Q3 2023 Planet Fitness Inc Earnings Call

November 7, 2023

Operator: Ladies and gentlemen, thank you for standing by. My name is Baldesh, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q3 2023 Planet Fitness earnings conference call. At this time, all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a teleconference question during this time, simply press Star followed by the number 1 on your keypad. To withdrawl your question, please press Star followed by 1 once again. Thank you. I will now hand the call over to Stacey Caravella, our VP of investor relations. You may begin your conference.

Yeah.

Ladies and gentlemen, thank you for standing by my name is Bob I shouldn't I'll be your conference operator today at this time I would like to welcome everyone to the Q3 'twenty to 'twenty three planet fitness, adding as called for in school.

At this time all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a teleconference question. During this time simply press the star followed by the number one on your telephone keypad to withdraw your question. Please press the star followed by the one once again.

Operator: If you'd like to ask a teleconference question during this time, simply press Star followed by the number 1 on your keypad. To withdrawl your question, please press Star followed by 1 once again. Thank you. I will now hand the call over to Stacey Caravella, our VP of investor relations. You may begin your conference.

Thank you I will now hand, the call over to Stacey Caravella VP of Investor Relations you May begin your conference.

Stacey Caravella: Thank you, operator, and good morning, everyone. Speaking on today's call will be interim Planet Fitness Chief Executive Officer Craig Benson and Chief Financial Officer Tom Fitzgerald. Both 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.

Both 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.

Stacey Caravella: Before I turn the call over to Craig, I'd like to note that we posted slides on our investor relations website this morning that summarize the updates that we will be discussing during our call. I'd also 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 investor website, 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 Craig.

On our Investor Relations website. This morning that summarize the update that we will be discussing during our call.

I'd also 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 are at.

At least can be found on our investor website, 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 Craig.

Craig Benson: Thank you, Stacey, and thanks, everyone, for joining us for the Planet Fitness Q3 earnings call. I'm honored to serve as interim CEO of such a truly unique brand with a strong track record of growth, as we enter the next chapter of the Planet Fitness journey. As a board member and a Planet Fitness franchisee, I know firsthand the power of this brand, the strength of our team, and our commitment to a welcoming, nonintimidating culture, all of which uniquely position us to continue to lead the industry. My priority is to lead the team as we execute on the current strategy with a focus on enhancing store returns.

Thank you Stacy and thanks, everyone for joining us for the planet fitness Q3 earnings call.

I'm honored to serve as interim CEO of such a truly unique brand with a strong track record of growth as we enter the next chapter of the planet fitness journey.

As a board member and a planet fitness franchisee I know firsthand the power of this brand.

<unk> of our team and our commitment to a welcoming non intimidating culture, all of which uniquely position us to continue to lead the industry.

My priorities are to lead the team as we execute on the current strategy.

With a focus on enhancing store returns.

Craig Benson: Look forward to finding an outstanding CEO candidate to lead us in capturing the growth opportunities ahead of us. Let's move on to our results. We ended the third quarter with more than 18.5 million members. Systemwide same-store sales growth was 8.4%, primarily driven by new member growth and more than 19% adjusted EBITDA growth.

Let's move on to our results.

We ended the third quarter with more than $18 5 million members system wide same store sales growth was eight 4% primarily driven by new member growth.

And more than 19% adjusted EBITDA growth.

Craig Benson: As a result of our performance and given our outlook for the fourth quarter, we're raising our full-year financial guidance targets for revenue and adjusted EBITDA for 2023. Tom will go through that later on. We feel really good about our membership trends. We added nearly 110,000 net new members in Q3, outperforming net growth for the same period last year, as well as 2019.

We feel really good about our membership trends we added nearly 210000.

New members in Q3.

Outperforming net growth for the same period last year as well as 2019, we continue to see our strongest net member growth tendencies, who now make up a quarter of our membership base. We believe we are unique among most multi unit brands and that the average age of our member.

Outperforming net growth for the same period last year as well as 2019,

Craig Benson: We continue to see our strongest net member growth for Gen Zs who now make up a quarter of our membership base. We believe we are unique among most multiunit brands and that the average age of our member continues to decrease. This was further enhanced by another successful High School Summer Pass program. We had more than 3 million teens and 2 million parents and guardians sign up for this year's program.

Continues to decrease.

This was further enhanced by another successful hateful somewhat pass program.

We had more than 3 million teams and 2 million parents and Guardians sign up for this year's program.

Craig Benson: At the end of October, our conversion rate of teen participants to paying members is 5.5% versus 5% last year. More than 30% of our new joins in Q3 were previous members, compared to about 20% pre-COVID. We also continue to see higher overall visits per member, as well as all age groups visiting more frequently year over year. We again experienced year-over-year improvement in our cancel rate, as it continues its decline for the ninth straight quarter.

We also continue to see higher overall visits per member as well as all age groups visiting more frequently year over year.

We again experienced year over year improvement in our expense rate as it continues its decline for the ninth straight quarter.

Craig Benson: Lastly, we opened 26 new stores this quarter, bringing our global store count to nearly 2,500. We've added 145 new locations since Q3 of last year, which is nearly three times the growth of the top 17 of our competitors combined. It was against this backdrop of industry-leading performance that we met with all of our franchisees last month to review the updates we are making as part of what we call our new growth model. We all left the meeting even more excited for the long-term opportunities that we have as a brand.

<unk> added 145, new locations since Q3 of last year, which is nearly three times the growth of the top 17 of our competitors combined.

Against this backdrop of industry, leading performance that we met with all of our franchisees last month to review the updates, we're making as part of what we call our new growth model.

We all left the meeting even more excited for the long term opportunities that we have as a brand.

Craig Benson: We are addressing the biggest opportunities to further improve the attractiveness of our returns for our franchisees as they manage their capital deployment and timing of their investments while maintaining our strong focus on a great member experience. We believe it's a win for the franchisees and for us as the franchisor. First on pricing. We're proud that we haven't raised the US$10 Classic Card price in 30 years.

I believe it's a win for the franchisees and for us as the franchisor.

First on pricing, we're proud that we havent raised $10 classic card pricing 30 years.

Craig Benson: However, consumer expectations on price have changed in a highly inflationary world. We are exploring whether we have an opportunity to take price on our classic card without sacrificing member growth. To that end, we've been testing different price structures, messaging, and price points in several markets around the country for more than a couple of months now. As we are a recurring revenue model, we plan to continue running these tests to understand the impact an increasing price has on membership growth.

To that end, we've been testing different price structures messaging and price points in several markets around the country for more than a couple of months now.

As we are a recurring revenue model, we plan to continue running these tests to understand the impact of increasing price has on membership growth.

Craig Benson: Now to our membership levels. Our membership recovery coming out of the pandemic closures has resulted in all-time high, systemwide membership levels. Additionally, the stores that will mature as of March 2020 are back to pre-COVID membership levels on average. And importantly, our 2023 cohort of new clubs is indexing very close to pre-pandemic new store ramp levels.

Our membership recovery coming out of the pandemic closures has resulted in all time high systemwide membership levels. Additionally, the stores that were mature as of March 2020 are back to pre COVID-19 membership levels on average and importantly, our 2023 cohort of new clubs is index.

And very close to pre pandemic new store ramp levels.

Craig Benson: However, the cohort of nearly 700 stores that opened from 2019 to 2022 have experienced much slower ramps to maturity, given that their early critical years of member growth were interrupted by COVID. This is nearly 30% of our system. These stores have not yet benefited from consecutive years of typical first quarters. As a reminder, 60% of our net member growth for the year historically occurs in Q1.

This is nearly 30% of our system.

Stores have not yet benefited from consecutive years, a typical first quarters as a reminder, 60% of our net member growth for the year historically occurs in Q1.

Craig Benson: We expect these stores to eventually grow to membership levels, consistent with the rest of the system, but they will take longer and will likely weigh on the returns across a given franchisee's portfolio. The cost to build a new store continues to be approximately 30% higher than in 2019. The total capex cost today, which includes total cost to build, reequipment, and remodel a Planet Fitness, are up nearly 70% over the 10-year life of a franchise agreement versus a decade ago. And while the pressures are primarily from external factors, such as inflation, higher interest rates, we're addressing the things that are within our control and further enhance store returns and lessen the increased capex burden for existing stores.

But they will take longer and will likely weigh on the returns across a given franchisees portfolio.

The cost to build a new store continues to be approximately 30%.

Fire than in 2019.

The total capex cost today, which includes total cost to build equipment and remodel a planet fitness are up nearly 70% over the 10 year life of a franchise agreement versus a decade ago.

While the pressures are primarily from external factors such as inflation higher interest rates, we are addressing with things that are within our control and further enhance store returns and lessen the increase capex burden for existing stores.

Craig Benson: Our management team has been working on the new growth model for a good portion of the year, trying to balance improving new store returns without significantly impacting our P&L. Our plan is focused on reducing the capital requirements for opening and operating a Planet Fitness franchise. This includes making changes to the franchise agreement, adjusting the timing of the cardio and strength reequips based on usage, and committing to reduce capex for new build and remodel while also looking for ways to reduce operating expenses. We believe that the changes we're making will free up a significant amount of capital for our franchisees in the near term, providing them with additional flexibility and resources to build their store portfolios for the long term.

Trying to balance improving new store returns without significantly impacting our P&L.

Our plan is focused on reducing the capital requirements for opening and operating a planet fitness franchise. This includes making changes to the franchise agreement adjusting the timing for cardio and strength for you based.

Based on usage and committing to reduce capex for new build and remodel while also looking for ways to reduce operating expenses we.

