Ladies and gentlemen, welcome to the Planet Fitness Fourth Quarter Earnings Conference Call. My name is Grant, and I will be the moderator for today's call. I will now pass the call over to Stacey Caravella to begin. Stacey, please go ahead.

Thank you, operator, and good morning, everyone. Speaking on today's call will be Planet Fitness Chief Executive Officer, Chris Rondeau; and Chief Financial Officer, Tom Fitzgerald. Also joining us is Edward Hymes, President and Chief Operating Officer. They will all 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'd like to remind everyone that the language on forward-looking statements included in our earnings release also applies to our comments made during the 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'll turn the call over to Chris.

Thank you, Stacey, and thank you, everyone, for joining us for the Planet Fitness Q4 earnings call. I am proud of how we continue to prove our system's resiliency, strength of our model, our differentiated offering and the passion of our franchisees, all of which positions us to continue to succeed in an environment of increasing consumer prioritization of health and wellness. Closing out 2022, we were very pleased with our record membership growth in the fourth quarter, which created a great momentum coming into Q1 of this year. Let me start with the two primary drivers behind this record growth. First, we had a new agency structure in place for the entire quarter with one agency handling our national advertising and two agencies partnering with our franchisees on a local level. The fourth quarter was the first time we had access to the ability to leverage our national and local media as we begin to optimize our marketing based on analytical findings. An example of this is our newly implemented post-national sales meeting with all three agencies to analyze results by region and franchise group to share best practices across our system. Importantly, our franchisees are pleased with the level of service they're getting from their agency partners, and they're confident with how our marketing investments are being executed at both national and local levels. Second, we continue to benefit from the increasing commitment to and interest in overall wellness coming out of the pandemic. Our members who are visiting the gym continue to visit more frequently, which we believe is a sign that they are more dedicated to working out. We had a successful promotion in November where you received a free Halo, Amazon Fitness and Health Tracker if you joined or upgraded to a Black Card membership. It also required a one-year commitment, which should be a tailwind to our average tenure. Additionally, it was our most successful upgrade promotion to date, with members trading up from our $10 classic membership as well as from our lower priced Black Card memberships to the new $24.99 Black Card price to get the Halo. We're working on an upcoming similar promotion and continue to explore possibilities to collaborate with other well-known brands in adjacent categories for the fitness industry. We believe that we are an attractive brand partner given our size, scale, and the diversity of our approximately 17 million members across gender, age, income, and other attributes. We ended the year with a natural promotion letting consumers know that it wasn't too late to join a gym in 2022 for those who made a new year's resolution. It drove great momentum at the end of the year as we head into the first quarter, during which we typically get 60% of our full year net membership gain pre-pandemic. Now to 2022 results. We ended the year with approximately 17 million members as our brand appeal continues to attract many first-time gym goers or people looking to get off the couch and restart their wellness journey with our affordable, approachable non-intermediate fitness environment. We are thrilled to have increased our membership by 1.8 million last year, despite softer membership growth in the first quarter, due in part to Omicron. Members did approximately 470 million workouts in our gyms in 2022, up more than 20% over last year. Nearly 40% of our members used our gyms in a 30-day period in 2022, up from mid-30% in 2021. Cancellation rates were also slightly lower compared to pre-COVID. We also grew our store base to 2,410 locations with the addition of 158 new stores, including 58 new stores in Q4 against the backdrop of an industry that is struggling to grow coming out of the pandemic. We upgraded and enhanced our digital ecosystem with our recently relaunched PF app. We also added more perks, providing value to our members outside the four walls of the gym, even when they can't make it to the club. In 2022, we offered discounts from brands such as Crocs, Grubhub, and Shell. In fact, recent data showed that 25% of our members who engage with our perks platform haven't visited the club in over three months. During 2022, our appeal with the younger generation continues to grow. More than 90% of all Gen Zs over the age of 15 in the US are members of Planet Fitness, with Gen Zs representing 25% of our total membership. We ended the year with all generations nearly back to or above pre-pandemic penetration levels. One of the highlights of the year was our successful High School Summer Pass program. We ended 2022 with approximately 400,000 teenagers whose parents or guardians had joined as paying members, with a conversion rate of nearly 7%. We continue to significantly outpace the 2019 conversion rate, the last time we ran this similar program. Additionally, we had a much bigger base, more than 3.5 times the participation we had in 2019. We believe that High School Summer Pass is so important as we're helping teens establish healthy habits and building brand loyalty with them. In New Hampshire, we've run this program for three years as it was a test market before the 2019 program. Today, 11% of all teens in the state of New Hampshire are now members of Planet Fitness, compared to 4% of all teens nationally. We look forward to bringing the program back in 2023. Now to the future, we along with our franchisees are very bullish on our growth prospects. We are pleased with the recovery coming out of the pandemic. We ended 2022 with 2.6 million members, more than we had at the end of 2019, and we've opened 420 net new stores during that same period. We are more than halfway through the first quarter of 2023. And so far, it’s the first time in four years that Q1 has not been interrupted by COVID. For the eighth year in a row, we were the presenting sponsor for the Times Square New Year's Eve event, which was back to high energy and atmosphere. This kicked off our big fitness energy campaign, which addresses the post-workout positive feelings, featuring low-key advertisements that have generated great consumer buzz. Throughout 2022, we met with our top franchise groups, and they are very encouraged by the recovery of their store portfolios with each quarter of positive membership growth. The top lines are recovering even more quickly, aided by the Black Card price increase last year and the recent annual fee increase from $39 annually to $49. We were recently recognized by Entrepreneur's Magazine with placement as 28 overall on its Franchise 500 list and number one in the fitness category. Along with brand strength and growth metrics, a primary consideration for the recognition is the relationship with our franchisees. We believe our historically strong relationship was further strengthened by working so closely together during the pandemic. It showed in that we didn't have one permanent store closure as a result of COVID. One year ago, we acquired Sunshine Fitness and doubled our corporate store portfolio to approximately 10% ownership of the system, a level that we think is appropriate as it allows us to maintain the asset-light nature of our business model. Importantly, we now have a dedicated team leading our corporate stores that is focused on driving membership growth in Black Card pricing. We began to see the positive impact in our results in the second half of 2022, when the corporate store same-store sales outpaced franchise same-store sales. A few weeks ago, we welcomed Edward Hymes to our leadership team as our new President and Chief Operating Officer. He's leading our primary business segments, U.S. and international franchise businesses, corporate stores, and equipment sales. He is also overseeing our technology and legal functions. We believe Edward's skills in franchise leadership will be instrumental in helping to accelerate our growth through existing and new geographies. One of his first tasks is to build a team to lead international operations. Once that team is in place, we believe that we will increase our pace of international expansion. For 30 years, it has been our mission to make it successful and affordable for all. Today, more than 6% of all Americans over the age of 15 are Planet Fitness members. But we're not stopping there. We believe we can double our membership, given our historic ability to do so, and the increasing penetration experienced with each successive generation. We also believe that the 4,000-plus store opportunity in the U.S. is the floor, not a ceiling, given the significant industry consolidation caused by the pandemic. We'll be reevaluating this target with a third party this year. We believe our purpose of enhancing people's lives and creating a healthier world sets us, our franchisees, and our shareholders up for long-term success. I'll now turn the call over to Tom.

