.8 million in the prior period. Total system wide same-store sales increased 10.6%. From a segment perspective franchisee same-store sales increased 11% and our corporate store same-store sales increased 4.7%. Over 90% of Q4 comp increase was driven by an increase in members. At the same time our black card membership penetration was 59% a 180 basis points improvement over Q4 of last year. Our franchise segment revenue was 32.1 million an increase of 30.2% from $24.7 million in the prior year period.

Let me breakdown the drivers of our fastest growing revenue segment. Royalty revenue was $17.5 million which consists of royalties on monthly membership dues and annual membership fees. This compares to royalty revenue $12.1 million in the same quarter of last year an increase of 45%. This year-over- year increase had 3 drivers; First, we opened 195 new franchise stores since the fourth quarter of last year and second, as I mentioned our franchise owned same-store sales increased by 11% and then third, a higher overall average royalty rate. For the fourth quarter the average royalty rate was 3.7% up from 3.2% in the same period last year driven by more stores at our current royalty rate of 5%. Next, our franchise and other fees worth $6.3 million and increase of 58% or $2.3 million over the prior year period.

These fees are received from processing dues through our point of sales system and fees from online new member sign-ups as well as fees paid to us in association with franchise agreements and area development agreements. Also, within the franchise segment revenue is our placement revenue which was $3.6 million versus $3.9 million in the prior year period a decrease of 9%. These are fees we received for assembly and placement of equipment for our franchisee-owned stores. The decrease was driven by the slight reduction in the number of new stores placed and assembled during the current year quarter. Finally our commission income which are commissions from third party preferred vendor arrangements and equipment commissions for our international new store openings this was essentially flat at $4.8 million compared to $4.7 million a year ago.

Our corporate owned store segment revenue increased 5.1% to $26 million from $24.7 million in the prior year period. The $1.2 million increase was driven by the increase in Corporate owned same-store sales of 4.7%. Turning to our equipment segment, revenue increased by $1.9 million or 3.3% to $58.3 million from $56.5 million. This was driven by an increase in replacement equipment sales to existing franchisee-owned stores and an increase in new store equipment sales as a result of a higher value per new store equipment sale due to a slightly larger average store size compared to the prior year period.

Replacement sales as a percentage of our total equipment sales was 20% in Q4 with strong purchases by our franchisees re-equipping their clubs during the quarter. For 2016 replacement revenue as a percentage of total equipment revenue was approximately 31%. Our cost to revenue which primarily relates to direct cost of equipment sales to new and existing franchisee owned stores amounted to $45 million compared to $43.4 million a year ago and increase of 3.6% which was driven by the increase in equipment sales during the quarter. Store operation expenses which are associated with our Corporate owned stores increased slightly to $14.4 million compared to $14.1 million a year ago. SG&A for the quarter was $13.5 million compared to $11.7 million a year ago. Both periods includes non-recurring expenses.

Last year these were primarily associated with our initial public offering and this year they were primarily in conjunction with the secondary offerings. Excluding these non-recurring expenses total SG&A increased by $1.8 million or 15.7%. This increase was primarily to support our growing franchise operations. Our operating income inclusive of the aforementioned non recurring expenses increased to $36.1 million for the quarter compared to operating income of $28.8 million in the prior year period. On an adjusted basis taking into account the one time items and expenses related to our equity offerings our adjusted operating margin was 31.2% in this quarter versus 28.1% in the prior year quarter. An increase of 310 basis points this was primarily due to the revenue growth and higher margins from the franchise segment where we have leveraged the cost infrastructure in our fastest growing segment. Our effective income tax rate for the quarter was 24.6% compared to 29.5% in the prior year period.

As we stated before, because of the income attributable to the non-controlling interest and not taxed at the Planet Fitness corporate level and appropriate adjusted income tax rate would be approximately 39.5% if all of the earnings of the company were taxed at the Planet Fitness Inc. level. On a GAAP basis for the fourth quarter of 2016 our net income was $29.9 million compared to $17.2 million in the prior year period. On an adjusted basis, net income was $19.7 million or $0.20 per diluted share an increase of 15.9% compared with $17 million or $0.17 per diluted share in the prior year period. Adjusted net income has been adjusted to exclude the impact of the public offerings, reflect a normalized federal income tax rate of 39.5% as if we were a public company for the current and comparable prior year periods and excludes several non-recurring costs.