We believe that the changes, we're making will free up a significant amount of capital for our franchisees in the near term provide.

Providing them with additional flexibility and resources to build their store portfolios for the long term Tom.

Craig Benson: Tom is going to walk us through the details momentarily. The new structure is standard for all agreements moving forward, and our franchisees can also take advantage of it for their existing stores. In closing, our management team has taken responsible and data-driven approaches to adjusting our franchisee return model, which we believe set us up for sustainable growth. We recognize that the operating landscape has changed, and therefore, we are evolving for the long-term sustainability of the model without compromising the member experience.

The new structure is standard for all agreements moving forward. Our franchisees can also take advantage of it for their existing stores.

In closing our management team has taken responsible and data driven approaches to adjusting our franchisee return model, which we believe set us up for sustainable growth.

We recognize the operating landscape has changed and therefore, we are evolving for the long term sustainability of the model.

Compromising our member experience.

Craig Benson: We believe we are pulling the correct leverage to drive the right long-term outcomes and to ultimately increase returns for all of our stakeholders, both internal and external. Now I will turn it over to Tom.

Now I will turn it over to Tom.

Thomas J. Fitzgerald: Thanks, Craig, and good morning, everyone. Today, I'm going to address three topics: first, further details on how we're evolving our model, as Craig referenced; second, our Q3 financial results; and lastly, our 2023 outlook. We learned valuable lessons as the franchisor of a fitness brand during the pandemic, including the importance of building and maintaining a trusted franchisee-franchisor relationship. We were nimble and quickly made changes to support our franchisees and their most pressing needs while our stores were temporarily closed.

Second our Q3 financial results and lastly, our 2023 outlook.

We learned valuable lessons is the franchise or fitness brand during the pandemic, including the importance of building and maintaining a trusted franchisees franchise our relationship.

We were nimble and quickly made changes to support our franchisees and their most pressing needs while our stores were temporarily closed.

Thomas J. Fitzgerald: This included 18-month extensions for both new store obligations under area development agreements and on reequip cycles for existing stores. These extensions provided franchisees with greater flexibility and liquidity to help meet their various obligations while stores were temporarily closed and until membership levels began to recover. The result was that we did not permanently close any of our stores due to COVID versus the industry, which experienced a 25% reduction of all gyms in the U.S. And in today's post-pandemic world with persistent higher inflation that has significantly increased new store construction costs, we're using that experience to further refine our model and position us and our franchisees for continued, sustainable growth.

The result was that we did not permanently close any of our stores due to COVID-19 versus the industry, which experienced a 25% reduction of all gyms in the U S.

And in today's post pandemic world with persistent higher inflation that had significantly increased new store construction costs. We are using that experience to further refine our model and positions us and our franchisees for continued sustainable growth.

Thomas J. Fitzgerald: As Craig noted, this isn't just a win for our franchisees. It's also a win for us as the franchisor, and we believe it is also in the best long-term interest of our shareholders. As part of the plan, we're making changes to how we hold franchisees accountable to their new store build obligations, as well as updating our joint fee structure. Let me walk through each of the five parts of our new growth model in more depth.

As part of the plan, we're making changes to how we hold franchisees accountable to their new store build obligations as well as updating our joined fee structure.

Let me walk through each of the five parts of our new growth model in more depth.

Thomas J. Fitzgerald: The first component of our plan is to extend the length of our franchise agreement from 10 years to 12 years and to eliminate the initial US$20,000 franchise fee. Franchisees will be required to remodel at the 12-year mark and pay a franchise fee at that time. The franchise fee change is meaningful to our franchisees who are required to pay the fee when the store opens but less impact to our P&L as we recognize it over the life of the agreement. The second element of our new growth model is to extend the timing for reequips to achieve a system average of six years for cardio and eight years for strength.

Franchisees will be required to remodel at the 12 year, Mark and pay a franchise fee at that time.

The franchise fee change is meaningful to our franchisees who were required to pay the fee when the store opens but less impact to our P&L as we recognize it over the life of the agreement.

The second element of our new growth model is to extend the timing for re equips to achieve a system average of six years for cardio and eight years for strength.

Thomas J. Fitzgerald: Clubs that have higher-than-average usage will still be required to reequip at five and seven years, while clubs with lower usage will be seven and nine years. As a reminder, all stores that were opened at the end of 2021 received the previous reequip extension. So today, on average, those stores are on a six-and-a-half and eight-and-a-half-year schedule already. Therefore, we expect this change to have minimal near-term impact to our financials.

As a reminder, all stores that were open at the end of 2021 received the previous re equip extension. So today on average those stores are on a six five and eight and a half year scheduled already.

Therefore, we expect this change to have minimal near term impact to our financials.

Thomas J. Fitzgerald: The second cardio reequip will coincide with the 12-year remodel requirement, reducing the number of disruptions to the club and its members from seven to six in the first 24 years of operation. It eliminates two consecutive years that members have to deal with disruptions in today's model. For the third component of the new growth model, we're targeting a 5% to 10% reduction to the investment required to build a new store without compromising the member experience. In addition to value engineering the store build, this targeted reduction includes the waived initial franchise fee and the changes to the mix of equipment, which we have been refining this past year, as our members are consistently seeking more strength and less cardio.

And its members from 7% to six in the first 24 years of operation It.

It eliminates two consecutive years that members have to deal with disruptions in todays model.

For the third component of the new growth model, we are targeting a 5% to 10% reduction to the investment required to build a new store without compromising the member experience. In addition to value engineering. The store build this targeted reductions includes the waived initial franchise fee and the changes to the mix of equipment, which we have been refining this past year.

As our members are consistently seeking more strength unless cardiac.

Thomas J. Fitzgerald: The latter has the added benefit of reducing capex investment and strength equipment costs less than cardio, and we're also adding additional open spaces for stretching and working out. We expect that this will continue to be a headwind to equipment segment revenue. However, we will continue to examine potential adjustments to our equipment pricing and margin, as appropriate, to protect our margin dollars for placement and reequip. The fourth part of our new growth model affects our area development agreements, where we will transition from grace periods to the more typical tier-period mechanism, which will lead to greater clarity and alignment on our development pipeline.

We expect that this will continue to be a headwind to equipment segment revenue. However, we will continue to examine potential adjustments to our equipment pricing and margin is appropriate to protect our margin dollars through replacement and re equip.

The fourth part of our new growth model affects our area development agreements, where we will transition from grace periods to the more typical cure periods mechanism.

Which will lead to greater clarity and alignment on our development pipeline.

Thomas J. Fitzgerald: Grace periods allowed a franchisee an additional 12 months to open a location if there was a delay outside of their control. Franchisees will now enter a six-month cure period if they are in default on a unit obligation, which is a more common practice in the franchise world. Now the fifth and final element of our new growth model is to shift from the franchisees paying us a fixed fee for online joins to a fee equal to a percent of members' dues for all joins, regardless of the join channel. This new structure allows us to participate in the upside on potential future price increase.

Franchisees will now lets or a six month cure period. If they are in default on a unit obligation, which is a more common practice in the franchise world.

Now the fifth and final element of our new growth model is to shift from the franchisees paying us a fixed fee for online joins to a fee equal to 8% of members dues for all joins regardless of the joined chip.

This new structure allows us to participate in the upside and potential future price increase.

Thomas J. Fitzgerald: There are many specifics and nuances that we are still working through as we transition to this new structure. As Craig noted, this is the model that we propose to our franchisees, and we are highly encouraged by their enthusiastic response to it. We expect most will accept it. Now I'll cover our third quarter results. All of my comments regarding our quarter performance will be comparing Q3 2023 to Q3 of last year, unless otherwise noted. We opened 26 new stores, compared to 29. We delivered same-store sales growth of 8.4% in the third quarter. Franchisee same-store sales grew 8.2%, and corporate same-store sales increased 10.1%.

Now I'll cover our third quarter results.

Thomas J. Fitzgerald: All of my comments regarding our quarter performance will be comparing Q3 2023 to Q3 of last year, unless otherwise noted. We opened 26 new stores, compared to 29. We delivered same-store sales growth of 8.4% in the third quarter. Franchisee same-store sales grew 8.2%, and corporate same-store sales increased 10.1%.

We opened 26, new stores compared to 2009.

We delivered same store sales growth of eight 4% in the third quarter franchisee same store sales grew eight 2% in corporate same store sales increased 10, 1%.

Thomas J. Fitzgerald: More than three-quarters of our Q3 comp increase was driven by net member growth with the balance being rate growth. Black Card penetration was 62.1%, a decrease of 80 basis points. The decrease primarily reflects the continued increase in our Gen Z membership growth and the conversion of High School Summer Pass participants to paying members. For the third quarter, total revenue was US$277.6 million, compared to US$244.4 million.

Black card penetration was 62, 1% a decrease of 80 basis points.

The decrease primarily reflects the continued increase in our Gen Z membership growth and the conversion of high school summer past participants to paying members.

For the third quarter total revenue was $277 6 million compared to $244 4 million.

Thomas J. Fitzgerald: The increase was driven by revenue growth across all three of the segments. The 21.6% increase in franchise segment revenue was primarily due to increases in royalties, web join fees, and national ad fund revenue. The royalty increase was primarily driven by same-store sales growth, royalties on annual fees, and new stores. For the third quarter, the average royalty rate was 6.6%, up from 6.5%.

The 21, 6% increase in franchise segment revenue was primarily due to increases in royalties web join fees and National AD Fund revenue.

The royalty increase was primarily driven by same store sales growth royalties on annual fees and new stores.

For the third quarter, the average royalty rate was six 6% up from six 5%.