Thanks, Chris, and good morning to everyone. Overall, we feel good about where our business and our system is, particularly given what has happened over the last three years. We believe that we are operating from a position of solid financial and balance sheet strength as we continue to break down fitness barriers for first timers and casual gym goers. Our asset-light, highly franchised business model drove consistent and reliable growth last year, and we met or exceeded our financial targets. Notably, in 2022, we accomplished four things that I want to call out. First, we completed the acquisition of one of our largest and best-performing franchisees. Second, we closed a very successful refinancing and upsizing of our debt in an oversubscribed deal that resulted in a lower overall weighted average interest rate for our total fixed rate debt. Third, we repurchased 1.5 million shares at an average price of approximately $62 per share for a total spend of approximately $94 million. And fourth, our Board of Directors approved a new $500 million share repurchase authorization that replaces the existing one from 2019. Now, I will cover our Q4 financial results, and then we'll address our operational and financial outlook for 2023. All of my comments regarding our fourth quarter performance will be comparing the fourth quarter of 2022 to Q4 of 2021. We opened 58 new stores during the quarter, bringing our full year total new store openings to 158, as Chris noted earlier. We had positive same-store sales growth of 9% in the fourth quarter, franchisee same-store sales grew 8.8%, and our corporate same-store sales increased 11%. As a reminder, same-store sales for the Sunshine Fitness franchise stores that we acquired in Q1 of 2022 will not be reflected in our corporate-owned same-store sales until we report first quarter results, but they will continue to be reflected in system-wide same-store sales consistent with how we've treated prior acquisitions. Approximately 75% of our Q4 comp increase was driven by net member growth, with the balance being rate growth. Black Card penetration was 62.5%, down slightly from 62.6%. As a reminder, the Black Card price increase that we took in May was for new joins only, so that should slowly begin to drive up average monthly dues over time. For the fourth quarter, total revenue was $281.3 million compared to $183.6 million. The increase was driven by revenue growth across all three segments. The 10% increase in franchise segment revenue was primarily due to an increase in royalties from same-store sales growth and new stores, as well as higher equipment placement and National Ad Fund revenue. Partially offsetting the increase was a decrease of approximately $2.6 million as a result of the stores acquired in the Sunshine Fitness transaction moving from the franchise segment to the corporate-owned segment. For the fourth quarter, the average royalty rate was 6.5%, which was a six basis point increase compared to the prior year period. The 123.9% increase in revenue in the corporate-owned store segment was primarily driven by the Sunshine Fitness transaction as well as same-store sales growth and new store openings. Equipment segment revenue increased 56.7%, driven by higher equipment sales to existing and new franchisee-owned stores. For the quarter, replacement equipment accounted for approximately 60% of total equipment revenue. We completed 66 new store placements in Q4 and 153 new store placements for the year. Now, our new store placements in franchise locations are one less than we pre-reported in early January. Since that time, one store that received the equipment in late December will not open as a new store due to an unresolved landlord dispute. We regret this unforeseen circumstance that resulted in a slight variance to what we previously reported. Our cost of revenue, which primarily relates to the cost of equipment sales to franchisee-owned stores, amounted to $73.8 million compared to $47.4 million. Store operations expenses, which relate to our corporate-owned store segment, increased to $57.6 million from $28.6 million, primarily due to the additional stores from the Sunshine acquisition. SG&A for the quarter was $28.7 million compared to $27.3 million. Payroll costs primarily drove this increase with the addition of the Sunshine Fitness team, as well as increased travel expenses. National Advertising Fund expense was $50.7 million compared to $17.6 million. We're rolling over the production costs associated with our Super Bowl ad last year, which drove the decrease. Net income was $36.3 million; adjusted net income was $47.3 million; and adjusted net income per diluted share was $0.53. A reconciliation of adjusted net income to GAAP net income can be found in the earnings release. Adjusted EBITDA was $106.1 million, and adjusted EBITDA margin was 37.7% compared to $62.2 