We have provided a reconciliation of adjusted net income to gap net income in today's earnings release adjusted EBITDA which is defined as net income before interest, taxes depreciation and amortization adjusted for the impact of certain non cash and other items that are not considered in the evaluation of ongoing operating performance increased 17.7% to $44.1 million from $37.5 million in the prior year period. A reconciliation of adjusted EBITDA to GAAP net income can also be found in the earnings release. By segment our franchise segment EBITDA increased 34.8% to $25.9 million driven by higher royalties received from additional franchisee owned stores not included in the same- store sales base and an increase in franchise-owned same-store sales of 11%. As well as higher commissions and other fees. Our franchise segment adjusted EBITDA margins increased by approximately 180 basis points to 80.9%. Corporate owned store segment EBITDA increased 8.8% to $10.6 million driven primarily by a 4.7% increase in Corporate same-store sales. Our Corporate store segment adjusted EBITDA margins increased by approximately 140 basis points to 41.5%.

Our equipment segment EBITDA increased 16% to $15.1 million. Driven by higher equipment sales for the quarter equipment segment adjusted EBITDA margins decreased slightly by 20 basis points to 22.9% and in line with our previously stated equipment margin range. Turning to the full year let me quickly summarize the highlights for 2016. Revenue rose by 14.4%. System wide same-store sales were up 8.8%. Our fastest growing franchise segment grew revenue by approximately 32% with adjusted EBITDA margins up 290 basis points. Our average royalty rate for the year increased 39 basis points to 3.66%. Corporate store segment revenue rose 6.4% driven by a 4.9% comp gain. Equipment segment revenue increased 9% which included 193 new domestic store equipment sales. This was slightly below our guidance range of 195 to 200 due to a few franchisees that were unable to complete the construction on a couple of locations in time for us to place the equipment prior to year end. Our adjusted EBITDA margins were up approximately 250 basis points. And then lastly, our adjusted net income was up 26.9%.

Now turning and to the balance sheet, as of December 31, 2016, we had cash and cash equivalence of $40.4 million and borrowing capacity of $75 million under our revolving credit facility. Total bank debt at the end of December was $716.7 million excluding deferred financing cost consisting solely of senior term loan which bears interest at LIBOR plus 350 basis points. As a reminder during the fourth quarter we amended our credit facility and increased our term loan borrowings by approximately $230 million which along with $45 million of cash on our balance sheet we used to fund be a special cash dividend of $271 million or $2.78 per share. That was paid to shareholders on December 5, 2016.

The total borrowings under our amended credit facility based upon the calculation of adjusted EBITDA in accordance with our credit agreement which includes incremental adjustments of $9.8 million that are in addition to our trailing 12 months adjusted EBITDA as of December 31, 2016, puts the company at a gross leverage ratio of approximately 4.5 times. We feel very comfortable with our debt to credit agreement adjusted EBITDA leverage ratio given our leverage ratio at year end was similar to our 2 previous credit facility amendments at March 31, 2014 and March 31, 2015 combined with a strong free cash flow that this business has consistently generated and our confidence in our business model.

Now to our outlook for 2017. For the year ended December 31, 2017, we expect revenue to be between $405 million and $415 million and adjusted net income is projected to range from $71 million to $74 million with adjusted EPS between $0.72 and $0.75 per share. Adjusted EBITDA is expected to increase between 13% and 16% to a range of $170 million to $175 million for the year. The following are the assumptions used in developing our full year guidance. First, with respect to sales, system wide same-store sales are expected to increase between 6% to 8%. We are also expecting to sell and place equipment in approximately 190 to 200 new stores. Finally our 2017 guidance assumes approximately $36 million in interest expense compared to $27 million in 2016. With the increase attributable to our Q4 credit facility amendment and the higher term loan borrowings associated with the Q4 special dividend.

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 John Heinbockle from Guggenheim. Your line is open.

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John Heinbockle, Guggenheim Securities - Analyst [2]

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On the royalty rate increase, that was probably the biggest increase we've seen in a while. Is that a function of this quarter in particular a lot of new clubs hitting that 5% rate. And is that a fair run rate in the near term or is there something aberrational in that 50 basis point increase.

