Planet Fitness, Inc.

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

Thank you, Stacey. And thank you everyone for joining us today for Planet Fitness' Q2 earnings call. It's a testament to the strength of our brand that more than 13 million people remain committed members of Planet Fitness in the depths of a global pandemic when most of our gyms were temporarily closed. Our membership momentum continues to defy our historical seasonal patterns. And through July, we had more than 15 million members. We have regained approximately 75% of the members we lost from our peak in Q1 2020 to our low in Q4 2020. I have never seen this type of unfeasible membership growth in my nearly 30 years at Bennett. And some of our larger franchisees who have been with us for a good portion of that time are also amazed at the positive trends that they're seeing across their portfolios. And today, with nearly all our stores reopened, existing members are reengaging with us, and new members are joining at unprecedented rates, as they all realize the importance of fitness to their overall wellness. We're in the business of helping people feel better and get healthy, and that's what they're seeking right now, a community-based support system in a gun-free environment combined with an incredible membership value proposition. COVID hit the U.S. hard. The country came into the pandemic with more than 70% of adults over the age of 20 considered overweight or obese. one of the top risk factors for severe illness from COVID. In fact, life expectancy in America fell by 1.5 years in 2020 due to the pandemic and other residual impacts, the largest single-year decline since World War II. A Kaiser Health study showed that people who regularly exercise had the best chance of beating COVID, while people who were inactive did much worse. And most importantly, physical activity makes people feel better, not only physically, but also mentally. We believe the unseasonal momentum and our membership gains is fueled by people recognizing the importance of self-care. Our messaging to consumers is about taking the first step by getting off the couch and getting into a fitness routine. Our national May sale of one month free and no commitment removed all the barriers to doing so. As a result, total net member growth in May was three times our growth in May 2019. In June, we ran a Blackheart Flash Sale, and for the month, net member growth was nearly 20 times what we saw in June 2019, during which we ran a similar offer. For the quarter, net member growth in Q2 not only exceeded Q1 net growth, it doubled what we saw in Q2 2019. We ended Q2 with more than 14.8 million members. Exceeding 15 million members with our July national sale is truly remarkable for our brand. When you consider the state of our business in the second quarter of 2020, we had approximately 30% of our stores temporarily closed and negative net membership growth. In just 12 months, our business has rebounded, and importantly, our franchisees are very excited about the trends in the future. It's hard to predict whether these unseasonable joins will continue for the rest of the year, but we believe that people are recognizing the importance of taking better care of themselves. The trends in our business attest to this. In addition to the strength of our joins in June, attrition and usage are normalizing, and in some cases, exceeding our 2019 level, both on a regional and age demographic basis. During June, we began to see certain key metrics in our business returning to nearly pre-COVID levels. National usage trending up during the quarter, ending June at nearly 90% of 2019 levels. Usage in June for all demographics was nearly back to a typical pre-COVID month, with only boomers trailing. However, it is still trending upward for that age group. Our last group of reopenings are returning to pre-pandemic performance levels faster than those that reopened back in 2020, as people begin to return to more normal activities. While COVID had a temporary impact on our business, there are areas that the pandemic accelerated, such as our digital strategy. When we shut down our stores last year, we quickly shifted to keeping our members engaged digitally with free workouts offered via the web and our mobile app. And as we announced last quarter, we strengthened our partnership with iFit to unlock future opportunities to further accelerate our digital content strategy. App adoption by our members is nearly 60%, having grown from 40% in Q4 2020. Here in Q3, we plan to roll out a referral-friendly incentive program through the app. During the second quarter, we hired Chief Digital Officer Cheryl Kaplan to lead our Bricks to Clicks strategy. We believe that the future of the fitness industry is about providing people with a high-quality in-person experience coupled with the ability to engage and service them outside our four walls. We're providing them with many other benefits as well as differentiated premium content to make it even easier to get the most of the membership. We believe that there may be an opportunity for us to aggregate other wellness categories into our app at a disruptive value, all geared towards casual first-timers. We continue to pilot PF Plus in a limited number of stores to test price elasticity, including as a bundled offering with our Blackheart membership. We expect to run this test for the rebalance of 2021 and look forward to sharing more on possible offerings in early 2022. In June, nearly 40% of PF Plus subscribers joined our bricks and mortar location, underscoring that consumers want a more omni-channel fitness experience. I'm proud of the efforts our franchisees, headquarters staff, and club staff who persevered during the pandemic to keep our system strong, and I'm very excited to now have nearly all our stores reopened. There's a dislocation in the fitness industry, with 22% of the gyms permanently closed due to the financial impact from COVID through the second quarter, while at the same time, more Americans are realizing that fitness is essential to physical, mental, and emotional well-being. After shutdowns, quarantines, and isolation, they are seeking a sense of community. We believe we are a place that fills that need with our affordable, non-fitting workout environment that gets people moving and confident as they go on vacations again, head back to the office, or see family and friends they haven't seen in a long time. Importantly, our franchisees believe this as well. As a result, we now expect to be at the high end of our 75 to 100 new store openings range for 2021, reflecting their growing confidence in the strength of our business and near-term growth prospects. Tom will get into more specifics on our outlook for the bounce of the year in his remarks. We also announced today that we signed an agreement to accelerate growth in Mexico with a joint venture made up of a prominent local retail services company and one of our largest U.S. developers. The agreement is for a minimum of 80 new stores over the next five years in addition to the five stores we currently have in Mexico. I am extremely pleased that we have added 1.5 million members in the first seven months of this year. With nearly one quarter of all gyms closed due to COVID, I believe that the opportunity in front of us is significant. With so much potential given to changing market dynamics and the tailwinds behind the health and wellness, the 4,000-plus long-term domestic store opportunity looks better and better. I always knew that we would come out of the pandemic even stronger, but the pace is even faster than I expected. I always come back to the fact that we are a purpose-led brand on a mission to change people's lives for the better, which is what the U.S. and the world need more than ever. I'll now turn the call over to Tom.

