Brendon Frey - IR Chris Rondeau - President and CEO Dorvin Lively - CFO.

Randy Konik - Jefferies Steven Forbes - Guggenheim Oliver Chen - Cowen and Company John Ivankoe - JP Morgan Sharon Zackfia - William Blair Sean Naughton - Piper Jaffray Dave King - ROTH Capital Partners Phil Terpolilli - Wedbush Benjamin Bray - Robert W. Baird George Kelly - Imperial Capital Rafe Jadrosich - Bank of America Merrill Lynch.

Good afternoon, ladies and gentlemen and thank you for standing by. Welcome to the Planet Fitness’ Second Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. 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 is being recorded. I’ll now turn the call over to Brendon Frey, Managing Director of ICR..

Thank you for joining us today to discuss Planet Fitness’ second quarter 2016 earnings results. On today’s call are Chris Rondeau, President and CEO and Dorvin Lively, Chief Financial Officer. A copy of today’s press release is available on the Investor Relations section of Planet Fitness’ website at planetfitness.com.

I would like to remind you that certain statements we will make in this presentation are forward-looking statements and 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 risk and uncertainties associated with the forward-looking statements to be made in this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements that is included in our second quarter 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 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, President and Chief Executive Officer of Planet Fitness.

Chris?.

Thank you, Brendon and thank you everyone for joining us today for our second quarter earnings call. Following a strong start to the year, our business accelerated during the second quarter, highlighted by systemwide same-store sales growth of 7.6%.

Our strong comp performance coupled with our franchisee's aggressive expansion efforts over the past year contributed to total revenue growth of 16%. During the second quarter, we opened 36 new franchisee-owned stores, bringing the total system wide store count to 1206 at the end of June, an increase of 19% compared to the same date a year ago.

Membership growth at existing and newly opened locations is fueling strong gains in our high margin franchise segment, which helps us achieve adjusted earnings per share of $0.17, $0.02 above consensus. Since going public just over a year ago, we have consistently delivered strong financial results as they’ve exceeded expectations.

At the heart of our success is our ability to track new members, both casual gym goers and our core target first-time gym members. In fact, in a voluntary survey we conducted of nearly 1 million new members, a little over 40% have reported they have never gone to a gym before joining Planet Fitness.

This powerful statistic demonstrates that our affordable non-intimidating fitness offering and brand positioning are resonating with the broad consumer audience. Our mission is to make fitness more accessible and bringing health and wellness to the majority of our population.

It’s extremely rewarding to learn we’re attracting new consumers to the fitness industry and growing the overall market size. This trend reaffirmed our confidence and our ability to increase our US footprint to 4000 locations over time.

A significant driver of new membership growth is our powerful national advertising fund, a key competitive advantage that continues to get stronger as we open new stores and grow EFTs The National ad fund has allowed us to increase our brand awareness to the highest level in the industry through major programs such as our sponsorship of Times Square's New Year's Eve Celebration and creative TV and digital advertising that run nationally.

The performance of the company over the past several years underscores that our formula is working to expand Planet Fitness’ market share and enrich member’s lives and deliver strong returns to our stakeholders. And with significant runway for future growth, we are confident this trend will continue.

Especially as we have just started scratching the surface of our international potential, the initial results from the nine stores opened in Canada and the one store in [indiscernible] show that our affordable non-intimidating fitness offering can be replicated in other countries that health and wellness trends are universal.

While our international expansion is still in its early days, we have become more bullish on our prospects outside the US and we’ll be stepping up our efforts to open new markets abroad in the coming years. In closing, I'm very proud of our recent results.

Looking ahead, the company and our franchisees have never been more aligned on our go forward growth strategies, which is bolstering our confidence in the potential of our business model to drive significant long-term value for our shareholders. With that, I will now turn the call over to Dorvin..

Thanks, Chris and good afternoon, everyone. I'll begin by reviewing the details of our second quarter results and then discuss our full year outlook. For the second quarter of 2016, total revenue increased 15.9% to $91.5 million from $79 million in the prior year period. Total systemwide same-store sales increased 7.6%.

From a segment perspective, franchisee same-store sales increased 7.8% and our corporate store same-store sales increased 4.7%. About 90% of our Q2 comp increase was driven by volume.

At the same time, we grew our Black Card membership penetration to 59%, a 100 basis point improvement over last year and this accounted for approximately 10% of our comp growth. Our franchise segment revenue was $29.5 million, an increase of 34.7% from $21.9 million in the prior year period.

Let me break down the drivers of our fastest growing segment. Royalty revenue, which was $17.9 million, which consists of royalties on monthly membership dews and the annual membership fees, this compares to royalty revenue of $12.7 million in the same quarter of last year, an increase of 40.9%. This year-over-year increase had three drivers.

First, we opened 194 new franchise stores since the second quarter of last year. Second, as I mentioned, our franchisee owned same-store sales increased by 7.8%, which was primarily driven by higher members per comp store as well as a slightly higher dews per member and then third, a higher overall average royalty rate.

For the second quarter, the average royalty rate was 3.43%, up from 2.97% in the same period last year, driven by more stores at our current royalty rate of 5%. Next, our franchise and other fees were $4.9 million, an increase of 34.2% or $1.2 million over the prior year period.

These fees are received from processing dues through our point of sale system, fees from online new member signups as well as fees paid to us in association with new franchise agreements and area development agreements.