Thomas J. Fitzgerald: The 12% increase in revenue in the corporate-owned store segment was primarily driven by same-store sales growth and new store openings, as well as the four stores that we acquired in the second quarter. Equipment segment revenue increased 6%. We completed 22 new store placements this quarter, compared to 27 last year. For the quarter, replacement equipment accounted for 78% of total equipment revenue.

Equipment segment revenue increased 6%, we completed 22, new store placements this quarter compared to <unk> 27 last year.

For the quarter replacement equipment accounted for 78% of total equipment revenue.

Thomas J. Fitzgerald: Our cost of revenue, which primarily relates to the cost of equipment sales to franchisee-owned stores, amounted to US$53.8 million, compared to US$48.5 million. So operations expense, which relates to our corporate-owned store segment, increased to US$63.1 million from US$57.9 million. SG&A for the quarter was US$33.3 million, compared to US$27.1 million. Adjusted SG&A was US$30.7 million. This includes a US$2.6 million adjustment for CEO transition-related expenses. National advertising fund expense was US$17.6 million, compared to US$17.0 million. Net income was US$41.3 million. Adjusted net income was US$51.8 million, and adjusted net income per diluted share was US$0.59.

Store operations expense, which relates to our corporate owned store segment increased to $63 1 million.

From $57 9 million.

SG&A for the quarter was $33 3 million compared to $27 1 million. Adjusted SG&A was $30 7 million. This includes a $2 $6 million adjustment for CEO transition related expenses.

SG&A for the quarter was $33 3 million compared to $27 1 million. Adjusted SG&A was $30 7 million.

Thomas J. Fitzgerald: This includes a US$2.6 million adjustment for CEO transition-related expenses. National advertising fund expense was US$17.6 million, compared to US$17.0 million. Net income was US$41.3 million. Adjusted net income was US$51.8 million, and adjusted net income per diluted share was US$0.59.

National advertising fund expense was $17 6 million compared to 17.0.

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Net income was $41 3 million adjusted net income was $51 8 million and adjusted net income per diluted share was <unk> 59.

Thomas J. Fitzgerald: A reconciliation of adjusted net income to GAAP net income can be found in the earnings release. Adjusted EBITDA was US$111.9 million and adjusted EBITDA margin was 40.3%, compared to US$93.9 million with adjusted EBITDA margin of 38.4%. A reconciliation of adjusted EBITDA to GAAP net income can be found in the earnings release. By segment, franchise adjusted EBITDA was US$67.6 million, and adjusted EBITDA margin was 68.9%, Corporate store adjusted EBITDA was US$44.4 million and adjusted EBITDA margin was 39.2 %

Adjusted EBITDA was $111 9 million and adjusted EBITDA margin was 43% compared to $93 9 million.

Adjusted EBITDA margin of 38, 4%.

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

By segment franchise, adjusted EBITDA was $67 6 million and adjusted EBITDA margin was 68, 9% CT.

Corporate store adjusted EBITDA was $44 4 million and adjusted EBITDA margin was 39, 2%.

Thomas J. Fitzgerald: Equipment adjusted EBITDA was US$16.4 million, and adjusted EBITDA margin was 24.8%. Now turning to the balance sheet. As of September 30, 2023, we had total cash, cash equivalents, and marketable securities of US$474.1 million, compared to US$472.5 million of cash and cash equivalents on December 31, 2022, which included US$46.4 million and US$62.7 million of restricted cash, respectively, in each period. Year to date through September, we used US$125 million to repurchase shares.

Now turning to the balance sheet.

As of September 32023, we had total cash cash equivalents and marketable securities of $474 1 million.

Compared to $472 5 million of cash and cash equivalents on December 31, 2022, which included $46 4 million and $62 7 million of restricted cash respectively in each period.

Year to date through September we used $125 million to repurchase shares.

Thomas J. Fitzgerald: Total long-term debt, excluding deferred financing costs, was US$2.0 billion as of September 30, 2023, consisting of our four tranches of fixed-rate securitized debt that carries a blended interest rate of approximately 4.0%. As a reminder, we don't have debt coming due until September of 2025. Finally, moving on to our updated 2023 outlook, which we included in our press release this morning. Historically, our new store openings typically skewed to the fourth quarter and in particular to December as franchisees work hard to open their new stores before New Year's Eve.

Carries a blended interest rate of approximately 4.0%.

As a reminder, we don't have debt coming due until September of 2025.

Finally, moving on to our updated 2023 outlook, which we included in our press release this morning.

Historically, our new store openings typically skew to the fourth quarter and in particular to December as franchisees work hard to open their new stores before new year's Eve.

Thomas J. Fitzgerald: However, similar to the past few years, we continued to experience unpredictable delays and the various steps to open a new store chief among them is the extended permitting timeline and many municipalities. With less than two months remaining in the year, we have narrowed in on a range for new store openings and franchisee equipment placements that we believe accounts for the things that we and our franchisees can control. We now expect between $150 160, new stores and between $130 140 equipment placements and new franchise stores. We continue to expect systemwide same store sales growth to be in the high single digit percentage range, given our strong membership trends.

Thomas J. Fitzgerald: However, similar to the past few years, we continue to experience unpredictable delays in the various steps to open a new store. Chief among them is the extended permitting timeline in many municipalities. With less than two months remaining in the year, we have narrowed in on a range for new store openings and franchisee equipment placements that we believe accounts for the things that we and our franchisees can control. We now expect between 150 and 160 new stores and between 130 and 140 equipment placements in new franchise stores.

With less than two months remaining in the year, we have narrowed in on a range for new store openings and franchisee equipment placements that we believe accounts for the things that we and our franchisees can control.

We now expect between $150 160, new stores and between $130 140 equipment placements and new franchise stores.

Thomas J. Fitzgerald: We continue to expect systemwide same-store sales growth to be in the high single-digit percentage range, given our strong membership trends. We now expect that reequip sales will make up approximately mid-60% of total equipment segment revenue for the year. Our franchisees continuing to invest in their existing stores, as evidenced by the fact that we expect our full-year reequip revenue to be greater than what we had originally forecasted. Given our strong sales during our reequipped promotions year to date, we expect light Q4 reequip sales as franchisees are allocating capital to building new stores.

We continue to expect systemwide same store sales growth to be in the high single digit percentage range, given our strong membership trends.

We now expect that <unk> sales will make up approximately mid 60% of total equipment segment revenue for the year.

Our franchisees continuing to invest in their existing stores as evidenced by the fact that we expect our full year revenue to be greater than what we had originally forecast.

Given our strong sales during our re equip promotions year to date, we expect light Q4 re equip sales as franchisees are allocating capital to building new stores.

Thomas J. Fitzgerald: This is the primary driver behind our revised expectation of approximately 14% revenue growth and approximately 18% adjusted EBITDA growth. We now expect approximately 33% growth in adjusted net income and adjusted earnings-per-share growth of approximately 35% based on shares outstanding of approximately US$89 million. We continue to expect net interest expense to be in the low US$70 million, capex up approximately 40%, and D&A up in the high teens percent range. As we mentioned last quarter, we will revisit our three-year outlook which we initially provided back in November 2022 next year when we provide our targets for 2024.

We now expect approximately 33% growth in adjusted net income and adjusted earnings per share growth of approximately 35% based on shares outstanding of approximately $89 million.

We continue to expect net interest expense to be in the low $70 million.

Capex up approximately 40% and.

And DNA up in the high teens percent range.

As we mentioned last quarter, we will revisit our three year outlook, which we initially provided back in November 2022 next year, when we provide our targets for 2024.

Thomas J. Fitzgerald: In the meantime, our teams are working with franchisees on their development remodel and reequip plans for 2024 as they determine their near and long-term capital requirements and priorities under this new structure. We believe our new growth model will further enhance franchisee returns, continue to increase our leading competitive position, and deliver long-term sustainable value that benefits our shareholders and our entire system. I'll now turn the call back to the operator to open it up for Q&A.

We believe our new growth model will further enhance franchisee returns continue to increase our leading competitive position and deliver long term sustainable value that benefits, our shareholders and our entire system.

I'll now turn the call back to the operator to open it up for Q&A.

Operator: Thank you. At this time, I would like to remind our teleconference participants in order to ask a teleconference question, please press the star followed by the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. You may also submit your questions via the Q&A tool on the webcast. Our first question comes from the line of Randall Konik from Jefferies. Please, go ahead with your question.

We will pause for just a moment to compile the Q&A roster.

You May also submit your questions via the Q&A tool on the webcast.

Our first question comes from the line of Randall <unk> from Jefferies. Please go ahead with your question.

Randal J. Konik: Thanks a lot, and good morning, guys. I guess what would be helpful for us on the call is you talked about you're going to give us '24 guidance in a couple of quarters, but what would be helpful is just to get some perspective on how we should be thinking about directional change in unit openings going into next year. And just like shaping of the curve around equipment revenues, I think you said there shouldn't be all that much change from a replacement perspective. So, just help us think about puts and takes about just next year without - obviously, you're not going to give us specific guidance but just framing out the kind of path from here, would be super helpful going in for next year.

Thanks, a lot and good morning, guys I guess.

What would be helpful for us on the call is you talked about you're going to give us.

For guidance in a couple.

Quarters, but what would be helpful is just to get some perspective on how we should be thinking about directional change in unit openings going into next year.

And just like shaping of the curve around equipment revenues I think you said that shouldn't be all that much change from a replacement perspective. So just could you just help us.

Think about puts and takes about just next year without obviously, you're not going to give us specific guidance, but just framing out.

The path from here will be Super helpful going in for next year.