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Dorvin Lively, Planet Fitness, Inc. - CFO [3]

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Yeah, thanks John this is Dorvin. We had throughout this year talked about the deal overall-- impact would be between 25 to 30 basis points on a full year basis. Just slightly ahead of that as I mentioned just a minute ago in my remarks and I think that it does have to do with mix and it does have to do with which stores come online and how fast they might ramp up a store that's got a 5% royalty rate versus one that has one lower than that. I think in terms of thinking about let's say 2017, I think that rate is probably going to be in the -- call it the low 30s. 30 basis to 35 basis points range. So, somewhat comparable to where it was in 2016. As you know with the pipeline of stores that we still have committed under area development agreements it's a combination of stores with lower rates and then stores with the current 5% rate.

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John Heinbockle, Guggenheim Securities - Analyst [4]

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--Yeah-- and then maybe two quick ones for Chris-- maybe not quick. When you guys-- think about the right rate of expansion--190 to 200 obviously financially and I would think you could do more than that-- is it really real estate bottleneck and or trying to get really better sights than maybe you had in the past. Secondly you have had some success with promotions going back to last summer how do you think about that do you now have the brand awareness where those promotions are more successful than maybe they might have been and do you do more of those?

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Chris Rondeau, Planet Fitness, Inc. - CEO [5]

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Yeah, hi John it's Chris. I think the 190 to 200 is of the right number. And it is with the comps you're seeing, the franchisees are extremely excited as you can imagine. They're as happy as they could be to continue to expand. So I think just being more selective with the real estate and waiting for that "A" site. Could we do more possibly but I don't think we want to force an opening to go in when there is a great Staples box they would rather have as opposed to being in the corner where elbow of a center. On the other question, I think the awareness I definitely looked at marketing as an investment and I feel like it compounds. This year again the second year in a row we first beat Gold's Gym. We finally took first place and we're first place again this year on for (inaudible). So I do think that promotions will and have continued to out perform. And digital like we mentioned in the past, last year was really the full year that we had a digital component to our marketing that was well thought out and digital as we have seen can change by the day it seems like. How they react and how it works and how it performs, so I think we can continue to learn from that and get better at it.

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Operator [6]

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Your next question comes from Randy Konic of Jefferies. Your line is open.

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Randy Konic, Jefferies - Analyst [7]

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Thanks a lot. My first question for Dorvin, I'm sure a lot of shareholders appreciate the special dividend. You have optimized capital structure generated a lot of cash flow. If we start thinking going forward now that you pay the special dividend and you say gross leverage at 4.5 times. How should we be thinking about you using the ongoing free cash flow over the next 12 to 24 months. Should we be thinking about keeping leverage ratios at current levels and using that free cash flow for potential more special dividends or should we be thinking about a mixture of paying down some debt take down the leverage a little bit. How should we be thinking about use of free cash flow going forward over the next 12 to 24 months is my first question.

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Dorvin Lively, Planet Fitness, Inc. - CFO [8]

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As you know from a CapEx perspective because of the real franchisee model here, we have a pre asset lite based model we continue to replace equipment in our existing stores and as we have stated in the past one, two three stores a year maybe, you know something like that corporately. So we don't expect our CapEx to be too significantly off from where it's been in the past. Other than maybe doing an extra corporate store if that right opportunity came along and some of our markets adjacent to where our current footprint is. Outside of that , the two or three things I would say and then possibly one new one that we have not really talked about in the past too much with the potential tax reform that the Trump administration is talking about and the elimination of interest I think that's one factor we might take into consideration as we think about the longer term uses of those cash.

But I still think I'll come back to what we have historically said now since we've been a public company and that is we'll look at the most prudent way to return cash to shareholders. We made that decision in Q4 to do the special dividend and we did that in lieu of one implementing a quarterly dividend or, two, doing any kind of a bigger pre payment of debt. We felt like our leverage ratio and the right capital structure was at a point that one, to take advantage of interest rates and where they were at the time and the ability to go the debt markets we felt the timing was right. As we go down the road the next 12 to 24 months we will evaluate those same options we have and It obviously provides us with lot of flexibility because of the cash flow we would generate. We will look and work with our board closely on whether it is a special dividend and where it would be maybe a quarterly dividend or even a debt pre payment if the right thing would occur and interest rates are rising.

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Randy Konic, Jefferies - Analyst [9]

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I wanted to ask about black card penetration obviously continues to move up nicely I think you quoted it at 59%. Just curious how much variability do see on that penetration by geography. Just wondering if there is any lower or higher penetration in the younger markets say the western markets versus the eastern markets. Just trying to get a sense of where you think black card penetration can ultimately get to over the medium term?