In the prior year, there were both the revenue component as well as the cost component in the cost of revenue related to the point-of-sale transaction revenue, whereas it’s now reported net in revenues.

If not for this change in how we report this revenue under our point-of-sale system, this source of revenue grew by approximately 1.6 million or 46.6%. Also within franchise segment revenue is our placement revenue, which was 2.7 million versus 2.3 million in the prior year period, an increase of 15.4%.

These are fees we received for assembly and placement of equipment for our franchisee owned stores and it was in line with our expectations.

And then, finally, our commission income, which are commissions from third-party preferred vendor arrangements used by all stores and equipment commissions for international new store openings was up $800,000 to $4 million, compared to $3.2 million a year ago, an increase of 24.6%.

This was driven by additional stores in the current year period over the prior year, as well as additional purchases from these vendors by existing stores. Our corporate owned store segment revenue increased 5.6% to $26.4 million from $25 million in the prior year period.

The $1.4 million increase was driven by the increase in corporate owned same-store sales of 4.7%. Our systemwide total membership increased from more than 8.3 million members at the end of our first quarter of 2016 to more than 8.6 million members at the end of Q2. Cumulative year-to-date, we've increased our net members by more than 1.3 million.

Turning to our equipment segment, revenue increased by $3.5 million or 10.9% to $35.6 million from $32.1 million.

This was driven by an increase in our replacement equipment sales to existing stores in comparison to the prior year quarter, somewhat offset by a decrease in our new equipment sales as a result of fewer new store openings, compared to the prior year quarter, and lower pricing from our new equipment contract that was effective July 1 of 2015.

This change in pricing reduced revenue by approximately 3.1%. Revenue would have been 14.5% higher without this contractual price reduction. Our replacement sales, as a percent of our total equipment sales, was 51% in Q2 with strong purchases by our franchisees reequipping their clubs during the quarter.

We see the smoothing out over the balance of the year to the mid-20% range on a full-year basis. Year-to-date, we've opened 84 new stores versus 99 new stores through the first half of last year.

We are confident in our 2016 plans and we're still on track to open between 210 and 220 new stores in 2016, compared to 209 new stores in 2015, and therefore project equipment sales to accelerate over the back half of the year, with the largest quarter-over-quarter increase in Q3.

Cost of revenue, which primarily relates to direct cost of equipment sales into new and existing franchise owned stores amounted to $27.8 million compared to $25.3 million a year ago, an increase of 9.9%, which was primarily driven by the increase in equipment sales during the quarter.

Store operation expenses which are associated with our corporate owned stores was $15.8 million, compared to $14.7 million a year ago.

The $1.1 million increase was driven by a combination of factors, including some incremental store labor costs at several of our corporate stores, as we increased staffing levels to provide a better member experience along with some additional marketing investments aimed at driving membership growth.

During the second quarter, we also experienced some elevated rent expense related to a catch up in common area maintenance or CAM charges at several locations. SG&A for the quarter was $12.4 million, flat with the prior year quarter. However, both periods include non-recurring expenses.

Last year, these were primarily associated with our initial public offering and this year, they were in conjunction with the follow-on offering in June. Additionally, the prior year included expenses in connection with the point-of sale upgrade. Excluding these non-recurring expenses, total SG&A increased by $2.7 million or 30.7%.

As you know, the prior year quarter did not include normal public company expenses like the current year, such as higher DNO insurance expense, audit and legal fees, investor relation expenses, et cetera.

In the current year quarter, we also had higher expenses to support our growing franchise operations before we had an incremental net 192 additional stores versus this time last year.

Our operating income, inclusive of the aforementioned non-recurring expenses increased to 27.8 million for the quarter compared to operating income of 18.7 million in the prior year period.

On an adjusted basis, taking into account the one-time items and expenses related to our public offerings and the point-of-sale upgrade, our adjusted operating margin was 31.9% in this quarter, versus 28.9% in the prior year quarter, an increase of 300 basis points.

This was primarily due to revenue growth in higher margins from our franchise segment for we have leveraged the cost infrastructure in our fastest-growing segment. Our effective income tax rate for the second quarter was 15.9%, compared to 3.4% in the prior year period.

The higher federal tax rate was due to the fact that prior to the appeal least year, on August the 5th, Planet Fitness was treated as a pass-through entity for US federal income taxes, as well as in most states, for state income taxes.

In the periods after the IPO, Planet Fitness incurs federal and state income taxes on its share of pre-tax income, a portion of income attributable to Planet Fitness Inc, but not on the pre-tax income attributable to the noncontrolling interest.

On a GAAP basis, for the second quarter of fiscal year 2016, our net income was $18.7 million, compared to net income of $11.6 million in the prior year period. On an adjusted basis, net income was $16.8 million or $0.17 per diluted share, an increase of 27.5% and up from $13.2 million or $0.13 per diluted share in the prior period.

Adjusted net income has been adjusted to exclude the impact of the public offerings to 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 GAAP net income and adjusted net income per share to GAAP net income per share 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 18.6% to $36.8 million from $31 million in the prior period.

A reconciliation of adjusted EBITDA to GAAP net income can also be found in the press release.

By segment, our franchise segment EBITDA increased 39.4% to $24.7 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 7.8%, as well as higher commissions and other fees.