Thomas J. Fitzgerald: Yeah. Hey, Randy. Good morning, and thanks for the question. I appreciate that there's a desire to know that it is difficult to talk about at the moment because that's the work that's ahead of us. We made these changes for a couple of reasons, one, to free up the capital for franchisees. Particularly, the big move is to move the remodels that we're doing in 2024 to move them out. Now some of those that are more brand damaging will have to get done. But ones that we can take a little time on, we will. And so, that frees up the capital.

<unk>.

Desire to know that it is difficult to talk about at the moment because thats. The work Thats ahead of US right. We did this we made these changes for a couple of reasons one to free up the capital.

For franchisees.

Particularly the big move is to move the Remodels that were due in 2024 to move them out.

Now some of those that are more brand damaging will have to get done but ones that we can take a little time on we will.

And so that frees up the capital So and then also making some other changes to improve the while we think the returns are strong making them even stronger should help drive some unit growth how that plays out and how both of those things play out in 2024 Directionally to your question is.

And so that frees up the capital

Thomas J. Fitzgerald: So and then also making some other changes to improve the while we think the returns are strong making them even stronger should help drive some unit growth how that plays out and how both of those things play out in 2024 Directionally to your question is. As the work ahead of us and our teams to work with our franchisees and really sort of play all of this through. Both in terms of how they see their pipeline, but also just executing the agreement changes so. Anyway, Craig go ahead for that so I just wanted to add one thing I mean as you know we rolled this out the 16th of October to our franchisees.

Thomas J. Fitzgerald: And then also, making some other changes to improve the - while we think the returns are strong, making them even stronger should help drive some unit growth. How that plays out, how both of those things play out in 2024, directionally to your question, is the work ahead of us and our teams to work with our franchisees and really sort of play all this through, both in terms of how they see their pipeline, but also just executing the agreement changes. So, anyway, Craig, go ahead.

As the work ahead of us and our teams to work with our franchisees and really sort of play all of this through.

Both in terms of how they see their pipeline, but also just executing the agreement changes so.

Anyway, Craig go ahead for that so I just wanted to add one thing I mean as you know we rolled this out the 16th of October to our franchisees.

Craig Benson: Yeah. So, I just want to add one thing. I mean, as you know, we rolled this out to the 16th of October to our franchisees. These are big organizations in many cases, and so it takes time for them to process these changes as well. They had no sort of inkling about what we're going to bring to the huddle, and so they're processing this as well. So, it's going to take us a little bit of time to get it through their organizations, much less through our organization. So, that's, I think, a big portion of what Tom is talking about.

These are big organizations in many cases and so it takes time for them to process. These changes as well.

It had no sort of inkling about what we're going to bring to the huddle.

And so they are processing this as well so it's going to take us a little bit of time to get to their organizations must invest into our organization. So.

I think a big portion of what Tom is talking about.

Randal J. Konik: Got it. And then would you - so then, to handicap it, would you think that the updated unit guidance you gave for this year would be kind of the floor or close to the floor based on the pipeline you kind of have that you can see? And then just on top of that, just kind of elaborating, Craig, you talked about some of the pricing change work or at least testing you've been doing, I believe, on the White Card. How do you - What have you learned so far in those tests? Maybe give us a little flavor there, so we can get some perspective on what's been changing in those tests, price elasticity, price sensitivity, so we can get a feel for just how high the probability is that you could lift off that US$10-a-month White Card price point?

Guidance you gave for this year would be kind of a floor or close to the floor.

Based on the pipeline you kind of have.

Kate you can see and then on top of that just kind of elaborate Craig you talked about some of the pricing change work or at least testing you've been doing I believe on the white card.

Randal J. Konik: How do you - What have you learned so far in those tests? Maybe give us a little flavor there, so we can get some perspective on what's been changing in those tests, price elasticity, price sensitivity, so we can get a feel for just how high the probability is that you could lift off that US$10-a-month White Card price point?

Craig Benson: How do you what have you learned so far in those tests, maybe give us a little flavor there. So we can get some perspective on what's been changing in those tests. Price elasticity price sensitivity. So we can get a feel for just how high the probability is that you could lift off that $10 amongst white card price point, Thanks, Scott Yeah.

So we can get some perspective on what's been changing in those tests.

Price elasticity price sensitivity. So we can get a feel for just how high the probability is that you could lift off that $10 amongst white card price point, Thanks, Scott Yeah.

Craig Benson: I'm going to let Tom talk about the pricing, but I just wanted to sort of talk about where we are as far as store openings go. Listen, Tom said it right at the beginning of the call. It has become increasingly difficult to forecast openings because of changes, especially in the permitting and the entire process of inspections and getting a certificate occupancy. And so what used to be a little more straightforward or maybe a lot more straightforward, has changed for the worst.

Listen Tom said it right at the beginning of the call.

It has become increasingly difficult to forecast openings because of changes, especially in the permitting and.

The entire process of inspections and getting a certificate of occupancy.

So what used to be a little more straightforward.

A lot more straightforward has changed for the worse.

Craig Benson: And so, we're dealing with that the best we can. And our franchisees are working very hard. And trust me, I'm one of them. So, I get what's happened in the marketplace, and it is frustrating is I'll get out to have things ready to go but not be able to complete the opening.

In our franchise. So we're working very hard and Trust me I am one of them So I get.

And in the marketplace and it is frustrating as all get out to have things ready to go but not be able to complete.

The opening.

Thomas J. Fitzgerald: Yeah. And Randy, on the pricing one, as you know, with the subscription model, we have to read it longer than you would a typical QSR retail test. And so, we're reading it through. We've got roughly 100 stores and a few different DMAs in the US$15 test.

As you know with the subscription model, we have to read it longer than you would a typical <unk> retail test.

And so we're reading it through we've got roughly 100 stores in a few different DMA in the $15 test and so it's $15. When we're not on sale, it's $10 on sale. So we're reading it both in those sort of sale periods and what we call the evergreen non sale periods.

And so we're reading it through we've got roughly 100 stores in a few different DMA in the $15 test

Thomas J. Fitzgerald: And so, it's US$15 when we're not on sale, it's US$10 on sale. So, we're reading it both in those sort of sale periods in what we call the evergreen nonsale periods. And at the end of the day, our criteria is we don't want to sacrifice member growth. We think like a retailer or restaurant transactions for them, member growth for us is the sustainable lifeblood of this business.

And at the end of the day. Our criteria is we don't want to sacrifice member growth, we think like a like a retailer or a restaurant transactions for them member growth for US is the sustainable lifeblood of this business. If we can maintain that while adding some dues up.

Thomas J. Fitzgerald: If we can maintain that while adding some dose upside, then we will. But we don't want to say - given we're trying to get people off the couch, and cost is a barrier to getting off the couch. We just want to be very careful about how we learn our way into what is a better place than where we are today. It may take us a little time, and these tests may prove to be that or they may prove not to be that we have to run some other tests, but it's definitely not something that - with only two price points we can't bet bunches on hunches. We got to scientifically figure out what's better than what we have. And if we find something, we'll move to it.

Side, then we will but we don't want to say given we're trying to get people off the couch.

And cost is a barrier to getting off the couch. We just wanted to be very careful about how we learn our way into what is a better place than where we are today. It may take us a little time in these tests may prove to be that or they may prove not to be that and we have to run some other tests, but it's definitely not something that we're the only two price points we can.

We can't bet bunches on Hunches, we got a scientifically figure out what's what's better than.

We can't bet bunches on Hunches,

we got a scientifically figure out what's what's better than.

Craig Benson: And then, I just want to add one thing. Part of ours is not just the entry price. It's the length of time somebody stays a member. So, to the extent, price influences that in a dramatic way. That's harmful to our business, and we're looking at the lifetime value of a member.

Length of time somebody stays in member right. So to the extent price influences in a dramatic way.

That's harmful to our business and we're looking at the lifetime value, which is part of that member growth that way I can answer yes, okay. Thanks, Randy understood. Thanks, guys.

That's harmful to our business and we're looking at the lifetime value, which is part of that member

growth that way I can answer yes, okay. Thanks, Randy understood. Thanks, guys.

Thomas J. Fitzgerald: Which is part of that member growth that we're talking about. OK.

Craig Benson: That's right.. Thanks, guys.

Craig Benson: That's right..

Randal J. Konik: Thanks, guys.

Operator: Thank you. Our next question comes from Simeon Siegel from BMO Capital Markets. Please go ahead with your question.

Simeon Avram Siegel: Thanks. Hey, everyone. Good morning. I hope you and your families are OK in these challenging times. So can you guys just talk a little bit more, you got to the decision to change the store level to our model. I guess is there an agreement as to what the save dollars will be used to? Or are you going to ask for a commitment toward the new gyms or something else? Or is this more to help their returns? Is this a concession or are you seeing a change in the structural requirements to run gym? So Tom, I think you mentioned maybe see a way to improve the margins for your own equipment. So kind of thinking that through, and then just really just thinking through if replacements and remodels where historically necessary to keep the gyms fresh, how do you ensure that loosening these restrictions won't hurt that customer experience? And then just lastly -- sorry, lastly, I guess, do you believe this is the end of negotiations? Or is there anything else to expect to come for franchisee benefits?

Simeon Avram Siegel: Thanks. Hey, everyone. Good morning. I hope you and your families are OK in these challenging times. So, can you guys just talk a little bit more, you got to the decision to change the store level to our model. I guess is there an agreement as to what the save dollars will be used to? Or are you going to ask for a commitment toward the new gyms or something else? Or is this more to help their returns? Is this a concession or are you seeing a change in the structural requirements to run gyms?