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Chris Rondeau, Planet Fitness, Inc. - CEO [10]

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Yeah Randy it is really not a factor of geography except for the piece that relates to reciprocity. And obviously you go into a market where you got only 3 or 4 stores in a big market and reciprocity is not as much of a benefit. The top two reasons are reciprocity and guest privileges. What we have not seen is a - let's just call it a region of the country where we drive consistently higher or lower. What you will see if you go back to stores that are 6 to7 years old and those stores were not built as -- today we call them our black card spa areas and they're not as built out and as nicely designated itself more -- more exclusive with doors and smoke glass and et cetera the way we do it today, you tend to see a lower percentage in those markets versus where you've got stores that have just opened in the last couple of years

It's more so that and obviously what we hope to happen is as stores come up for renewals on their franchise agreements and do some major renovations and expand that black card area to be able to get that benefit that is what really drives it more than anything else.

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Randy Konic, Jefferies - Analyst [11]

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My next question it seems like-every call we have you are getting more confidence that the model-the business model that is-is repeatable across-countries and it sounds like you had progress and success in Canada-spoke in the past about the Dominican Republic. Just want to get an update on the international timeline what are you thinking over the next 12-24 months. You talked about more master licensee or franchise agreements etcetera. Just want to get more meat on the bone or color and how you're thinking about the timeline of potentially more international expansion going forward over the medium term. Thanks.

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Chris Rondeau, Planet Fitness, Inc. - CEO [12]

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This is Chris. We are continuing to -- to look at all of Latin America. I will be -- I'll let you know that happily we finally did a do a deal in Panama recently. It's not a big country but it is a multi-unit deal there and little bit less complicated to go there because it's a US dollar. It's testing the waters and getting our model right before we even enter into a bigger country like Mexico or Brazil for that matter.

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Randy Konic, Jefferies - Analyst [13]

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Great thank you so much.

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Operator [14]

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Your next question comes from Sean Naughton of Piper Jaffray. Your line is open.

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Sean Naughton, Piper Jaffray - Analyst [15]

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Good afternoon.

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Chris Rondeau, Planet Fitness, Inc. - CEO [16]

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Hi, Sean.

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Sean Naughton, Piper Jaffray - Analyst [17]

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So, just any comments on the current quarter how you are running. We're about 2/3 of the way here. I know January is a pretty big month. I think last year you had guided some mid single digit comps. I guess is it fair to say that you're now guiding for the full year in is a that 6-8 range that we can safely expect that you're in that range for the current quarter?

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Chris Rondeau, Planet Fitness, Inc. - CEO [18]

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Yeah, sure after the New Years Eve celebration which was a big hit for us I would say that the acceleration we say in the last half of last year is continuing. So I think it's the -- everything is still going on (inaudible)

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Dorvin Lively, Planet Fitness, Inc. - CFO [19]

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What I'd add to that Sean is that in my full year guidance I gave of 6% to 8% comps, Q1 is going to be the easiest comp quarter for us when you look at year-over-year comparisons so I would say you can expect a higher comp in Q1. Everything else being equal when you try to compare the quarters year-over-year because it's an easier comparison.

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Sean Naughton, Piper Jaffray - Analyst [20]

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Okay, that's fair. I think you guys are looking strong EBITDA margin expansion this year. Just wondering can you frame up whether that's more coming from the franchise segment or the corporate stores. I am assuming the equipment is going to be relatively stable but any guidance or color you could help on the segments would be helpful on where you are looking for that margin expansion.

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Dorvin Lively, Planet Fitness, Inc. - CFO [21]

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Yeah, I think that a couple-- thoughts Sean, you are right on the equipment that ought to stay and it has stayed pretty constant. When you think about our Corporate store segment as it was most of 2016 , it's somewhat driven really by comp --you got a -- you got a relatively fixed cost structure there and little bit of variable cost on marketing and few things like that in terms of the top line growth. And then where our fastest growing segment and obviously the most profitable segment is franchise side and as I said in the past, we-- continue to invest there because that's the life blood of the company with the 1300 plus that we have out there now and the franchisees continuing to have over 1,000 in the pipeline to build. But with that said, I think we can continue to get some leverage in that segment as well. But, that's about all I can say right now other than we don't see anything abnormally different than what we have seen in the last 12 months or so.