million with adjusted EBITDA margin of 33.9%. A reconciliation of adjusted EBITDA to GAAP net income can also be found in the earnings release. As a reminder, as of the third quarter, we are no longer excluding preopening costs from our adjusted EBITDA. In the reconciliation, you'll find the prior year period restated reflecting this change. By segment, franchise adjusted EBITDA was $57.5 million, and adjusted EBITDA margin was 66.7%. Corporate store adjusted EBITDA was $38.9 million, and adjusted EBITDA margin was 38.8%. Equipment adjusted EBITDA was $24.4 million, and adjusted EBITDA margin was 25.9%. Now, turning to the balance sheet. As of December 31, 2022, we had total cash and cash equivalents of $472.5 million compared to $603.9 million on December 31, 2021, which included $62.7 million and $58 million of restricted cash, respectively, in each period. Total long-term debt, excluding deferred financing costs, was $2.0 billion as of December 31, 2022, consisting of our four tranches of fixed-rate securitized debt that carries a blended interest rate of approximately 4.0%. Now to our 2023 outlook. Our view for this year assumes there is no material resurgence of COVID that causes member disruptions, whether via shutdowns or more stringent mandates, resulting in a significant change in membership behaviors or any new significant supply chain disruptions. First, on store growth. As I said, at our Investor Day in November, we expect to average 200 new stores per year over the next three years. However, our 2023 new store openings will be below that, as we still face some headwinds, both of which have been factored into our 2023 outlook. First, HVAC availability and other supply chain issues continue to be a challenge for both corporate and franchise locations. Second, we've recently agreed to terms with one of our larger franchisees to defer the majority of their development obligations in the near term and lift their exclusivity from certain markets. This will allow this franchisee to focus their cash flow on re-equipments and remodels of their existing fleet and service their debt. While this group's stores are profitable, they had an aggressive capital structure in place that became tenuous when the pandemic hit. This will be a drag on placements in 2023, but we are hopeful it will be offset somewhat by other developers in the system stepping up to build new clubs in those markets. Therefore, we expect new equipment placements of approximately 160. We expect that re-equipped sales will make up between mid to high 50% of total equipment segment revenue. As a reminder, these placements are only in franchise-owned locations. Our net new stores for the year will include corporate-owned stores. We also expect system-wide same-store sales growth to be in the high single-digit percentage range. Now all of the following targets reflect growth over fiscal 2022 results. We expect our full year revenue to grow in the 13% to 14% range. We expect our full year adjusted EBITDA will grow in the 17% to 18% range. We expect our adjusted net income to increase in the 30% to 33% range, and we expect adjusted earnings per share to grow in the 33% to 36% range. We also expect shares outstanding to be approximately 89.5 million, which is inclusive of the repurchase of 1 million shares over the course of the year. We repurchased approximately 300,000 shares in January. As we discussed at our Investor Day, we may also opportunistically buy more shares, keeping in mind that we want to ensure that the pandemic impact is fully behind us. And we expect our net interest expense to be approximately $75 million. Lastly, we expect CapEx to be up in the mid-30% range, driven by additional stores in our corporate-owned portfolio, and D&A to be up in the mid-teens percent range, driven by the increase in CapEx and a full year of Sunshine in our results. As Chris noted earlier, during our most recent franchise business reviews in 2022, there was a lot of enthusiasm across our system to build new stores. With each quarter of positive membership growth, franchisees are more encouraged by the recovery of their store portfolios. Additionally, last year's increase in the Black Card membership to $24.99 and the recent increase in annual fees to $49 will add approximately 300 basis points to 400 basis points of margin to new stores, as the vast majority of new members in a new store will pay these higher rates. With our disruptive brand and disciplined asset-light franchise model, we believe that we are capitalizing on the greater importance that people are putting on their overall health and wellness to drive store and membership growth, which we believe translates into among the best franchisee margins and ROI. We believe this flywheel creates sustainable long-term value for our shareholders. And with that, I'll now turn it over to the operator for Q&A.