So can you guys just talk a little bit more you got to the decision to change the store level with our model I guess is there an agreement as to what to save dollars will be used or are you going to ask our commitment towards the new James or something else or is this more to help.

Their returns.

Is this the concession or are you seeing a change in the structural requirements to run jenne. So Tom I think you mentioned may be see a way to improve the margins for your own equipment. So kind of thinking that through and then just really just thinking through it for placements and remodels, where historically necessary to keep the chips fresh how do you sure that loosening. These restrictions will hurt that customer experience.

Simeon Avram Siegel: So Tom, I think you mentioned maybe see a way to improve the margins for your own equipment. So, kind of thinking that through, and then just really just thinking through if replacements and remodels where historically necessary to keep the gyms fresh, how do you ensure that loosening these restrictions won't hurt that customer experience? And then just lastly - sorry, lastly, I guess, do you believe this is the end of negotiations? Or is there anything else to expect to come for franchisee benefits?

And then just lastly, sorry.

Lastly, I guess do you believe this is the end of the negotiations or.

Is there anything else to expect com for franchisee benefits. Thanks, guys.

Thomas J. Fitzgerald: Yeah, Simeon. You're setting a record there

You are setting a record there.

Simeon Avram Siegel: Sorry.

Sorry.

Thomas J. Fitzgerald: That's OK. I think, and we've been working on this for months with the Board and with the leadership team here, looking at various things that we could consider. I think we've talked about on some calls when we've been asked, is there anything you can do? And we thought this was kind of the sweet spot of all things that help them on the liquidity side, recognizing the higher cost of inflation - Sorry, what inflation has done to the build cost and the remodel costs, give us some time to value engineer those remodels. If they are brand damaging, then they have to get them fixed, whether that's a corporate store that we acquired from somebody else or a franchise store.

I think we've talked about on some calls when we've been asked.

There anything you can do and we thought this was kind of the sweet spot of all things that help them.

Thomas J. Fitzgerald: And we thought this was kind of the sweet spot of all things that help them on the liquidity side, recognizing the higher cost of inflation - Sorry, what inflation has done to the build cost and the remodel costs, give us some time to value engineer those remodels. If they are brand damaging, then they have to get them fixed, whether that's a corporate store that we acquired from somebody else or a franchise store.

On the on the liquidity side, recognizing the higher cost of inflation.

And sorry that what inflation is done to the build cost in the remodel costs give us some time to value engineer those remodels. If they are brand damaging than they have to get them fixed whether thats a corporate store that we acquired from somebody else or a franchise store.

Thomas J. Fitzgerald: At the end of the day, this is still member first in our thinking. But there are cases where we're moving away from a one-size-fits-all to a little bit more of a variation, and that really goes to the reequips. So, if you have a store that's got a lot more members than the average, you're going to have to reequip the cardio on the five-year cycle. And you probably, in some cases, may want to do that even earlier if it's getting beat up. And the same with strength.

But there are cases, where we're moving away from a one size fits all too a little bit more of a variation and that really goes to the re equips right. So if you have a store that's got a lot more members than the average youre going to have to re equip the cardio on the five year cycle and you're probably in some cases may want to do that even earlier if it's getting.

Beat up.

And the same with strength if your stores not quite.

And the same with strength

Thomas J. Fitzgerald: If your store is not quite as strong as you thought or just has less membership, then you would do it on a seven-year cycle and everybody else would be on the six-year cycle. So, it is taking some of that into account so that the member experience is considered based on the usage essentially. And trying to get sort of store growth as an increased store growth as a, I'll call it, a quid pro quo, not your terms mine, but it's difficult to do. We can't really rewrite the ADA and the pacing of the ADA.

No.

As strong as you thought or just does is less membership.

Then you would do it on a on a seven year cycle and everybody else would be on the six year cycle. So it is taking some of that into account so that the member experience is.

Is considered based on the usage essentially and.

Trying to get.

Sort of store growth as a.

Increased store growth is the I'll call. It a quid pro quo not your terms mine, but.

It's difficult to do we can't really rewrite the Ada and the pacing of the Ada This is to recognize.

It's difficult to do we can't really rewrite the Ada and the pacing of the Ada

Thomas J. Fitzgerald: This is to recognize and it's also harder to find real estate. I think CBRE said it's the fourth year in a row of really record lows center growth. So, I think we're trying to factor in all those dynamics and really work with our franchisees to figure out what is the best combination of changes. While also on the get side, we want to move away from these grace periods.

And it's also harder to find real estate I think CBRE said, it's the fourth year in a row of really record lows center growth.

So I think we're trying to factor in all of those dynamics and really work with our franchisees to figure out what is the best best combination of changes.

Also.

On the get side, we wanted to move away from these grace periods. There are uncommon in franchising and going to more of a cure method.

On the get side, we wanted to move away from these grace periods.

Thomas J. Fitzgerald: They're uncommon in franchising and going to more of a cure method allows us, to Craig's point, to have better visibility and control over the pipeline. And so, we have to transition from where we are to where we want to go, and it will take probably a few months to do that, but that's the intent. And we think, ultimately, this was the best set of changes that we could develop to improve - to free up some cash to invest in new store growth, improve the store returns of those new stores. And we're excited about it.

Allows us to Craig's point to have better visibility and control over the pipeline and.

And so we have to transition from where we are to where we want to go and it will take probably a few months to do that but that's the intent and we think ultimately this was the best set of changes that we could develop.

To improve.

To free up some cash to invest in new store growth improve the store returns of those new stores.

Now we're excited about it and so far the reaction from franchisees has been quite enthusiastic now we have to go through.

Now we're excited about it

Thomas J. Fitzgerald: And so far, the reaction from franchisees has been quite enthusiastic. Now we have to go through and see how all that plays out and how many convert, but we feel the economics are compelling, and we'll end up in most saying, yes. Is there more to come after this? We think this is a big set of changes that's going to sit for a while, and we'll continue to evaluate how the world changes, how the economy changes and how our business moves. I'll tell you, what we don't want to get lost in all this is our business is performing well.

And see how all that plays out and how many convert but we feel that the economics are compelling and we will end up in most.

Most saying, yes is there more to come after this.

We think this is a big set of changes thats going to sit for a while.

And we will continue to evaluate how the world changes how the economy changes in how our business moves.

Well, we don't want to get lost in all this is our business is performing well member growth is strong profitability is up.

Well, we don't want to get lost in all this is our business is performing well

Thomas J. Fitzgerald: Member growth is strong, profitability is up. We've got some timing on equipment that's impacting us across the quarters when compared to last year. But overall, I feel really good about the fact that three-quarters of our same-store sales growth is driven by member growth. We're opening orders of magnitude, more stores than our competitors. So, it's just a - we feel good about a lot of things in this business. And ultimately, what we created, we think, is a win for us, a win for our franchisees and a win for our shareholders.

We've got some timing on equipment.

Impacting us across the quarters, when compared to last year, but overall feel really good about the fact that three quarters of our same store sales growth was driven by member growth.

Thomas J. Fitzgerald: We are opening orders of magnitude more stores than our competitors. So it's just a. We feel good about a lot of things in this business. And ultimately what we created we think is a win for US a win for our franchisees and a win for our shareholders. I think thats well said, thanks, a lot guys best of luck for the rest of the year.

Thomas J. Fitzgerald: We're opening orders of magnitude, more stores than our competitors. So, it's just a - we feel good about a lot of things in this business. And ultimately, what we created, we think, is a win for us, a win for our franchisees and a win for our shareholders.

We feel good about a lot of things in this business.

And ultimately what we created we think is a win for US a win for our franchisees and a win for our shareholders.

Simeon Avram Siegel: Perfect. I think that's well said. Thanks a lot, guys. Best of luck for the rest of the year.

I think thats well said, thanks, a lot guys best of luck for the rest of the year.

Operator: Thank you. Our next question comes from the line of Joe Altobello from Raymond James. Please go ahead with your question.

Thank you. Our next question comes from the line of Joe John.

Quarter Bella.

Raymond James. Please go ahead with your question.

Joseph Nicholas Altobello: Thanks. Hey, guys, good morning. I guess first question, and I think I know the answer to this, but, is there anything you guys can do on the permitting and inspection side to accelerate that? Or is it really out of your hands and it really just depends on the particular town?

I guess first question and I think I've already answered this but is there anything you guys can do on the permitting and inspection side to accelerate that or is it really out of your hands and it really just depends on the particular town.

Craig Benson: It is completely dependent upon where you're trying to locate. Some towns are very cooperative and other towns are very slow. And it starts with just getting the permit to start, and it goes all the way through the inspections. My last - second last club, I just opened 1.5 months or so ago.

Some towns are very cooperative and other towns are very slow and it starts with just getting the permit to start and it goes all the way through the inspections My last and second last club I just open the app or so ago, the Guy who decided to building a spec decided to go to Italy for a month and didn't tell anybody and so we couldnt get into <unk>.

Craig Benson: The guy decided the building a spec decide to go to Italy for a month and didn't tell anybody. And so, we couldn't get into reset for a month waiting for them to come back from his trip that was unplanned. And so, since COVID, some of the departments and some of the towns have taken a lot of new personality, as far as expediting permits and inspections and certificates of occupancy. So, it's you go in and you don't even know what you're going to deal with till it starts.

We sat for a month waiting for them to come back from a strip that was unplanned.

And so since Covid.

Some of the departments and some of the towns have taken on a new personality as far as expediting permits and inspections and certificates certificates of occupancy so it's.

You go in and you don't even know what youre going to deal with until it starts that's the other thing because it.