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Sean Naughton, Piper Jaffray - Analyst [22]

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That's helpful. Best of luck.

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Chris Rondeau, Planet Fitness, Inc. - CEO [23]

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Thank you.

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Operator [24]

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Your next question comes from the line of Oliver Chen of Cohen and Company. Your line is open.

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Oliver Chen, Cowen and Company - Analyst [25]

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Thank you. Congrat on great results. Regarding the comp store sales and the opportunity you had on the comp line do you think that there's still the majority of that will be related to new members and as you think in the year ahead for as you continue to add members and members per store versus the maximum of where you can go in terms of members per gym, what's the nature of the types of marketing programs that you're going to be doing in adding new members if there is in he nuances we should about looking and thinking about the comp for next year. Thanks.

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Dorvin Lively, Planet Fitness, Inc. - CFO [26]

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I'll take a stab at the first part of that and then let Chris jump in on the last part. We have seen now for the last -- certainly in 2016 and good part of 2015 roughly 90% of our comp gain or so has been from member growth and that -- we're glad to see that rate increase and driven by the black card because it's obviously incremental to the bottom line. It speaks to the fact that we are reaching out to more and more new members that fit our profile as we are adding those members so that is what has been adding the comp. I would expect to see again in 2017 the far majority of our comp gains that I referred to earlier as being driven by member growth.

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Chris Rondeau, Planet Fitness, Inc. - CEO [27]

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I'd say, Oliver, as I mentioned a little bit earlier this, digital stuff we've been learning a lot from that and doing better at it we mentioned the last call the flash sales we began doing which is a one day sale which is something we've never done before we take over websites and really make a big digital splash and proven to be real successful for us and better --time placement --and even commercials I mean. We're able to afford now, prime time which was something we couldn't do before just because of the pure expense. As I mentioned in my script the fact that every incremental number is really incremental advertising dollars so its not a flat marketing budget so each incremental join we added 1.6 million last year so it is more dollars to spend which-- pushes more members through our door and away from our competition is just a number they can't come close to that they can't come close to replicate or match-- which is just putting more and more pressure on our competition.

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Oliver Chen, Cowen and Company - Analyst [28]

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Okay and Chris as you continue to innovate and ensure that your concept is on the cutting edge. Are you seeing anything out there with the equipment in terms of what you want to do over the longer term and what customers are looking for as you evolve and continue to standardize and look for the best experience at a good price?

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Chris Rondeau, Planet Fitness, Inc. - CEO [29]

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Yeah, I mean we're always definitely looking for new things out there. I think-- in a lot of the ways (inaudible) it gravitates to the newest fad which is something we stayed disciplined not to pulled into. Nuts and bolts the treadmill is always the number one most important piece in the gym and we stay true to that. The one thing that has changed this industry though is that technology has definitely come full boar, which I think this industry probably lacked technology in the past so, I think more technology advancements may be in the cardio which is what most of our members use. Could be something that might get people excited and give more value to them. you got really consistent growth and progress.

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Oliver Chen, Cowen and Company - Analyst [30]

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Yeah, and just lastly you guys have had really consistent growth and progress. What is your take on how your consumer is feeling because there are so many cross currents as it applies to the consumer in the retail environment but the business model is quite resilient. I am just curious about how you feel your customers are feeling with regards to the larger environment and how they're feeling with the geopolitical volatility.

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Chris Rondeau, Planet Fitness, Inc. - CEO [31]

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Yeah, I think-with 10 years of straight sales comps we've seen a lot of ups and downs whether it's the economy or political goings ones I guess you would say. I guess we continue to perform and I think health and well wellness regardless what is going on in the world, society, you always have that on the top of your mind. In some cases you say it's more on top of your mind when things are in the down cycle. I think it's a good tailwind for us and with the market we go after it's -- when that person is thinking this is the week I got to do something, what better brand to go try it out than Planet Fitness with the affordability and that 80% -- we cater to are first timers and right conducive atmosphere for them.

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Oliver Chen, Cowen and Company - Analyst [32]

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Thank you. Best regards.

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Chris Rondeau, Planet Fitness, Inc. - CEO [33]

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Thank you.

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Operator [34]

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Your next question comes from the line of John IvanKoe of JP Morgan. Your line is open.

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Unidentified Participant [35]

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Hi, every one. This is Alex (inaudible) from JP Morgan on for John today. Thank you for the question.