Thanks. Hey, guys. Hope you are all doing well, a nice end to the year.

Thanks, Simeon.

Tom, could you provide more details regarding the growth expectations for the franchisee you mentioned? Have you noticed any others entering those areas with exclusivity or expressing interest? Additionally, how do you feel about this being a one-time occurrence? Also, could you share your perspective on the overall SG&A expenses for next year as we consider various factors? Thank you. Chris, I would really appreciate it if you could expand on your statement about the potential to double membership. That was an exciting point in the press release, so any additional information would be appreciated.

Hi, Simeon. Regarding the franchisee in question, we aren't revealing their identity, which is typical for us. We believe this is the right approach. There seems to be some interest, particularly as their exclusivity is no longer in effect in several markets, leading existing franchisees to potentially explore opportunities. Additionally, some former franchisees who are completely out of the system have expressed desire to return in some capacity, though possibly on a smaller scale than before. We've considered all these factors in our outlook for placements this year. We gather financial data from our franchisees periodically and engage in discussions with our top performers. From this, we believe this situation is unique and arises from various circumstances we won't delve into. Concerning SG&A, while we're not providing specific guidance, our outlook aligns with what we discussed at Investor Day, where we anticipated slight leverage in SG&A over the next three years. We still plan to make necessary investments, focus on expanding our international team for accelerated growth, and enhance IT capabilities. We view this as a growth-oriented business and aim to support its development responsibly, without expecting significant leverage in SG&A. It's more likely to be very minor leverage. Now, Chris, over to you.

Sure, yes. Thanks, Simeon. Yes, I think when you look at our historical track record from the IPO, we had 1,000 locations at the IPO, at about 7 million members. Here we are eight years later, and arguably three years of the eight were COVID, right? If that wouldn't have happened, we probably would be growing faster. But here we are now with 17 million members in 2,400 locations. Even if you go back before the IPO, we partnered with TSG, the private equity company before we went public, we had about 600 stores in 2012, about 4 million members. So you can see the cadence of our growth. Leading into COVID, we had 53 straight quarters of positive comps. The vast majority of those being member growth. And this year, the same thing, 2022, we had the full year 11% same-store sales, and again, vast majority is member growth. So there's nothing pointing in any other direction other than why wouldn't that happen again. We're very confident, especially with the Gen Z acceleration we've been talking about and how they're joining. Their sign-ups have been great past tailwinds as well as helping that out. Right behind them is Gen Alpha, which will come into the mix in about another four to five years. So there's no reason why we can't see us doubling once again.

Great. Thanks a lot, guys. Best of luck for the rest of the year.

Thank you.

Thank you very much.

Thank you, Simeon. Our next question comes from Rakhlenko Max from Cowen. Rakhlenko, your line is now open.

Hey, good morning, guys. This is Bradley on for Max this morning. Great results this quarter. First, I'd love if you could just discuss quickly any quarter-to-date learnings with the advertising rolling into January and then perhaps any early results from January?

Yes, we're not sharing anything really from the current quarter. But I do believe the large promotion we did at the end of December that expired on the 30th and then we actually kicked off New Year's Eve with the January sale, actually on the 31st helped carry the momentum from the December sales. So we're pleased with how momentum is playing out.

Great. And then switching gears a little bit to Gen Z. Could you just provide any more color on perhaps Gen Z utilization, maybe churn compared to other cohorts, Black Card mix? Just kind of any more details on what you're seeing with their ramp-up as they continue to join? Thanks, guys.

Yes, Gen Z is very similar, and their workout patterns are very similar to other generations. There's nothing really that stands out differently. The average members are working out about six times a month, and it holds true really across all generations, believe it or not. Even the younger Gen Z, which includes teenagers, are still the same. We even saw that during the High School Summer Pass last summer, it sounds actually their workout pattern is very similar regardless of their age.

Great. Thanks, Chris. Best of luck.

Great. Thank you, Bradley.