The prior year included certain non-recurring expenses like the POS upgrade I mentioned earlier. After adjusting for these non-recurring items, franchise segment EBITDA margins increased by 80 basis points to 83.8%.

Corporate owned store segment EBITDA increased slightly to $9.5 million, driven primarily by a 4.7% increase in corporate same-store sales.

Our corporate store segment adjusted EBITDA margins decreased by 180 basis points, primarily driven by the incremental investments in store labor and marketing and temporary increase in rent and related expenses I mentioned above. Our equipment segment EBITDA increased 8.5% to $7.9 million, driven by higher equipment sales.

For the quarter, equipment adjusted EBITDA margins decreased slightly by 50 basis points to 22.1% and in line with our stated equipment margin range of 21% to 22%. Now turning to the balance sheet, as of June 30, 2016, we had cash and cash equivalents of $55.7 million and borrowing capacity of $40 million under our revolving credit facility.

Total bank debt at the end of June was $489.7 million, excluding deferred financing costs, consisting solely of our senior term loan, which bears interest at LIBOR plus 350. Based on our ability to generate significant cash flows, we feel very comfortable with our current capitalization.

Let me summarize quickly the highlights of our very strong quarter. Revenue rose by almost 16%, comps were up a strong 7.6%, our fastest-growing segment grew by approximately 35% with adjusted EBITDA margins up 80 basis points. Our average royalty rate in the quarter increased to 3.43%.

Corporate store segment revenue rose 5.6%, driven by a 4.7%, comp gain. We opened an additional 36 new stores this quarter, which brings us to 84 new stores year-to-date, and our adjusted EBITDA margins or operating margins were up 90 basis points.

Our adjusted net income was up over 27% and we have a very strong balance sheet and we continue to generate significant cash flows. Now to our outlook. Based on our second quarter performance, we are raising our full-year guidance.

We now expect revenue to be in the range of $366 million to $372 million, up from our previous guidance range of $360 million to $370 million. Adjusted net income is now projected to range from $62 million to $65 million with adjusted EPS between $0.63 and $0.66, up from our previous adjusted EPS guidance of $-.62 to $0.65.

We still see new store openings in the range of 210 to 220 this year with a higher degree of confidence towards the lower to mid-point of that range. With respect to comps, we now expect systemwide comparable sales to increase in the high single digit range, up from our previous guidance of mid-single digits.

Factored into our current guidance are some incremental expenses related primarily to higher costs in our corporate stores from additional labor as a result of recent changes in labor law, which we’ll start experiencing beginning in Q4.

With respect to our comp performance, we are pleased with the acceleration in growth that we've experienced as the year has progressed as it indicates that our marketing and our promotional activities aimed at attracting new members to Planet Fitness are working.

While we expect this trend to continue during the second half, it is important to note that 95% of our store base are franchise locations, the impact on our total revenue, and even more so on profitability from each additional point of comp increases is modest, particularly with a number of stores at a royalty rate below our current royalty rate of 5%.

However, this speaks to the success that our franchisees are having in driving higher four-wall economics at their stores with incremental flow through to their bottom line. This continues to bode very well for future development of our pipeline in committed locations under existing ADAs. I’ll now turn the call back to the operator for questions..

Thank you. [Operator Instructions] Your first question comes from the line of Randy Konik from Jefferies. Your line is open..

Hey, guys. Good afternoon.

So one thing that sounded very interesting I think in the comments is, did you guys talk about increasing some staff levels in some of all the stores, it just sounds like there is an opportunity here to kind of drive higher member satisfaction and then create more stickiness in those members, just curious of what you kind of were talking about in the speech?.

Yes. Sure, Randy. This is Chris. Remember, in the first quarter, we announced that we had hired Jim as legal VP of corporate stores. And quite frankly, up until he was there, it was really myself trying to keep a pulse on the corporate stores for running their business.

So he’s come in and looked at where some of the holes were, some of the things we were lacking and putting some staffing and reign some of the schedules here and I think we’ll see some good stuff come out of what he is looking at to produce out of those locations and I think you will see already in comps of what the corporate source are doing to see some of that..

Got it.

And then when you talk about, I think the Black Card penetration is up to 59%, is there any perspective you can give us in terms of the take rate of the Black Card of existing members versus the take rate of a new member, meaning like are you getting existing conversions from existing members and then also having a higher take rate from new members, just curious there?.

Yes. This is Dorvin. I will just jump in with one thing and maybe Chris can jump in. I think I said that we were up 100 basis points over last year, actually 100 basis points over Q1, up to 59 from 58, we are up 200 basis points over the same quarter last year.

I think we've said in the past that in most cases, we see a prospective member electing for that Black Card, when they come in to join. At times, you will see some conversions up to the Black Card when we've been in markets where we didn't have a lot of penetration of the stores in the market.

So the reciprocity, which is one of the top two reasons someone will take the Black Card offering. So when you open more stores and have more opportunities in the market to use other locations, sometimes you will see that conversion up to the Black Card, but typically that decision is made at the point-of-sale at the time they join the club..

I think the only thing I will add to that is that towards the end of last year, we started a lot of digital marketing initiatives and going after White Card members that offer these, that is a new thing that’s been going on as well. So a little bit of the existing upgrading, but as Dorvin mentioned, it’s usually point-of-sale..

Yes, it's very helpful. And I guess my last question would be, it sounds like you are getting even more bullish on the international opportunities.