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Chris Rondeau, Planet Fitness, Inc. - CEO [36]

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Hey, how's it going.

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Unidentified Participant [37]

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Hey. Your franchisees are required to replacement the equipment on a roughly 4 to7 year cycle. Based on your unit growth history there seems to be an acceleration in replacement revenue that will occur in the 2018 to 2019 time frame. Given where we stand today can you give us best guess as to what you are expecting in replacement revenue or the number of re-equips in 2018 or 2019. Even if it's a wide range. Thank you.

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Dorvin Lively, Planet Fitness, Inc. - CFO [38]

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Yeah. We have never given any kinds of guidance like that on a longer term basis. But you make a good point in terms of if you go back and look at the vintage years when we started opening more and more stores. Obviously when they hit their fourth, fifth, sixth, seventh, eighth years they come into that pool of needing to replace equipment. We said in the past that it's you don't just -- on day one of your four going to replace everything all the cardio is an example that has got to replace first. It's usually on a rolling quarterly basis. We don't shut down stores when we go and replace equipment.

And that is the way it has been over the last two or three years. As we continue to open up more stores there is some overlapping in there too. If you are replacing some equipment in your fourth or fifth year by the time you're in sixth, seventh, eighth year you have other stores that in the first part of the cycle of replacing their cardio. What I would say is that so we ended the year right around 30% of our total equipment revenues were replacement equipment. At the end of Q3 I said it would be in the high twenties. So it was pretty close to that. Right around 30%. I expect that in 2017 to be right around that or slightly higher. 30% -very low 30% range. As re-equipment as a percent of our total obviously the dollars are higher. But that's kind of the insight we have right now in terms of that replacement cycle.

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Unidentified Participant [39]

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All right. That's very helpful. Thank you for the insight there. No more for me. Take care, guys.

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Chris Rondeau, Planet Fitness, Inc. - CEO [40]

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Thanks.

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Operator [41]

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Your next question comes from Jonathan comp of William B. Baird. Your line is open.

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Jonathan Comp, Robert W. Baird & Co. - Analyst [42]

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Yeah, hi, thanks, John Comp from Baird. Dorvin, maybe if I could follow-up on that last question real quick. Can you just remind us a year ago last year what you expected the re-equipment piece to be as a percent of total. Seems like it's been a consistent source of upside and I'm just curious maybe more context around the trends you've seen relative to your initial expectations.

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Dorvin Lively, Planet Fitness, Inc. - CFO [43]

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I think we said at the beginning of the year it was going to be low to mid twenties as a percentage and then throughout the year as we saw what our franchisee's were doing and what was in the pipeline I believe I said at the end of Q3 we expected the full year to be up in the mid to high twenties as a percentage and then again as I just repeated a minute ago it came right in around 30% and we expected maybe just to be slight increase over that. What that means John is that I think our brand is doing very well in the market. I think you saw our comps. I think our franchisees are bigger now on average. The franchisee two years ago had four, five, six, seven, eight, ten stores less than we have today. So you got a number of franchises that got a pretty good portfolio of stores now.

And generally in that market they don't want one store to be rundown versus a store that they just opened up or a store that's been opened up a year or year and a half or so. I think what you see is that the franchisees much like taking care of your house or your car or something, they realize that this is -- it's what killed the industry if you go back 15, 20 years ago, just that lack of CapEx that we have talked about a number of times. And I think what differentiates us is for $10 or $19.99 a month you get this really high value proposition because you got fresh, clean and in some cases brand new equipment. That's what is going on out there and we hope will continue as our franchisees uphold that brand and what they provide to their customers.

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Jonathan Comp, Robert W. Baird & Co. - Analyst [44]

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One more follow-up clarification. Just on the guidance of the year, Dorvin. I just want to make sure you said 190 to 200 placements and when you factor in the international openings is it the total unit growth higher than that? I just wanted to confirm.

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Dorvin Lively, Planet Fitness, Inc. - CFO [45]

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No,--I think the total would be somewhere around between that 190 and 200 including international. International obviously will be a small component of that in total as we continue to open more and more stores in Canada, number one, and then as Chris said we're just going into Panama. We might get one opened at the end of this year and might not open until Q1 of next year.