Thank you, Bradley. We have our next question that comes from John Heinbockel from Guggenheim Partners. John, your line is now open.

Hey, guys. I wanted to start with, Chris, how do you think the seasonality has changed versus 2019, both in terms of fitness being more top of mind and High School Pass being as important as it is? Do you think you're a little less reliant on the 1Q and 3Q and particularly 4Q will be bigger? And then also as part of that, if you think about High School Pass, right, the 7% penetration, you would think that would build over time, right? I'm not sure how it would build as you get people coming in a second, third summer. How do you think about that?

Yes. I think you probably recall, we were talking about for a few years, even before COVID, that summers weren't quite the drop off they used to be. It wasn't just the first quarter; the first quarter will always be the biggest one. It's important to note that 10 to 15 years ago, summers were very different than they are today, as we still today have some net member growth during the summer months, which typically 10 to 15 years ago, we didn't. So there's definitely less reliance on that. I think the New Year's resolution thing is still good, but it's not quite as driver-centric as it was. It's more about workout for the sake of working out. About the High School Summer Pass, you've heard in my opening remarks, I mean, in New Hampshire, we've run this program for three years, where we have 11% of our high school age teens being members of Planet Fitness. Naturally, that's only 4% by all accounts. If you think about it, as we continue to roll this program out summer after summer, we should be able to penetrate more as paying members of teens and get more members from high schools to give a shout out again. What's interesting, too, is the coming summer; when we did it in 2019 when we re-launched it this past summer, probably two-thirds of those teens are already out of high school by then. So, there weren't many teens that could repeat the free summer again. So, it will be interesting with the 3.5 million teens that did last year, let's call it, the 18 or 19-year-olds are off to college; get backfilled with the new 14 or 15-year-olds, but there's going to be a big chunk of those junior students that will still do this free for the second time, and they'll likely encourage their friends to join again. So hopefully, we can get more momentum this summer.

And then secondly, on international, when will that team be in place? How many countries do you think you will go into this year and maybe next year? And geographically, will Asia be the focus? And then lastly, I assume that you've not been interested in MFAs, and I assume you're still not.

Hey, John, thanks for the question. This is Edward. I've actually jumped in a bit on the international side already. We're currently definitely taking inventory of the opportunities to really accelerate in that space and look to new geographies. As we said in the past, though, I think we're not really going to change that strategy in terms of entering one to three markets per year. I don't see that changing; not really interested in just planning a flag. We really want to grow from a strong foundation and establish a disciplined approach around that. But just to let you know on that, the initial read on Mexico and Australia, they really performed well. I've been really happy with sales, and the model is actually translating very, very well in the markets outside the US. So, I'm in the process of expanding that team working with them now, and you'll be hearing more about that in the future.

Okay. Thank you.

And John last point there. We still don't have interest in it.

Okay. Thank you.

Thank you, John. We have our next question comes from Brian Harbour from Morgan Stanley. Brian, your line is now open.

Yes. Thank you. Good morning, guys. Just on kind of unit openings, when I think about this year and when I think about hopefully stepping up in 2024 and 2025 based on what you've said, how much of that do you think will come from some other franchisees selling in for this specific issue you called out? How much of that is more just tied to equipment availability and such? How much of that do you think will be international? I guess I'm trying to just kind of parse out what you think will kind of drive that step up in the subsequent years?

Yes, Brian, it's Tom. I'll start that. So I think we still feel very good about what we said at Investor Day, that over the three years, we feel very good about being able to average 200-plus per year across the three years. We said this year would have some headwinds, so we didn't expect it to be at that level when we were all together in November. There are some headwinds; costs are up. We talked about that. They're up about 20%. Typically, franchisees would be ahead of their development obligations before COVID. Some will go ahead and build. Obviously, there's a lot of new units going in the ground, but others may just take a bit of a wait-and-see approach. If it was clear that the costs would remain elevated, they would probably move ahead because the returns are still great. There's still a fair amount of interest outside the system to come in because when you look at multi-unit brands, we still believe our concept and our model is far less impacted by inflation. When you look at other food concepts, they may have low single-digit same-store sales growth, but they have a lot of pricing and not much traffic growth. Our business is quite the opposite. We have 75% member growth driving the same-store sales. So we feel good about it. We factored in all the puts and takes into our outlook. But I think our model still stands as one of the best, if not the best economic propositions in multi-unit opportunities.

That sounds good. Can you share some insights about the recent app upgrade? Has it led to better engagement? I know you've seen a lot of digital sign-ups; did that trend continue? Any comments on that?