So I guess what I'm interested in is do you really -- do you think about the world is flat, meaning in your learnings of the stores thus far in Canada and the Dominican Republic, have they been, the way they have to be operated, the way that the customer reacts to pricing, et cetera, is it truly the business model seems to be extremely portable from a geographic standpoint.

So just any learnings that you can share with us on that, seems like the world is flat, but this is truly be just transported around the world would be helpful? Thanks..

Yes. I’d say any of the initial stuff we’ve seen so far is in a lot of cases, it is somewhat flat and I think the non-intimidating factor from what we’ve seen applies regardless of where we are looking.

But I think some small agencies for example, as credit card, EFG is probably more acceptable than the technicality, we are in the state, but small factors like that..

Got it. Okay, very helpful. Thanks guys..

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

Hey, guys. Steve Forbes on for John today.

So you mentioned in the national advertising fund and increasing brand awareness as the co-driver of the membership growth, but given the quarter-over-quarter growth you just delivered, can you kind of expand on what you’re seeing as it relates to the membership base, maybe if you can touch on demographics, income levels, really where is the growth coming from.

Is it broad based or are you seeing any changes in your attrition levels?.

Everything has been the same, there is not any region or market that’s working better or worse than the others. It's pretty much uniform throughout the entire country. And I think the duty of the day in the local advertising fund is that as you mentioned, every membership that joins a member growth is just more money put to work.

So it constantly builds the momentum quite a bit and I think that comes back to that, where it’s over 40% of first timers, which I think is right in the warehouse of where we are going after that first time that we are doubt before in the non-intimidating and pushing that.

So I think every time we keep pushing those dollars to work, we just keep penetrating deeper..

Maybe just one other comment, Steve, I will add to that is when we open these stores, and we go through our process, we call presale which can be 4 to 6 weeks or so before store opens, we take a look at how those stores perform out of the gate, and I would say one of the key metrics obviously is how many members they sign up in the earlier stages and we’re seeing our new stores open in Q2, opened up at a higher rate than they did last year in Q2.

So I think it speaks to the power of the brand with more stores and more marketing dollars to Chris's point that we are throwing out there to get our brand in front of people and it's certainly been effective in what we’re seeing in some of our stores now..

And then, just as a follow-up regarding the growth in replacement equipment this quarter. I know there is a team in place, right, tracking the timetable for the franchisees to replace the equipment.

So there is a growth of function of their success or are you actually seeing some behavioral changes as it relates to the franchisees and their willingness to refresh the clubs?.

Yes. I would say it's both. I would say if you went back over the last 18 months or so, it was more of the team pushing and having some good conversations direct with franchisees that you need to be taking a look because you've got clubs coming up that need to be -- have equipment replaced, et cetera.

Two, I think in a lot of cases now where you have some larger franchisees have got a significant amount of investment in a portfolio of 15, 20, 30 stores, and where they’ve got a market penetration in the market, they don't want to have one store that is giving a different member experience and showing the wear and tear, et cetera, that some of their newer stores have.

And then in combination to that, certainly some of the older stores, if you go back four or five, six years ago, that didn't have the nice sort of Black Cards spi that they are going into some of our newer stores in the last say 18 months, 24 months, they are saying that he get a bigger lift on that Black Card mix and so it's a combination of all of those things I think that's going on that’s causing them to say, I've got to protect my investment, protect my brand, I want to be first, and I want to be better than competition, I don't want to let anybody else kind of we call it out new to you and so I think it is all of those that is driving those replacement equipment sales..

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

Hi, Chris and Dorvin, congrats on a great quarter.

So Dorvin, just had a question on the equipment sales and what do we need to know about the pricing trends that are embedded in your guidance and what is ahead for how you think about pricing and when you evaluate those decisions with your franchisees partners? Also, Chris, as you expand into new regions in the West Coast and what are some learnings from the newer regions that are different or surprises as some regions have less brand awareness or penetration than others, just curious about that as we think about momentum towards your long-term target?.

Okay. Oliver, I will jump in on the equipment first. I think as you know, we entered into a new contract last year in July 1 and went almost all exclusive with life, there are still a few places that we buy outside of that, that they don't provide in the offering.

But the majority of the equipment purchases that a franchisee makes from a dollar perspective is through that life contract, it's a three-year contract, it's got some thresholds on there on some rebate volumes, et cetera, but we tend to pass that along to the franchisees in the form of, you've heard us, I think maybe even in Q1, we talked about some promotions, et cetera.

And there are times they’re aware where we like to be able to share that back with them and sometimes it goes to drive the reequipped process frankly, and we found, if you even go back past to the life 2 or 3 years, you will see the franchisees tend to even for a fairly small discount, will tend to make a decision at the time, and replace the equipment.

So the net of your question is that under this contract, we have, two more years now, our pricing will stay consistent and our margins should stay right in the 21 to 22 range that I mentioned in my prepared comments a few minutes ago..

Oliver, this is Chris. I would say in the West Coast, this club performed really great. Even out of the gate, and I think there is a couple of things going on there. We’re going to see what’s the Mississippi -- and luckily our national ad campaigns are hitting everywhere, regardless of our clubs in the area.

So we go to these markets as almost a pent-up demand that people have been waiting, they know the brand, they know what we're about. So we opened, and they come out of the gate, slightly club here in the East.