You go in and you don't even know what youre going to deal with until it starts

Craig Benson: That's the other thing because in my case, if you're going into a new town, you don't know what to expect until you're in the process. And you hope for the best, but sometimes that doesn't happen. Other towns are great. But it's - you don't know. So, it's difficult to project and different portions of the permitting process and the inspection process are run by different people, so that one section may be fine and another section may not be as fine. So, it is all over the place.

In my case Youre going into a new town you don't know what to expect until you are in the process.

And you hope for the best but sometimes that doesn't happen other towns are great.

But its you.

You don't know.

It's difficult to project.

And different portions of the permitting process and the inspection process are run by different people. So that one section may be fine in another section may not be as fine. So it is it is all over the place and Joe maybe one thing to add on that and permitting some cases, you can use an expediter and franchisees really.

Thomas J. Fitzgerald: and Joe maybe one thing to add on that and permitting some cases, you can use an expediter and franchisees really. They want like Craig wanted to get the store opened so they'll do whatever they can on inspection not so much. There is nobody going to fast track that but it is definitely more difficult than it's been and it's difficult on us too because we have free rent periods, but if youre stuck not opening those free rent periods expire and youre not even open to enjoy the benefits of free rent.

Thomas J. Fitzgerald: Yeah. And Joe, maybe one thing to add on that. In permitting some cases, you can use an expeditor and franchisees really, they want, like Craig, I want to get the store open, so they'll do whatever they can. On inspection not so much. I mean, there's nobody going to fast-track that. But it is definitely more difficult than it's been [inaudible].

They want like Craig wanted to get the store opened so they'll do whatever they can on inspection not so much.

There is nobody going to fast track that but it is definitely more difficult than it's been and it's difficult on us too because we have free rent periods, but if youre stuck not opening those free rent periods expire and youre not even open to enjoy the benefits of free rent.

Craig Benson: And it's difficult on us too because we have free rent periods, but if you're stuck not opening, those free rent periods expire and you're not even open to enjoy the benefits of free rent.

Joseph Nicholas Altobello: Got it. OK. And just maybe on the timing of a new CEO. I know it's obviously early, but how do you see that playing out? And what are you guys looking for in terms of qualifications? Is fitness experience a must or not necessarily?

What are you guys looking for in terms of qualifications is fitness experience a months or not necessarily.

Thomas J. Fitzgerald: So, from what I hear, it's early. The process is going well. We're attracting some good interest. As far as the qualifications go, clearly, fitness were pretty well. I don't think there's anybody bigger than us in fitness. So, we can't attract somebody from a bigger company, a fitness company, at least that would know more than what we know. But certainly, international experience is important to us. Consumer branding is important to us. Consumer marketing is important to us and perhaps understanding globally how we do all this, obviously, our public company experience is important to us as well.

The process is going well, we're attracting some some good interest.

As far as the qualifications go clearly fitness work pretty well.

I don't think there's anything bigger than us in fitness. So we can't attract somebody from a bigger company fitness company at least that would know more than what we know, but certainly international experiences important towards consumer branding is important to us consumer marketing is important to us.

Thomas J. Fitzgerald: But certainly, international experience is important to us. Consumer branding is important to us. Consumer marketing is important to us and perhaps understanding globally how we do all this, obviously, our public company experience is important to us as well.

Thomas J. Fitzgerald: Consumer marketing is important to us and perhaps understanding globally how we do all this, obviously, our public company experience is important to us as well.

Company experience is important to us as well.

Joseph Nicholas Altobello: And would you expect someone to be in place before you provide guidance for next year or after?

Craig Benson: That might be a bit tight, but maybe. I don't know exactly how fast this is proceeding. But I know that the board who is running this process is very focused on doing a good job and moving it along.

But.

I know that the board was running this process is very focused on doing good job in and moving it along its always hard to predict Joe as you know and I think to Craig's point. This is an attractive.

I know that the board was running this process is very focused on doing good job in and moving it along

Thomas J. Fitzgerald: It's always hard to predict, Joe, as you know, and I think to Craig's point, this is an attractive role. Hard to find a place where you're eight-ish times bigger than your next competitor with lots of growth opportunity. But it is an important job, obviously, to make sure we take our time. I think we're providing guidance at the end of February. I think that's - as these things go pretty tight to Craig's point. But I think the board is moving with urgency but not hastily.

Roll hard to find a place where you are.

Eight ish times bigger than your next competitor with lots of growth opportunity, but it is important job obviously to make sure. We take our time I think we're providing guidance at the end of February I think that's it.

As these things go pretty tight to Craig's point, but.

The board is moving with urgency.

But not hastily.

Joseph Nicholas Altobello: Okay. Thank you, guys.

Thomas J. Fitzgerald: Thank you.

Operator: Thank you. Our next question comes from the line of John Heinbockel from Guggenheim Partners. Please, go ahead with your question.

John Heinbockel: Tom, can you talk about the mechanics of shifting from the grace period Meaning so, if I'm on one now, does that continue? When do you transition over? Is it January 1st? And then do you think, does that have any impact, you think, on cadence of openings, one way or the other, whether pull it forward, push it out? And then relatedly, for Craig, as a franchisee, what do you think you need to see, others need to see to want to step up again? Because maybe returns will never be what they were five years ago, that's fine relative to other alternatives? Do you just need to see stabilization and some modest improvement?

Shifting from the Grace period, meaning so if I'm on one now does that continue when do you transition over as of January one.

And then do you think does that have any impact you think on cadence of openings one.

One way or the other.

Pulling forward push it out.

And then Relatedly for.

For Craig right as a franchisee what do you think you need to see others need to see.

Wanted to step up again is it because maybe returns will never be what they were five years ago.

That's fine relative to other alternatives do you just need to see stabilization and some modest improvement.

Thomas J. Fitzgerald: Yeah, I'll take the first one there, Joe. So, we're - sorry, John, my gosh. We're moving through those changes here in all the documents. It's going to take a little while. We expect by January, we'll be moving through that transition process by which the grace - whatever, if a store is in a grace period today, it will move to a cure method. And our intent is not to have a meaningfully different timeline for that particular store than would exist under the grace period. We need to work to case individually. But that's essentially how we see it.

Sure.

Sorry, John My Gosh, where.

We're moving through.

Those changes here and all of the documents, it's going to take a little while we expect by January will be.

Moving through that transition process.

By which the great whatever if a store is in a grace period today, it will move to a cure method.

And our intent is not to have a meaningfully different timeline for that particular store then would exist under the grace period, and we need to work through each case individually.

But that's essentially how we see it so we don't think it will affect the timing of new store that are that are in process. Now, it's just a matter of transitioning from one to the other.

But that's essentially how we see it

Thomas J. Fitzgerald: So we don't think it will affect the timing of new stores that are in process now. It's just a matter of transitioning from one to the other. And I'll maybe defer to Craig on the what question.

Maybe deferred Craig on the.

Yeah. Good question, yes, so thanks for the question.

Craig Benson: Yeah. No, no. So, thanks for the question. I love Planet, as do all of our franchisees. And maybe I'll take you back to the huddle where I talked about the four pillars of what we need to do together to make this brand even stronger than it is. And it starts with being aligned with our franchisees and having buying from both sides and frequent work together to enable us to be able to deal with this inflationary environment. It's not going to go away, at least not soon. And so, we need to work together on different aspects of this model to ensure that we do the best we can.

And maybe I'll take you back to the huddled, where I talked about the four pillars of what we need to do together to make this brand even stronger than it is and it starts with being aligned with our franchisees and having buy in from both sides frequent.

Work together to enable us to.

To be able to deal with this inflationary environment, it's not going to go away.

At least not soon.

And so we need to work together on different aspects of this model to ensure that we do the best we can and so one of those areas is leverage our size is so big.

And so we need to work together on different aspects of this model to ensure that we do the best we can

Craig Benson: And so, one of those areas is leverage. Our size is so big that we've never done a really good job of leveraging that for pricing, for opportunities to work with people directly. Some of the promotional things we're doing within clubs now, we're starting to see vendors that want to come to us to sell their merchandise and consumer brands that never would have happened before, but our scale has changed at 18.5 million members, 2,500 locations. I'm going to harken back to my insurance build that Tom likes to laugh about.

That we've never done a really good job of leveraging that for pricing.

For opportunities to work with people directly some of the promotional things we're doing within clubs now we're starting to see vendors that want to come to us to sell their merchandise and consumer brands that never would have happened before but our scale has changed at $18 5 million members 2500 locations.

Im going to harken back to my insurance Bill that Tom lifestyle App.

Craig Benson: But I got paid US$425,000 last year for business insurance. And my quote that came in four days before due renewal came in at US$850. Total claims over the last five years is less than US$800,000. But with 23 gyms, I don't have the leverage to lean on an insurance company and say, that's not acceptable.

I get paid 425000 last year for business insurance and my quote that came in four days before it was due to renew came in at 850.

Total claims over the last five years is less than 800000, so but with 23 gyms I don't have the leverage to lean on and insurance companies say, that's not acceptable, but with 2500, we've got an opportunity to work with some of these people to get the best product at the best price and that goes across all different things.

Total claims over the last five years is less than 800000, so but with 23 gyms I don't have the leverage to lean on and insurance companies say, that's not acceptable,

Craig Benson: But with 2,500, we've got an opportunity to work with some of these people to get the best product at the best price and that goes across all different things. So, that's leverage. The other thing that we need to do a better job with this marketing. We talked about earlier is branding, as well as promotional marketing.

That's leverage.

The other thing that we need to do a better job with is marketing and that we talked about earlier is branding as well as promotional marketing we need to do that to make sure that we have an opportunity to get our story out there because of these gen Z.