Yes, we are seeing increasing traction. Digital sign-ups remain strong, even with gyms reopening. Many people are joining through the app, often ahead of pre-COVID levels. Unlike before, where individuals would tour and experience the facilities firsthand, we've streamlined the app's usage, making it easier to join, utilize perks, refer friends, and check the crowd meter. Referrals and perks are gaining popularity. As I mentioned earlier, we've gathered data indicating that 25% of our members haven't visited the club in three months or longer. As I noted in previous discussions, the main reason for cancellations is inactivity. Customers may not use the club for three to six months and then choose to cancel. If we can offer value beyond the physical location, it significantly benefits us. Members have spent around $1 million in the app over three months. If we can deliver real value, I believe people will maintain their memberships for the opportunity to use them. We've reached a point where members who used perks and redeemed them have saved over $10.

Thank you.

Thank you, Brian. We have our next question comes from Alex Perry from Bank of America. Alex, your line is now open.

Hi. Thanks for answering my question, and congratulations on a strong quarter. First, can you discuss how churn is trending compared to pre-COVID, especially since members are using the service more? Are customers showing increased loyalty? Also, could you provide some insight on how customers have responded to the recent annual fee increase? Thank you.

Sure. Thank you, Alex. Yes, the retention is just slightly better than pre-COVID. So it's a little bit more stickiness now. Hard to really say exactly what causes this. I think it's probably just maybe just more or less people pay attention to fitness more now and health than they were pre-COVID, probably driving a lot of that, which I think is also why they're probably working out more than they were pre-COVID. So that's a good trend. We'll hope that it continues. What was the other…?

The annual fee.

We tested the annual fee in about 400 to 500 clubs early last year, prior to COVID. We observed no change in retention or acquisition, which is why we decided to implement it in mid-December. It was great to see those results. Additionally, as Tom mentioned, it definitely contributes to the profitability of new stores as we convert them. With new members coming in, even though a new build may cost a couple of hundred thousand more, this helps us recover that cost quickly. Yes, it was a successful promotion. The challenge with our pricing is that typically, in non-promotional scenarios, there is an enrollment fee. However, during promotions, we waive that fee. Aside from that, there aren't many other incentives for someone to join. We've observed that eliminating the enrollment fee, alongside a $24.99 membership or a $1 down and $10 monthly option, creates more excitement and motivation to join compared to simply waiving the fee. This provides dual incentives: no enrollment fee and a complimentary $70 Halo for signing up, which is appealing. New membership numbers were strong, and intriguingly, we saw people upgrading their existing memberships to the new $24.99 tier to receive the Halo. Members who were previously on $10 plans, as well as long-time Black Card members paying $19.99 for many years, were moving to the $24.99 plan just to receive the Halo while committing to a new 12-month contract. This was fascinating to observe as we have never previously influenced upgrades in this way. Historically, once people joined, they typically did not upgrade their memberships. It’s encouraging to discover a method that motivates current members to consider higher-priced options in the future.

Perfect. That’s really helpful. Best of luck going forward.

Thanks, Alex.

Thanks, Alex.

Thank you, Alex. We have our next question comes from Jonathan Komp from Baird. Jonathan, your line is now open.

Yes. Thank you. Good morning. I want to ask about the membership trends, how you're thinking about the year? If you look at 2022, you added 1.8 million members for the year, 1 million in Q1 of 2022. That's despite Omicron and then also not having your marketing in place for the full year. So just thinking through 2023, is there any reason that you wouldn't exceed those targets? And then, Tom, could you just comment on the NAF expectations? Would you expect the revenue to more closely track the expense for the year?

Yes. I'll take that. Regarding membership, we don't provide specific guidance, and we've returned to our pre-pandemic practice of not discussing the current month during earnings calls. However, we are pleased with the record growth we experienced in Q4, and we expect that momentum to continue into the new year, so we’ll have more information on that in our next call. As for NAF, we anticipate that collections will match our spending this year, assuming there are no unexpected disruptions. Last year, NAF was slightly better than our projections, which we viewed as the right investments over the past three years. Moving forward, we expect spending to be in line with collections.

Yes. Great. And then just one follow-up, thinking about the margin benefit you outlined for new units from the pricing assuming that also benefits all stores in 2023 and 2024 as the pricing rolls in over time. Just how are you thinking about the right royalty rates the next few years, given the margin benefits and the membership recovery that you're seeing?

Sure, Jonathan, it's Chris. As I mentioned before, if COVID hadn't occurred and our consistent same-store sales had continued, supported by 53 consecutive quarters of positive growth primarily driven by member increases, we would be in a different position. The additional members don't significantly impact our operating costs, providing about $0.84 to the bottom line. Since the pandemic, we're working towards recovering our margins and profitability. Previously, we reported that around 30% of our clubs had membership levels at or above pre-COVID numbers, and now that figure has risen to approximately 43%. We are making progress. The pricing strategy is ahead of that recovery, and while it isn't a pressing topic right now, it will likely be something to consider in the next year or two.

Yes. That’s really helpful. Thank you.