I think coupled that with two other things is that they, the West Coast and that's because East Coast will be here longer, people have seen us grow over the last more than a decade, so they’re much more familiar with low-cost as there are low cost competitors out here, we’re out there, they’re almost 3, 4 years behind I would say the East Coast.

So that there is not really much low-cost competition. Lastly, I would say is that the two largest chains under us [indiscernible] which were in that 500, 600 club range, they also started out on the West Coast and they are also -- they’re more hiring clubs.

So we come in with brand new boxes, they see our product and the clubs so very well out of the gate..

Okay, that's really helpful.

And on the topic of churn, you've had such great numbers here, has your market research and kind of the variation in the numbers you've been seeing there still trending in the low single digit rate on a monthly basis, is there anything different there or anything we should know about that and is the reality of anyone who churn, they’re going back to their couch, is that still kind of the theme? Thanks..

Yes. I would say not much change at all in what we see trend wise.

If you go back over the last two, three years, what we’ve said is that primarily because we go after that 80% that don't belong to gym, and as Chris made in his comments a few minutes ago that in the case of almost 1 million members, 40% of them have not ever been belong to the Planet Fitness before, you’re going after that segment that to your point, if they decide to not stick to it, they’re going to go back to the cabs.

And so from the -- the way we look at it and because of that, as we said what happens after the first 12 months, because you’re going to have a lot of those, you’re going to try, no, no, not going to make it.

And that single digit, low single digit range that you’re talking about is what we have been seeing in the past and continue to see, so it is no significant change at all in the last couple of years or so..

And our final question is on the topic of national wage growth, we've done a lot of work regarding scenario analysis on national wages increasing over time.

How should we interpret that in terms of how we will need the modern your business and what are your thoughts about the pressure or the opportunities as wages go up?.

I would say a couple of things and Chris might jump in on this too, I made in my comments a few minutes ago in terms of corporate clubs and some of the things we're doing and Chris inferred to the investment we’re making and we anytime you're going after a lower wage earner you’re always going to have snap turnover and we think that member experiences is really critically important to our brand of what we do and so we've looked at ways to bring some of those wages up, more so in some markets than in others frankly because they’re not all exactly consistent.

And then the second thing I would say is that and I made this comment on my prepared remarks earlier that with some of the law changes on the FLSA that kick in, we are increasing some of salary, our manager salaries will go up a bit starting in Q4, if you take all of that combined just to give you a sense though to I think where you're going in terms of what is this all mean, the combination of our incremental staffing that we've already started making and then what we will have to do with respect to the law change, you're talking a couple of thousand dollars a month per store, so it is with the kind of volume that we are doing and the margins that we do in the high 30s to low 40 EBITDA margins couple of thousand bucks per store doesn't move the needle much..

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

I think you said Dorvin that we should expect maybe the lower end of your previous development range or lower to mid end I should say of your previous development range of 210 to 220, did you say that and was that just an indication that maybe some of the units that were getting billed in ‘16 are now getting pushed to ‘17 and ‘17 could be higher than ’16 or do you guys kind of feel that you’re beginning to approach an absolute number of club openings every year whether that number may be getting a base out as we think about the model from ‘17, ‘18, ‘19?.

Sure John, I did say that our confidence range was higher at the lower end to the middle of that range, we are certainly sticking to that it could be in there up to the 220, but just wanted to give you guys a sense here we’re setting, call it five months or so out.

You are right on your second point, is that the timing issue is always a tricky one quarter by quarter and frankly even more so with the December quarter and because you just have a higher volume of stores that you’re climbing into a shorter period of time and some of those stores and I think we've talked about this in the past, some of the stores have at times will slide into the next quarter or the next month rather.

In most cases it doesn’t impact our revenue, so I guess two things, one is it in some cases won't impact revenue number because we will place the equipment let’s same in the last day or two or even up to four, five, six days in a month but the bunch list and getting the final seal from the town might not come through so that they can actually open the doors for business.

So that's one point.

And then just the second point of, you never know from snowstorms to other things that might happen and the we are in pretty good shape last year because we didn't have that but I think the net of it is we are, you know, we upped our revenue number, we feel very confident with that range and we are still in that 210 to 220, but just to give you a little more flavor on where it could be, I would say that to the extent we are on the lower end of that range, it doesn't really impact the way we think about 2017.

At this stage, obviously there's a lot of franchises that are in the market looking for sites for next year.

And sometimes in some really contested markets, you can be talking 12, 18 months of actual working in market to get the sites because we go from main and main, and not only do we push back on franchisees of not taking a side because we don't think it is the optimum side in the market, they also are, you know, they get choosy as well but with that set, sometimes we turn down two sides for every one we approved.

We've done that this year, we've approved significantly less than the total size that got submitted. So, we still feel very comfortable with, we set on the road show that couple of hundreds of stores a year and we did 209 last year, we are in this 210 to 220 this year and that’s the US and Canada and taking international out of the equation.

I still feel like that we can do that but we are also though going to be very conscious to make sure we don't just put up a store to put one up and pick an inferior location..

And secondly, you mentioned a few times in your prepared remarks, you’re comfort with the balance sheet.

And I want to kind of take those comments a little bit further and when you look at other predominantly franchised capital light businesses, you oftentimes seen ratios debt to EBITDA higher, sometimes a few turns higher than what you currently have.