The other thing that we need to do a better job with is marketing and that we talked about earlier is branding as well as promotional marketing

Craig Benson: We need to do that to make sure that we have an opportunity to get our story out there, because these Gen Zs and what have you are much more into value but also into what do you stand for? And that brand is very important to us. So, those are just some of the things we need to do a better job of in order to really grow this brand. So, I have a big believer in this brand, and we have to be really innovative in the way we look at putting new things in clubs, testing our pricing, different iterations of our pricing to make sure that we're getting the maximum value that we can to augment the customer experience. So, those are some of the things we need to do. And if we do those well, this brand will be around for at least another 30 years.

And what have you are much more into value, but also into what do you stand for.

That brand is very important to us. So those are just some of the things we need to do a better job.

In order to.

Really grow this brand so I havent big believer in this brand and we have to be really innovative in the way, we look at putting new things in clubs.

Craig Benson: So, I have a big believer in this brand, and we have to be really innovative in the way we look at putting new things in clubs, testing our pricing, different iterations of our pricing to make sure that we're getting the maximum value that we can to augment the customer experience. So, those are some of the things we need to do. And if we do those well, this brand will be around for at least another 30 years.

Our pricing different iterations of our pricing to make sure that we're getting the maximum value that we can.

To augment the customer experience. So those are some of the things we need to do.

And if we do those well this brand will be around for at least another 30 years.

John Heinbockel: Guys, one quick follow-up since you brought up marketing. That's always looked like an opportunity, as you get to US$300 million of spend and higher, to restructure that more national, maybe provide relief to franchisees. They can spend 100 basis points less. How do you think about that? Is that not a near-term opportunity, it's down the road?

Right as you get to 300 million of spend and higher right to restructure that more national maybe provide relief to franchisees right. They can spend 100 basis points less how do you think about that is that and is that does that not a near term opportunity it's down the road.

Craig Benson: We need to grow into this brand thing a little bit better. We're not ready right now. At the huddle, I talked about changing the mix. And I said it's coming, because we have to be much more about branding and a little less with promotion. And by the way, we're going to probably spend closer to US$400 million next year. So, it's getting to be a big nut. And we need to spend it effectively. We are, by far, the biggest spender and marketing of anybody else and US$0.09 of every member dollar goes into marketing. So, it's a big expenditure, but it's also a big opportunity. Chris used to call it the flywheel. I'm not sure I'd use the same term. But what the term I do is we have some ways to communicate with people that nobody else does.

You talked about changing the mix and I said, it's coming.

Because we have to be much more about branding and a little less with promotion.

Craig Benson: And by the way, we're going to probably spend closer to US$400 million next year. So, it's getting to be a big nut. And we need to spend it effectively. We are, by far, the biggest spender and marketing of anybody else and US$0.09 of every member dollar goes into marketing. So, it's a big expenditure, but it's also a big opportunity. Chris used to call it the flywheel. I'm not sure I'd use the same term. But what the term I do is we have some ways to communicate with people that nobody else does.

We need to spend it effectively we are by far the biggest spender in marketing of anybody else and wait nine cents of every member dollar goes into marketing. So it's a big expenditure, but it's also a big opportunity Chris used to call. It the flywheel I'm not sure I'd use the same term.

Craig Benson: And we need to spend it effectively. We are, by far, the biggest spender and marketing of anybody else and US$0.09 of every member dollar goes into marketing. So, it's a big expenditure, but it's also a big opportunity. Chris used to call it the flywheel. I'm not sure I'd use the same term. But what the term I do is we have some ways to communicate with people that nobody else does.

And remind us as we have some ways to communicate with people and nobody else does.

Thomas J. Fitzgerald: And John, the discussion that Craig is mentioning, that was just merely taking the US$0.09 and remixing it, not lowering it. We still think there's a lot of folks to get into fitness before we start thinking about reducing the rate.

Craig's mentioning that was just merely taking the nine and remixing it not lowering it we still think there is a lot of.

Folks to get into fitness before we start thinking about reducing the rate okay alright. Thank you.

Folks to get into fitness before we start thinking about reducing the rate

John Heinbockel: Alright. Thank you.

Operator: Thank you. Our next question comes from Rahul Krotthapalli from J.P. Morgan. Please, go ahead with your question.

Thank you. Our next question comes from Rahul <unk> Poly from J P. Morgan. Please go ahead with your question.

Rahul Krotthapalli: Good morning, guys. Thanks for taking my question. Tom, can you just clarify what your comments meant to the equipment margins? I know you talked about protecting the dollar profits in the segment. Is there a way where you can probably pass through the cost you buy the equipment from to the franchises at least on a case-to-case basis? Or is it something differently how you're thinking about it?

Tom can you just clarify what your comments Matt.

The <unk> margins I know you talked about protecting that dollar profits in the segment.

Better.

There you can probably pass through the cost youll buyback you've mined from the franchisees at least on the gas to gas business.

Is it something differently, how youre thinking about that.

Thomas J. Fitzgerald: Yeah, I think what I was trying to convey there is, as we continue to evolve the mix of equipment, you may have heard us talk about where the Gen Z clearly seems to prefer strength and functional workouts versus cardio. Treadmills still get about the same use, but things like elliptical and bikes are getting far less used. So, we've been - we took a first swing at this to readjust the mix or to adjust the mix to have less cardio, more strength. We're now taking a bigger move on that because it's just, given Gen Zs are 25% of our member base and millennials have similar habits though not quite the same.

You may have heard us talk about whereas Gen Z clearly seems to prefer.

Strength in functional workouts versus cardio.

Treadmill still get about the same use but things like elliptical and bikes are getting far less use so we've been.

We took a first swing at this to readjust the mix or to adjust the mix to have less cardio more strength, where now taken a bigger move on that because it's just it's given gen Z or 25% of our member base and millennials have similar habits, though not quite is not quite the same.

Thomas J. Fitzgerald: And because strength costs less than cardio and because, in some cases, the functional areas just have more open space so people can work out. Overall, the revenue per new store will come down. And so what we've done is adjusted our margin that we charge, so that the dollar margins that we earn on that new store placement are roughly the same. That's what I was trying to convey. So, we've done that historically. We'll continue to do that, and we'll see how it all evolves. But that's what I was trying to convey.

And so what we've done is adjusted our margin that we charge so that the dollar.

Dollar margins that we earn on that new store placement are roughly the same so that's what I was trying to convey now.

Rahul Krotthapalli: Got it. And a follow-up on the changes to the growth model. So, looking at the math here, it looks like this uplift and cash-on-cash returns over the life of the period is close to up 200 bps and it's translating close to US$0.5 million per new store build, in terms of present value of savings. So, is it fair to expect that this improves the visibility by like 15 to 20 stores each year, at least on back of envelope, is this the right way to think about it?

And we'll see how it all evolves, but that's what I was trying to convey.

Got it.

A follow up on the changes to the growth model.

So looking at the math here at <unk>.

Looks like thus uplift and cash on cash returns or the life of the PDR is close to up to 100 bps unexplained slate and close to half a million for new store base in terms of present value of savings.

So is it fair to expect that this improves the visibility by like 15 to 20 stores each year at least on the back of envelope.

Is this the right way to think about it.

Thomas J. Fitzgerald: Yeah. I think there are two different things. One is the capex dollars. As you know, this model is a capex heavier opex way lighter model compared to most, our flow-through and all that and margins attest to that. But we've - in light of the inflation and higher interest rates and the usage patterns that have changed in our stores, we thought it was appropriate to look at the reinvestment cycles, read cardio and strength three equips, and also remodels.

The Capex dollars.

This model is a capex heavier.

Opex way lighter model compared to most of our flow through and all that and margins attest to that.

But.

And in light of the inflation and higher interest rates and the usage patterns that have changed in our stores.

Thought it was appropriate to look at the reinvestment cycles.

Cardio and strength re equips and also remodels.

Thomas J. Fitzgerald: And back to what I was saying before, Rahul, on the cardio, not all stores are created equal either when it comes to remodeling. Prior to 2016, we didn't really have a design standard. And then 2016 and forward, the stores that were built look like stores we're building today, much closer to them. So, the cost to remodel those prior stores is going to be more than the cost to remodel the stores that were built 2016 and forward.

And then 2016 and forward the stores that were built looked like stores. We're building today much closer to them. So the cost to remodel those prior stores is going to be more than the cost to remodel. The stores that were built 2016 and forward. So again, we can apply a one size fits all but there are some stores that frankly, when we go in them.

Thomas J. Fitzgerald: So again, we can't apply a one size fits all, but there are some stores that, frankly, when we go in them, we're not happy with them. So, those stores will still need to be remodeled, and that's what we're calling sort of brand damaging. But you can't really translate the improved store returns and improved economics, admittedly starting from a pretty darn strong place to begin with. To new store, incremental new store units. That's the work that's ahead of us working with our franchisees, as Craig and I talked about earlier.

We're not we're not happy with them. So those stores will still need to be remodeled and thats, what were calling sort of brand damaging but you can't really.

Translate the improved store returns and improved economics.

Starting from a pretty darn strong price place to begin with.

Two new store incremental new store units.

The work Thats ahead of us working with our franchisees as Craig and I talked about earlier.

Craig Benson: And I just want to bring up one thing that's maybe not clear to everybody. Remodels, there's no margin in it at all for corporate. So, it's a nice new box. It looks nice and it hopefully attracts more members, and therefore, we get better royalties from that. But there's no direct margin that comes from a remodel.

Remodels, there's no margin in it at all for corporate so yes.

It's a nice new box it looks nice and they hopefully attract more members and therefore, we get better royalties from that but there's no direct March margin that comes from a remodel.