Thanks, Jonathan.

Thanks, Jonathan.

Thanks, Jon. We have our next question comes from Joe Altobello from Raymond James. Joe, your line is now open.

Thanks. Hey, guys. Good morning. I guess first question on the placement guidance. What's sort of baked in, in terms of the HVAC supply situation? Are you guys assuming it gets better by mid-year? And will the cadence of placements to be similar to what we saw in 2022?

Yes. Joe, it's Tom. So we have factored in what we think is our best thinking on HVAC. We still are not hearing anything concrete from the large manufacturers we deal with in terms of when things get back to normal or anything opposed to what we experienced before in terms of lead times. We have worked to try to secure more production for us. We assume it’s more of the same, and I think our cadence in terms of the quarterly openings is not dissimilar to what we had historically.

Got it. And maybe just to follow up on that. In terms of Black Card penetration, you mentioned it was down slightly. What's been the historical experience when you do raise Black Card pricing? Does it typically take a step back and then maybe 6 to 12 months later start to grow again?

Yes. Historically, yes, it would come back slightly, then a year later, you wouldn't even know it happened, and it starts getting traction again. We see this pullback. We tested this in a few hundred stores with no pullback. The pullback we experienced is mostly driven by the High School Summer Pass and the teens that are joining, which generally join not as Black Card members, which is putting pressure on it as well as such a strong record growth in the fourth quarter, which is all promotional-driven, definitely pushes it down as well. Although one was a Black Card promotion, the December sale was a White Card promotion. So member growth is great, but it definitely puts a little bit of pressure on that. But that's the only reason I think it wasn't the pricing that drove it down; it was more just the volume of new members.

Got it. Okay. Thanks, guys.

Thanks.

Thank you, Joe. We have our next question comes from Rahul Krotthapalli from JPMorgan. Rahul, your line is now open.

Hi, everyone. I appreciate the opportunity to ask my question. Ed, this is mainly for you. It's nice to see you at ICR. Since you’ve been in your role for almost two months and are managing several segments, what do you identify as your current priorities? What areas do you plan to concentrate on in the near to medium term as you settle into your position? Where do you see the greatest opportunities?

Yes. Thanks for the question and great to talk to you again. Look, I've been in the role a little bit over 30 days now, right? I'm very happy that I've joined the Planet Fitness team. I mean the business model that Chris and the team has put together is just incredible. The more I learn about it, the more excited I am about it. I'm really excited about the future because although we're an industry leader, of course, I believe we're just getting warmed up. That's one of my priorities in the growth side. I've mentioned earlier taking inventory around those opportunities to really grow both domestically and internationally as well. I've been responsible for the primary business segments, including US and international franchise businesses, corporate stores, equipment sales, and technology and legal functions as well. I've really spent my first few weeks in listening mode and engaging with as many stakeholders as possible, including franchisees, and that's really helped me to kind of take that inventory and put that plan together to really focus on the growth space, which I'm really excited about.

Thanks for that. Tom, this is probably better for you. In terms of thinking about franchise margins, I mean, pre-COVID, we did like closer to, I think, mid-80s almost. Like how should I think about going forward, given all the changes to the systems within franchisees and moving towards building more international stores? Overall, how do you see this shaking out?

Yes, Rahul. I think you're talking about the franchise segment. Where we see the margin today is kind of where we think they'll be given the investments we're making in the segment and the resourcing. Of course, over time, as we see that there may be opportunities to raise the royalty rate, will certainly help. But I think what you've seen here in the last little while is, especially on an adjusted basis, more indicative of where we see it going forward once you adjust out the NAF discrepancy there. So, if you equalize the NAF to not be an investment but as collections and spend equalized, then that’s a more predictable margin going forward. That's the one big adjustment you have to make there.

Great. Thanks, guys. This is Patrick on for Chris. I wanted to touch on the mix of company development for this year. I mean, you're obviously planning to increase CapEx spend and that would seem to suggest company store openings would accelerate relative to history. But I was hoping you could frame that out a little bit more as we just think through what that additional investment could look like in terms of corporate store unit growth relative to maybe the pace you've held in the past?

Yes, we opened 14 new corporate stores this year, and while we don't typically provide guidance on that, we expect it to be in the same range, possibly a bit higher for 2023. With Jen Simons now in a role focused on growth, alongside Chris, we are optimistic about the opportunities we've identified and aim to enhance the pipeline for growth. The margins we've discussed are attractive for the territories where Sunshine primarily operates in the Southeast, and we are seeing positive results from new opportunities. Additionally, as Chris mentioned, the strategies that the marketing team and Sunshine implemented in our legacy markets are driving accelerated growth. Notably, these stores are now leading the system rather than trailing, which has been a shift since they consist of a higher proportion of mature stores. We believe there are opportunities in both legacy markets and newly acquired territories, and it's a matter of allocating additional resources to pursue the development opportunities we see. As a result, we anticipate that the number of openings will likely increase in the future.