You seen a pretty active cash return to equity holders strategy and you oftentimes don't see companies amortizing their debt at all. So, I guess, I would say comfortable means conservative and it might even mean very conservative.

So, how are you thinking about the balance sheet now that you have some experience as a public company, you see what the markets are, you see what's available to you, but how should we think about the balance sheet over the next 12 to 18 months in terms of how that could change and how might make that a friendly use for the equity holder..

Couple of things I would say is that we were as high as 4.5 and on a net basis today; we’re just call it 3.25 something like that. I think I've said in the past that I feel very comfortable in that, call it 3 range up to that 4.5 range or so.

This business can definitely based on its cash flow and based on how we see our business can certainly support leverage higher than that. We put in the stock repurchase plan you know back earlier into Q1, part of that was we’re having some significant volatility in the market.

So we have kind of that in our pocket, if he ever felt like that that was something that we needed to do. And in the last comment on that I'd make is that I think with the continued overhang from TSG shares, we did the one-for-one.

And I'm sure over time their plan is to work that down and I think I've talked a lot to a lot of different investors now over the last 12, 18 months or since the IPO, and I think that utilizing some of that cash may be part of the overhang that could be an option, it could be accretive and it could be kind of a right decision to make.

So, we've got options which is good, and I think longer term we should look at what's the right way to return to our shareholders and whether that is in the form of a dividend or some form of kind of stock purchases is something that we will take very serious when we get a little bit further down the road..

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

A couple of questions on the comps for the quarter, I know it was only a modest acceleration, but we haven't seen too many consumer companies showing improvement in the second quarter versus the first quarter.

I know you talked a lot about the kind of California opening strong and so on, but I mean what do you think is happening where your compass are actually improving somewhat where most people are kind of struggling?.

I think Sharon what we're seeing is two or three things that's going on in our business, one is and I think Chris spoke to it a bit ago and that is just the ability that we have to get our name out in front of a lot of people with more stores every day.

And I think from the New Year's Eve branding opportunity we had there to really showcase our brand in a way we’d never done before was huge and I think there is residual effect of that that we see.

We go in and Chris said this a while ago, we go into some of these markets where either the brand is not known or there is only one or two stores in the market and we see those stores open up with a significant number of members on day one that they open up.

Our stores are performing this year better than last year across the system in terms of vintage years, go back and look at stores open in 2008, 2009, 2010 et cetera, so not only are the newer stores are doing very well out of the gate but then the vintage years are too.

And then you get the impact of having opened more newer stores in the last two to three years and when those start rolling into comp that first year or two you get a pity big lift but our model is such that from market to market from vintage to vintage they’re doing very well and then some of the things that we're doing on our social and digital that we just started this year, we never really ever done that a lot and including taking it over from our franchisees and doing it more centralized now and doing it more efficiently than what kind of the sum of the parts can do before so I think it is a combination of all those that gives us a significant amount of confidence in our business right now..

Another quick question on the royalty rate, it did go up quite a bit this quarter, Dorvin, what are you thinking in the right royalty rate is for the full year?.

I think in the past I've said we would be somewhere in that call it 25, 35 bps range year-over-year increase and I think we will be right there kind of towards the upper end of that range on a full-year basis..

And lastly, do you have any range or franchise openings that you would expect in the third quarter, I know usually you wait more heavily to the fourth quarter?.

We talked about I think on the last call that when you look at our equipment revenues which as you know in Q3 and 4, particularly 4 can drive higher percentage of total revenues. We said we probably have a higher increase in Q3 than in Q4 on a percentage basis. So we will open just a handful more stores this year in Q3 then we did last year.

I think to a certain extent the way we thought about our guidance is we let a little bit of kind of what we beat Q3 or Q2 flow through. I think the way we’re looking at it is, there is probably a little bit of that that was timing from Q3 to Q1, a small piece.

And then probably the increase in EPS if you probably flow through in more in Q4, but I think that you will see if we get into the range that I was just talking with John while ago about I think you will see a small increase in store openings in Q3 and then the balance of that to hit, the total will hit in Q4..

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

So couple of questions on the black card, how are some of your initiatives here, how are you guys doing in terms of trying to enhance the value of that black card and then I guess also any statistics or qualitative comments on whether or not those black card numbers are actually stickier than non-black card numbers?.

I think Sean, we've looked at this in the past, the way that members’ actions are with respect to black card white card with respect to different geographies we are in, it really doesn't move much, I mean it’s pretty consistent and it has been that way to my comment earlier and so you typically get them to sign up.

As I mentioned newer stores that have a much bigger and more profile kind of a Black Card’s buyer, they will tend to have a higher percentage, we've got we’ve said in the past we have a number of stores up in mid to high 60% range on a system basis, we are at 59 now.

We have and continue to look at ways we can enhance that to be able to drive that but still the top two reasons are reciprocity and guest privileges.

And you'll see that day in day out across the system now with 1,200 stores, so I think it is still just kind of a steady continued push by our franchisees and us or corporate clubs when prospective members in and do a tour, I think there is ways that you can kind of sell that a little bit better, I think some do better than others but no major change in the way we see any of the member actions to date..

But just to sit on the black card members, so if you just took that cohort of people, is there attrition any different than the overall chain, are those people potentially a little bit stickier members, do they last a little longer?.

No, not really. It is pretty consistent with between black card white card..