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Jonathan Comp, Robert W. Baird & Co. - Analyst [46]

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Okay. Got it. Chris, maybe a bigger picture question. As you approach 10 million members or maybe might even be at that now today, obviously growing base overall and strong base of good operating franchisees. Can you just a little bit more and I'm sure there are always ideas franchisees are bouncing your way about how to capture some of the opportunity that you have throughout the system. Anything in the pipeline that franchisees are looking at and any ideas that they're in test mode today that have promise. I know it's a balance of maintaining the discipline and that's proven successful over time. But any color there?

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Chris Rondeau, Planet Fitness, Inc. - CEO [47]

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Yeah, we're constantly trying and testing different types of equipment that would be in the wheel house of our type of member. A lot of the stuff in the industry unfortunately is probably more not our member and drives payroll costs other expenses though it's how to we stay true to our expense line and our payroll model and not move that needle but moving revenue instead. I think what I am still seeing as I mentioned last is 2016 was the first year we started to really see the competition calling your local franchisee or calling me directly waving the white flag. I think our constantly growing advertising dollar, I think our industry is really feeling the pressure coming -- probably solely from PF at this point. We did a handful of conversions fourth quarter and looks like we're doing some more this first quarter. I think it's going to be a trend that continues for sure.

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Jonathan Comp, Robert W. Baird & Co. - Analyst [48]

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Okay, thank you.

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Chris Rondeau, Planet Fitness, Inc. - CEO [49]

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Thank you.

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Operator [50]

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Your next question comes from the Rafe Jadrosich of Bank of America Merrill Lynch. Your line is open.

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Rafe Jadrosich, BofA Merrill Lynch - Analyst [51]

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Thank you for taking my questions. In the past given some color on how many of your store openings are coming from existing franchisees can you just talk about how many are new ada's and in your current pipeline how many of the openings will come from existing franchisees?

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Chris Rondeau, Planet Fitness, Inc. - CEO [52]

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I would say the same trend is continuing as in the last couple of years about 90% of the openings will be by the existing franchisees adding to their portfolio and same new sales of new ada's are-- individual units are coming from the same franchisee continuing to add more dirt. That is the one thing that we deal with the most is what franchisee gets it over another. It's kind of a good problem to have. They all want more to add to their portfolio, so it is pretty much existing.

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Rafe Jadrosich, BofA Merrill Lynch - Analyst [53]

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I think you spoke about how online trends were strong in the quarter. Can you talk about-- as a percent of total sign-ups how much of that is coming from online. And how does that compare to prior years and can you just remind us how much of a fee do you expect to collect from that?

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Chris Rondeau, Planet Fitness, Inc. - CEO [54]

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We collect a $5 online joined fee for each one we can produce on the website. Last year we probably in the mid 20% range out of the online and total joins about 25% and before that I would say low 20s was the norm. As we get better at e-commerce and how the join process is streamlined and coupled with our digital marketing we'll continue to drive that and -- drive that number for sure.

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Rafe Jadrosich, BofA Merrill Lynch - Analyst [55]

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Thank you. One final question. Just when you look across the industry, can you just talk about the promotional cadence versus prior years and then maybe your promotional cadence for prior years -- and you spoke about it a little bit earlier. But just in terms of the competitive environment have you seen any changes in terms of the store opening outlook for some of the low cost competitors. Thanks you.

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Chris Rondeau, Planet Fitness, Inc. - CEO [56]

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Industry norm-- you advertise for memberships in the first half of the year and you buckle down and weather the storm throughout the summer and third and fourth quarter and waited for the winter again. But with PF we have always looked at it as you have to be our there all the time regardless of what season it is. So I think we are more disciplined now between our quarter mandatory sales nationwide and our digital component that's constantly running on focusing on your online drop offs that were attempting to join but got cold feet through the process and retargeting them and our flash sales, so we are much more disciplined with our quarterly schedules to market the full four seasons of the year.

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Operator [57]

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Your next question comes from the line of George Kelly of Imperial Capital. Your line is open.

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George Kelly, Imperial Capital - Analyst [58]

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Hi, guys. Couple of questions. You created this big brand and have 9 million members at this time. Is there an opportunity at some time in the future for you to introduce new products or additional revenue streams. Are there other ways that you can monetize either your brand or your member base?

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Chris Rondeau, Planet Fitness, Inc. - CEO [59]

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We get asked that a lot and with 9 million members as you said I would agree we are getting to the point where we're a brand within itself. So we are thinking what other things can we do. It is there component we could get into -- a clothing line or something. We haven't done anything, we have thought about it but nothing really concrete at this point but nothing really concrete at this point but I agree we are getting to the point now we have a large member base and a pretty good size following that is a brand outside the gym.