Thanks, Chris, and good afternoon, everyone. Before I get into the review of our financials, I want to touch on a couple of key topics, starting with store expansion. During the quarter, we opened 24 new stores, bringing our total count to 2,170. As Chris said, we now expect to be at the top end of the 75 to 100 new store range for the year, reflecting the growing confidence of our franchisees to accelerate their development plans. It also reflects the strengthening of their balance sheets. Several franchisee groups are taking advantage of the increased supply of real estate. As a reminder, we don't typically go after the real estate from gyms that have closed. We look for big box retailers that occupy a 20,000 square foot space. We believe we're even more attractive to landlords given that no Planet Fitness locations permanently closed because of the pandemic, which strengthened our position as a tenant of choice. We're not necessarily seeing rents come down yet, but we are hearing from franchisees that landlords are sometimes offering more tenant improvement dollars. In general, we are seeing a more favorable real estate market and historically unseasonable membership trends, which have been the catalyst for some of our franchisees to accelerate their development pipelines. I would categorize franchisee sentiment as bullish as membership levels continue to climb. Next, I want to elaborate on Chris's comments about the state of our business last year in the second quarter. As previously mentioned on last quarter's call, we are not reporting a Q2 system-wide same store sales growth number due to the fact that the majority of our stores were not billing in the prior year period. We assume we will resume reporting system-wide same store sales in the third quarter. As a reminder, our same store sales results are a function of the change in membership trends over the trailing 12 months compared to the year-ago period. As of the end of Q2, we had six consecutive months of sequential net member growth, but our membership levels were still below prior year. Black card penetration increased to 62.6%, up 191 basis points to last year, contributing to continued growth in average monthly rate. Now I'll turn to our Q2 financial results. Total revenue increased $97 million or 241.1% to $137.3 million from $40.2 million in the prior year period. The increase was driven by revenue growth across all three segments. The increase in franchise segment revenue was primarily due to growth in royalties, NAF, and franchise and other fees primarily attributable to COVID-related temporary store closures in Q2 last year. The increase in revenue in the corporate store segment was also primarily due to COVID-related temporary store closures, as well as the impact of seven new corporate stores opened compared to Q2 2020. Equipment segment revenue increases were driven by higher equipment sales to new and existing franchise-owned stores due in part to temporary store closures related to COVID last year. Our cost of revenue, which primarily relates to the direct cost of equipment sales to new and existing franchise-owned stores, amounted to $18.5 million compared to $8.5 million a year ago. Store operation expenses, which relate to our corporate owned store segment, were $28.4 million compared to $14.7 million in Q2 last year. The increase was primarily attributable to lower operating and payroll expenses last year with the COVID-related temporary closures, along with higher expenses with the new stores we opened in the last 12 months. SG&A for the quarter was $21.8 million compared to $15.9 million a year ago. The increase was driven by higher incentive and stock-based compensation, travel expenses, and expenses associated with our mobile app compared with the prior year period. National advertising fund expense was $13.5 million compared to $10.9 million in the prior year period. Adjusted EBITDA was $55.6 million compared to a loss of $9.3 million in the prior year period. A reconciliation of adjusted EBITDA to GAAP Net income or loss can be found in the earnings release. By segment, franchise adjusted EBITDA was $51.8 million, corporate store adjusted EBITDA was $10.4 million, and equipment adjusted EBITDA was $5.6 million. Adjusted net income was $18.2 million, and adjusted net income per diluted share was $0.21. Now turning to the balance sheet. As of June 30th, 2021, we had total cash of $527.4 million compared to $515.8 million on December 31st, 2020. This was comprised of cash and cash equivalents of $469.1 million compared to $439.5 million. 58.2 million, and 76.3 million of restricted cash, respectively, in each period. Total long-term debt, excluding financing costs, was 1.78 billion as of June 30, consisting of our three tranches of securitized debt and $75 million of variable funding notes. Our securitized debt structure is covenant-like. We have two maintenance covenants, a debt service coverage ratio, and a total system-wide sales threshold. These are both tested quarterly, calculated on a trailing 12 month basis, and reported on a roughly two month lag. In our most recent debt covenant reporting period of June 5th, 2021, we had a 13% and an 81% cushion to the first triggering event for our debt service coverage ratio and system-wide sales covenant, respectively. We believe we have sufficient headroom for our two maintenance covenants, especially now with nearly all of our stores open. Additionally, I'd like to point out that this was the final reporting period with Q2 2020, included in our trailing 12-month calculation. This was our toughest quarter financially last year, and as a result, we believe it was a trough from a DSCR standpoint. Now to our outlook for the balance of 2021. With vaccines readily available across the nation, strong membership growth trends, and just under five months remaining in this year, we have better insight into what we believe our performance will be across key metrics. However, I'd like to note that our current view for 2021 assumes there is no major resurgence of COVID that causes member disruptions, whether via shutdowns or more stringent mask mandates, that result in a significant change in membership trends. particularly as the Delta variant is causing case counts to spike across the U.S. We have already discussed that we expect to be at the high end of our 75 to 100 new store opening range. As a reminder, last quarter we noted that we expect equipment replacement to be approximately 50% of our total equipment revenue this year.