And then, I know here has been a few questions on staffing costs, and I'm just going to ask one more, is there any way for you to give us any sensitivity on just potentially the overall impact may be to the margin of a company-owned store from some of the changes that it sounds like that you may be impacted on from the overtime rule that’s starting here in Q4.

Just trying to think through some of the dynamics in the modeling changes potential for 2017, not asking obviously to give any guidance there but just trying to figure out there is a sensitivity we can think about?.

I think the run rate when you get to the end of this year, so we've added some laborers we talked about earlier and for the reasons we addressed. And then, the incremental kind of salary impact that starts in Q4, on a full run-rate basis by the end of Q4, it'll be about a couple of thousand dollars a month per store.

So not, you know, when you think about the economics to the bottom line of the four wall store, corporate or franchise store for that matter, I mean that gives you a sense of the impact, it's not a huge impact..

Your next question comes from the line of Dave King from ROTH Capital Partners. Your line is open..

I guess, first off Chris, maybe just following up on your prepared remarks around international, and the efforts I guess stepping up the opening there, maybe can you talk about what's involved in the stepping up of pursuing those openings and give us some thoughts on how we're thinking about it over the course of the next couple of years?.

Nothing really strong specifics but most back finding on a handful of countries, and which ones are probably the best to start with.

We have some internal and external sources that we are gathering info now as well as I mentioned, some of our vendors like [indiscernible] for example, already does business in a lot of these countries, so we can get a lot of intel from them as well before we decide to go in.

We will probably end up partner with a couple of franchisees that expressed interest to open a store or two in a couple of countries and experiment much like we did in Dominican and then from there make a final learning before we have the largest strategy to enroll and look to get a one..

And then, maybe Dorvin, do you have any breakdown or do you have any color you can add in terms of how we should be thinking about or how the comp, may be the 7.8 franchise own comp that you did this quarter, how did that that breakdown between mature stores or newer stores or maybe you can just talk about vintages, to some of the earlier commentary and how did that trend in the quarter and how you’re thinking about that shaping up for the year?.

It is pretty consistent with how we talked about in the past albeit as the result show some improvement and that is really coming from volume from member growth which from our perspective is a healthy measure of what the brand is able to do in these markets by driving more and more people for the stores, you're still going to see your older vintage stores, are going to comp with a few exceptions but you're always going to see them comp in a very low single digits, 1% to 3% maybe 4% type comps that’s what you're going to see in those, let’s just say more than three years old or so.

And then you’re newer stores over the first year comp, as you guys know we put them in comp in the 13th month that they draft, you’re going to see that month 13, 14, 15 et cetera that full-year they can comp up, call it 40% range or so, it could be a little higher, could be little lower.

And then in its second year comp, year three of operation you're going to see kind of mid to high teens and so when, you know, with our call it 1,200 stores now, and back out close to 200 hundred that are not in comp that’s kind of the way that you will see it to fallout in terms of how that gets ultimately to the 7.8 for the franchise stores today.

And as I said earlier, the rate growth of black card percentage was about 10% that's what about what it was in Q1 as well so that’s still running at about the same rate it was, so year-to-date most of the volume or most of the comp growth is driven by volume..

I guess one last one, if I may, in terms of current ADAs that you've got for the 1,000 locations, beyond that, I guess can you talk about the pipeline to get to the 4,000 stores and sort of what's been the trend on that front for new ADAs or is that, I mean it is still the assumption to try to do it, the bulk of that through existing sort of relationships or just I guess just how are you feeling there and sort of what's been the recent trends? Thank you..

The same trend has continued, where we still have over 1000 that are still committed to, even though we open more store and continue to backpedal the pipeline. In the same trend where the existing franchisees but are buying the additional units so they are just adding more dirt to their territory.

They're still just as bullish on the brand and they continue to double down and take down more dirt which is great..

And there is no interest in sort of winding up that broadening them out to….

We obviously just have a – we always have a little bit new blood but the existing teams are building great stores and a lot less to handle, so they are great and they have competitors in their own right, they’ve got 20 stores behind them that are helping them build the store little faster, so it sounds a good recipe..

Your next question comes from the line of the Phil Terpolilli from Wedbush. Your line is open..

So I just wanted to touch briefly kind of going back to that new store comment, and I think earlier you talked about say rejections and some of the ones that come in and if anything sort of you reject more than you accept.

I would have thought that some of those franchisees especially if they have been partners with you for a long time, it sort of understand may be the optimal locations but may be getting a little more little bit more challenging for them to find locations or just any sort of color as to why you think that’s the case if that’s happening?.

I wouldn't say more challenging, maybe just more locations to look at even just one more this morning with Macy’s, you know, there is just more and more open boxes so it’s, [indiscernible] that helps us look at market studies and locations and stuff and we just kind of put them all together against each other to pick the best of the best if you will, so it is always good to go through many locations, be sure we actually are looking at all the possible, viable locations to figure out which one is the best, so it is they are on the ground and they are driving the site too, so it is going to get us all on the phone on email in the rooms to approve these locations, figure out which one is the right one to go with..