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George Kelly, Imperial Capital - Analyst [60]

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Okay. Okay. And then a couple of questions on your international expansion. You mentioned seems like Latin America is a focus for you. I don't know what the exact question is, but how do you think about as you're looking at Mexico or Brazil, what's the opportunity like in one of those markets? How competitive is it currently and what's the gym usage? Any kind of help around that would be great.

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Chris Rondeau, Planet Fitness, Inc. - CEO [61]

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Yeah, we're still studying it at this point. Our focus as I said in the past going down there is mostly around the fact that our Latin American community here in the states, Miami and El Paso and the San Antonio and Puerto Rico, they do real well for us. So, it's kind of our focus. Overseas might be a focus in the future. But that's our main direction at this point. Down in South America it's focusing on what is the right POS company that uses the markets and how is technology used and electronic funds transfer and EFT used. It's more studying at this point. That's why we like Panama because it's American US dollars so it's a good way to get our feet wet again.

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George Kelly, Imperial Capital - Analyst [62]

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Okay, okay. Last question on Canada. You've seen how your stores have performed there now. Seen how they've matured. Does it look similar to the US store maturity?

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Dorvin Lively, Planet Fitness, Inc. - CFO [63]

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Yeah, I'd say comparable to the US. I don't I don't see anything red flaggy. It's pretty comparable to how they react here.

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George Kelly, Imperial Capital - Analyst [64]

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Okay, thanks.

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Operator [65]

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Your last question comes from the line of Tania Anderson of William Blair. Your line is open.

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Tania Anderson, William Blair & Company - Analyst [66]

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Hi. Most of my questions have been answered. I was just curious on the replacement equipment revenue can we expect this year's cadence to be --where it's in the second and third quarter sort of that 70% range over the last prior years?

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Dorvin Lively, Planet Fitness, Inc. - CFO [67]

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Yeah, I think a couple of things. I think that Q1's probably going to be a little more difficult or little less comparable than the prior year. But I think on a total basis for the year it should be -- if look at the guidance I gave it's going to be the very comparable. I'd say the last two quarters of the year as we see it today will be pretty similar to Q3 and Q4 of last year.

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Tania Anderson, William Blair & Company - Analyst [68]

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Okay. Did you say your CapEx guidance specifically -- I know it's not that big. I'm just curious.

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Dorvin Lively, Planet Fitness, Inc. - CFO [69]

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We did not. It's typically been in the low to mid twenties in that range. And as I said a while ago the real only big variable is typically do we do one or two or three corporate stores. We didn't do any corporate stores this year in 2016 so if we do a couple of stores in 2017, it will be a little higher. But not in a material way.

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Tania Anderson, William Blair & Company - Analyst [70]

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Okay. And then on Latin America, out of curiosity because you're mentioning finding the right POS system and some of these things you have to figure out before you can really start maybe some expansion there. Are these things a year off or two years off. I'm trying to figure out when US grows and a little bit in Canada -- how it's augmented by Latin America.

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Dorvin Lively, Planet Fitness, Inc. - CFO [71]

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Yeah, I think I would say as Chris said a minute ago it's -- we want to make sure we get the model right and I think what we've done in Canada was the right way to do it. Don't rush in and just open up a bunch of stores all at once and see how the model works, operates and marketing is different there. Even things like advertising and social and digital and how much should be mobile versus not, et cetera and you get into some places like Mexico and some other countries the form of payment is drastically different. A lot of people don't bank accounts. Today you can only join in the US by giving us your bank account. We continue to study it and make sure that when we do that, that we have a model that will operate and get the kind of returns that our franchisees expect. At this point that is all we can address in terms of international expansion.

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Tania Anderson, William Blair & Company - Analyst [72]

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That's all I have.

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Dorvin Lively, Planet Fitness, Inc. - CFO [73]

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Thank you.

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Operator [74]

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There are no further questions at this time and we'll turn the call back over to the presenters.

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Chris Rondeau, Planet Fitness, Inc. - CEO [75]

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I want to thank you for joining us today. As you see here we had a great year and great fourth quarter and thank you for joining the call and I look forward to the first quarter release in a few months. Thank you.

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Operator [76]

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