Great. That is a helpful segue into my second question, which is you mentioned the focus of the team a couple of times in terms of driving the corporate store same-store sales performance. So I was curious, what are the things happening today that may not have been happening previously? And what's really driving that result? On the margin side for the company stores, can you provide a sense of what percent of the corporate store portfolio has recaptured their pre-COVID membership levels? Maybe relative to that overall system average? And how should we think about the opportunity for corporate store margin performance in 2023 to recapture at some point in the year the 2019 margin levels? Or do you still see that being a slower build that maybe pushes out into 2024?

Hey, Patrick, this is Chris. I'll start, and then I'll hand it over to Tom. I think a lot of the same-store sales benefits we're seeing result from a much more disciplined approach and cadence to the marketing of the legacy stores that weren't in place before. You may recall, our corporate stores did not really have a dedicated team previously, they were tapping into our marketing team here, who also services the franchisees, tapping into the development team, and they also worked on franchisees. They now have their own development people, their own marketing people. I think it's helping, combined with operational improvement, and a bit of gamification or competition among staff in different club locations to outperform on various metrics like Black Card upgrades, closing percentages, etc. It's just getting the team more oriented towards servicing the customer and helping them make better membership choices. I think it's a little of that from an operational perspective, combined with a disciplined marketing approach. Then I will have Tom answer the margin question.

Yes, Patrick. As you know, we don't guide on segment margins, but I think maybe just to talk about it more generally, the corporate store portfolio isn't too far off from where the system is in terms of recovery to pre-COVID levels. It varies a bit between the legacy markets and the Sunshine markets, given that the legacy markets were hit harder during some mandates and temporary closures. The way to think about it is if you look at the 2019 corporate store margin trace that were all legacy stores. Now we are mixing in Sunshine stores with more store growth and ramping stores. So there's a bit of a mix effect there. We don't want to predict timing on crossing thresholds but there's an averaging effect. Overall, as you've heard us say, at the time of the transaction when we were discussing it, the mature stores that Sunshine had were generally around 600 to 700 basis points higher in four-wall margin than the mature stores in our legacy markets. Therefore, mix impact and pricing impacts will lead to a more drastic margin increase for both corporate and franchise stores.

Great. Thanks, guys.

Thank you.

Thank you. We have our last question comes from Ryan Cohen from Jefferies. Ryan, your line is open.

Yes. Thanks for taking my question. This is Ryan Cohen for Randy this morning. Given the strong growth in Gen Z and millennial penetration, just curious if you could provide your thoughts on how consumers shifting their focus towards strength training could impact performance and retention? Similarly, are you discussing rematching the equipment proportions at franchises?

Yes, it's a good question. It’s something we've already begun to do. Since COVID and the increase in our member base of Gen Zs and millennials continue to grow, it has compared to what it was before. Gen Zs are now our second largest part of our member base; it was one of our smallest pre-COVID. What we've witnessed is we see a decrease in cardio and more gym space for functional training and related activities. We've begun to collaborate and work with universities researching the habits of college-age kids and have adapted some of our equipment accordingly.

Great. Thank you.

You're welcome.

Thank you, Ryan. We have our last question comes from Linda Bolton Weiser from Davidson. Linda, your line is now open.

Hi. I was curious just about the comment you made about the increase in, I think, it was opening costs now versus pre-COVID. I think you said 20% higher. Is that primarily equipment cost or something else? Can you give a little more insight around that number and what goes into that?

Yes, Linda, it's Tom. The 20% increase is consistent with what we’ve talked about on prior calls and at Investor Day, where roughly 20% was due to price increases from our equipment vendors, low-double-digit price increases based on the inflation they were witnessing, but we maintained our margin rate on that. A part of the increase is also inflationary pressure on materials like concrete and other commodities, which varies depending on the market. The general contractor expenses have influenced by market factors regarding labor supply and demand. These factors rolled together have contributed to the overall 20% increase.

Yes. Thank you very much.

Okay. Thanks, Linda.

Thank you, Linda. This marks the end of the Q&A session. I will now pass the floor back to Chris Rondeau, CEO of Planet Fitness for closing remarks.

Thank you, Lynn. Really, really pleased with our strong ramp-up for 2022 with a record fourth quarter. I was actually at the Times Square event on New Year’s Eve to see the atmosphere back to normal and to kick off our January sales will carry momentum forward. I'm really excited about this year, continuing with the Black Card price at $24.99 and the annual fee increase, which I think is going to be beneficial. It's great to see the price elasticity we have and continue to have re-kicking off past in a few months. All good news and positive trends ahead. Thanks for joining the call today, and I look forward to speaking again.

Thank you. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.