And frankly another, I guess it is good for us, is that, in some of these markets you've got these franchisees that have multiple brokers and so the brokers are always trying to do their deal and so with the way we handle the development side out there on the real estate often times you will get multiple sites omitted because in some cases you are work in the market, work in the market, work on the market that’s the only one that’s available that you fits our criteria because we want main to main, we want the right kind of demographic surrounded, we need a certain size box, we want signage, you go down the list that we are looking for and oftentimes will tell franchise deals say, this is only one I can get and we will just say hang on and wait a bit, and so you get a little bit of that as well..

And then just two big picture questions, I guess the first one you referenced earlier in the prepared remarks about voluntary new member survey, I think it was 1 million members and some data from that, so just kind of curios if there is anything else you may be learned coming away from that or insights you are able to gather from serving new members?.

That was the first one of that kind that we’ve done and it was a fairly large sample set which was great, I think the only couple of thing is it was both online web joints as well as in-house, so a mixture of both and they both trended almost the exact same way, just over 40% have never belonged to a gym before, so its’ pretty compelling data that it’s now we’re really accomplishing what we thought we were heading to spending out to do so I think it would be interesting as we drive the brand and drive that if we can move that number..

And then, now understanding you after a different consumer but any sort of competitive changes you're seeing out there maybe in some of the newer markets for you more aggressive pricing or any sort of responses from some of the other change that would be helpful? Thanks..

Not bad, I would say, I mentioned in the last call it’s a recent trend that is continuing again, and I thought this would happen years ago but some of our lower cost non-cost if you will in our market have approached our franchisees to take them out of the game trying to make a go at it and they just can’t complete with our marketing and our boxes, so they approach our guys to take them out and even this quarter a couple more recent ones have approached us so interesting trend, I kind of feel probably will continue..

Your next question comes from the line of Benjamin Bray from Robert W. Baird. Your line is open..

I just wanted to know if you could give us some detail on some of the digital and email marketing efforts, how is that impacting member signups and are you seeing more digital signups than you saw in the past?.

We’ve always had web joints but we never really had a promotion digitally, I mean some of the things we're doing which is really low hanging fruit quite honestly, we never really focused on it is, one example is our black card members are allowed to bring a free guest every day, it could be the same guess or different guests.

We in previous times believe it or not never really went after them to see if we can convert them to joining us or try and give a message to trying to get them to actually join the member that was coming as a free guest.

Coupled with that and another one would be something we are targeting or retargeting, people who have attempted to join online but somehow through the process got cold feet or the doorbell rang and they stopped, they didn't joint, so we’re now retargeting those people as well and 20% of our memberships joined each month are web joins, so to produce that kind of number you can imagine how many are actually dropping off.

So it is a lot of big pool we go after, and I guess probably just for example, on a typical Monday night these couples are doing 50 to 100 free guest for the night, it’s a big number, so it is at this interesting now look at trying out different methods of ways to entice them to get them join so it is pretty interesting stuff..

And then are you seeing any more opportunity within real estate markets in terms of finding attractive potential units with the Sporting Goods bankruptcy, the number of other retail closures in the market?.

Yes, I mean landlords in today's day and age are, they love what we are and do in classes, we drive traffic, we drive traffic on the off days, our busy days are Monday, Tuesday Wednesday, a decade ago they didn't like to help us as a whole, whereas nowadays there are look for us to drive the traffic and we’re the largest brand out there so that REITs and chemicals for example of the world are looking for us to come fill these boxes there are not many big box retailers that are looking to grow..

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

First to start on Canada, wondering how many units you’ve sold there and how big is the longer term opportunity?.

[indiscernible] just over 300 locations in Canada was sold just over 100 locations for development probably have nine open..

And then second question, on marketing for the major initiatives for the second half of this year, wondering if there is any kind of impact to your spending from the elections or Olympics and can you give an update on your plans with the biggest loser if anything has been announced regarding that?.

Yes sure, we have another promotion this quarter and next, the election for example, usually it’s an October promotion, this year it’s going to be November, so not competing for that. And biggest loser was still [indiscernible] hasn’t picked up yet, so it is up for discussion what biggest loser going to do..

When would you expect that to be finalized?.

It’s hard to really say it, it’s up to the, they haven’t picked it up yet [indiscernible]..

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

Just wanted to quick word, Dorvin what level of comps do you have to run in your corporate stores or do your franchisees have to run to sort of leverage occupancy and labor costs?.

In occupancy is a little bit of a tough one for me to be able to answer exactly what the franchisees do other than, I can use the corporate stores as a kind of a measure, I mean, in some cases you have some rent escalation clauses in there on a GAAP basis that doesn't tend to be a lot.

So that one - other than when you're renewing a lease and you are in market that is turned hot from maybe every it wasn’t in the past and I could see a big increase we have not seen huge increases across curate researching in that regard.

And then from my more from a labor perspective if you kind of go back to the comment I made earlier of we’ve stepped up and are paying some of our team members a bit more starting in Q2 and then we'll do some more in Q4.

And I think that to get to the staffing levels of where we’re very trying to get to as well as the FLSA requirements, you’re talking couple of thousand a month and if you - when you start to try to then triangulate that back to what kind of growth you need, you can back into that pretty easily by taking what a typical average card will do and how many members you need and so one of the things that we think we can do is offset some of that by just our normal member growth that we get because it is not a huge hit to the bottom line..

There are no further questions at this time, Mr. Chris Rondeau, I would turn the call back over to you..

Chris Rondeau:.

, :.

Thank you ladies and gentlemen, this concludes today's conference call you may now disconnect..