Thomas J. Fitzgerald: There's no revenue or margin implication, none.

Craig Benson: Yes.

Rahul Krotthapalli: Thanks, guys. Okay. Thanks, Ron.

Rahul Krotthapalli: Thanks, guys.

Thomas J. Fitzgerald: Okay. Thanks, Rahul.

Operator: Thank you. Our next question comes from the line of Chris O'Cull from Stifel. Please, go ahead with your question.

Christopher Thomas O'Cull: Thanks. Good morning, guys. Tom, can you quantify the impact on the cash-on-cash returns you're expecting from this new growth model changes? And also, can you describe what changes are being made to reduce the US$3 million investment by 5% to 10%, beyond just the elimination of the initial franchise fee?

Tom can you quantify the impact on the cash on cash returns are you expecting from this new growth model changes and also can you describe what changes are being made to reduce the $3 million investment by 5% to 10% beyond just the elimination of the initial franchise fee.

Thomas J. Fitzgerald: Yeah. So, it's a target, Chris, and it's not a one and done. We want to continue to challenge ourselves to now and going forward. As we have historically, maybe a little more urgency for lack of a better term, given the higher cost of everything now to build. The way we've modeled it, we think the returns move up pretty nicely.

It's a target for us and it's not a it's not a one and done right. We want to continue to challenge ourselves to.

Now and going forward as we have historically, maybe a little more.

Urgency for lack of a better term given the higher cost of everything now to build.

The way we've modeled it.

The returns move up pretty nicely it depends on obviously the store and how many members they project and so on and so forth but on average.

The returns move up pretty nicely

Thomas J. Fitzgerald: It depends on obviously the store and how many members they project and so on and so forth. But on average, it's an improvement that we think may take folks from thinking about, should I get ahead of my schedule again and maybe saying no historically with the current environment. But now in this new model, this new growth model, maybe that no turns to a yes. And that's really the intent that we're after. And I think once we work through all these changes and so on, I think folks will do the math themselves and hopefully come to that same conclusion.

It's an improvement that we think may take folks from thinking about should I get get ahead of my schedule again, and maybe saying no historically with the with the current environment, but now in this new model. This new growth model, maybe that no turns to us and that's really the intent that we're after.

Thomas J. Fitzgerald: And I think once we work through all these changes and so on, I think folks will do the math themselves and hopefully come to that same conclusion.

Christopher Thomas O'Cull: Ok. And then Craig, we saw the Flynn Group's recent announcement that had made a significant investment in the system. Can you help us understand how much interest you're filling from experienced franchise operators from other industries, and whether there's a meaningful opportunity to bring in new franchisees with scale and kind of desire to grow into the system?

And then Craig we saw that when the <unk> group's recent announcement that had made a significant investment in the system can you help us understand how much interest you're fielding from experience franchise operators from other industries and whether there's a meaningful opportunity to bring in new franchisees with scale and kind of desire to grow into the system.

Craig Benson: I mean, as you know, I have interest in Dunkin' Donuts as well. And we have about 2,000 franchisees at Dunkin' Donuts, and we have just about 100 here. So, many of our franchisees have scale and they are big operators. We're excited the Flynn Group wants to participate with us.

As you know I have interest in Dunkin' Donuts as well.

And we have about 2000 franchisees, a dunkin' donuts and we have just about 100 here. So many of our franchisees have scale and they are big operators.

We're excited the Flynn group wants to participate with US I think they can help be helpful to the system as a whole because of their experience and other franchise models.

We're excited the Flynn group wants to participate with US

Craig Benson: I think they can help - be helpful to the system is all because of their experience in other franchise models. But clearly, we've had interest from a number of different sources over the past, and this brings a different dynamic. So, anxious to see what it brings for us and the opportunities to learn from somebody else that comes in the system. But we have some pretty strong, large operators in the system right now.

But clearly we have had interest from a number of different sources.

Over the past.

And this brings a different dynamic so.

Anxious to see what it brings for us and the opportunities to learn from somebody else that comes in the system, but we have some pretty strong.

Large operators in the system right now.

Thomas J. Fitzgerald: And Chris, just one thing on that, too. They're investing in the operators rolling in the case of the Flynn Group like in other situations.

And Chris just one thing on that too.

They are investing in the operator's rolling.

Yes in the case of the Flint group life and <unk>.

Other situations yes.

Christopher Thomas O'Cull: Yeah. That makes sense. Thank you.

Operator: Thank you. Our next question comes from the line of Sharon Zackfia from William Blair. Please, go ahead with your question.

Yes.

Thank you. Our next question comes from the line of Sharon Zackfia from William Blair. Please go ahead with your question.

Sharon Zackfia: Hi. Good morning. I guess, kind of going back to development and appreciating all the challenges there. I'm just curious, what you can do to maybe bring more into the top of funnel to help buffer against the kind of delays that are not within anyone's control? I mean, is that anything that you can do for that top of funnel? And then secondarily, if these changes to franchisee capital requirements do free up more capital to develop, what would be a logical lag time there? I guess I'm just these will be adopted theoretically in the not-too-distant future by franchisees. Is it too late for that to really impact 2024, just given the time frame that now is extended to open a club?

Kind of going back to development and appreciating all the challenges there I'm just curious.

What you can do to maybe bring more into the top of funnel.

Two hub.

Again kind of delays that are not within anyone's control I mean is that.

Anything that you can do for that top of funnel and then secondarily.

Sharon Zackfia: And then secondarily, if these changes to franchisee capital requirements do free up more capital to develop, what would be a logical lag time there? I guess I'm just these will be adopted theoretically in the not-too-distant future by franchisees. Is it too late for that to really impact 2024, just given the time frame that now is extended to open a club?

Yes.

Changes still franchisee capital requirements do you.

Free up more capital to develop what would be a logical lag time, there I guess I'm just.

These will be adopted theoretically in the not too distant future by franchisees.

So.

Is it too late for that to really impact 2024.

Given the timeframe that now is extended to open a club yes. Good question again, we don't know all the answers because our franchisees just got this information.

Given the timeframe that now is extended to open a club

Craig Benson: Yeah, it's a good question. Again, we don't know all the answers because our franchisees just got this information less than a month ago now. But there's a few other issues associated with development and Tom mentioned one, which is real estate availability. And so, you heard me talk about leverage earlier.

Less than a month ago now.

But.

There's a few other issues associated with development and Tom mentioned, one which is real estate availability and so.

You heard me talk about leverage earlier again employment, we haven't employed leverage for our scale and the way we should have years ago.

You heard me talk about leverage earlier

Craig Benson: Again, employee - we have an employed leverage for our scale in the way we should have years ago. And I think we need to work the real estate industry just as hard with the scale that we bring. We're the third largest retail consumer of space. TJX and all their concepts is one Dollar Generals, two, and we're three.

And I think we need to work that real estate.

Industry, just as hard with the scale that we bring.

We're the third largest retail.

Consumer of space.

<unk> and all of their concepts is one dollar general's two and three.

Craig Benson: But I don't think that we've employed that leverage and scale to be able to take advantage of that. So, the first thing is finding a site. And from then on, it's all the other things you have to go through in order to do it. And so, Tom also mentioned that CBRE said that the amount of development has gone down consistently over the last four years.

And from then on it's all the other things you have to go through in order to do it.

So.

Tom also mentioned the CBRE said that the amount of development has gone downloads consistently over the last four years.

Craig Benson: So, we're finding a few different dynamics. But our scale should help us, and we're trying to really push that to help us get into places that, maybe in the past we wouldn't have got into. And then the permitting, I mean, we can learn from each other and find better ways to try and get through the process, and I think we need to do that. But at the end of the day, bureaucracy's bureaucracy in some of these towns, and Tom mentioned the expeditor. I had an expeditor in Jersey City. It took me three years to open that club. And so, it was unbelievable. And so, sometimes it is what it is and you just have to cope with it.

We're fighting a few different dynamics, but our scale should help us and we're trying to really push that.

Two to help us get into places that maybe in the past we wouldn't have gotten into and then the permitting I mean.

We can learn from each other and find better ways to try and get through the process and I think we need to do that.

But at the end of the day bureaucracies bureaucracy and some of these towns and.

Craig Benson: But at the end of the day, bureaucracy's bureaucracy in some of these towns, and Tom mentioned the expeditor. I had an expeditor in Jersey City. It took me three years to open that club. And so, it was unbelievable. And so, sometimes it is what it is and you just have to cope with it.

Tom mentioned, the excavator I had an expedited in Jersey City. It took me three years to open that club.

And so it was unbelievable.

And so.

Sometimes it is what it is and you just have to cope with it.

Thomas J. Fitzgerald: Yeah. And Sharon, maybe to add to that, we do - back to your top of funnel point, some of the big brands like Bed Bath & Beyond, more recently, Rite Aid, we do come at those folks to try to get a number of sites to be able to come our way. We're actually opening a couple of stores in our corporate segment that are former Bed Bath & Beyond over time here. So, I think that's another opportunity, but it is trickier given the vacancy rates are tougher.

We do expect to your top of funnel point.

Some of the big brands like bed Bath and beyond.

More recently Rite aid, we do come out those folks to try to get a number of sites to be able to come our way, we're actually opening a couple of stores and our corporate.

Segment that are former bed Bath <unk> beyond overtime here so.

That's another opportunity.

But it is trickier given the vacancy rates are tougher the other thing I would say in some cases, we have exclusionary clauses, where people don't allow fitness centers into this space. Another retailer will block it and so our real estate team and the leadership team there are doing top to tops with some of those.

But it is trickier given the vacancy rates are tougher

Thomas J. Fitzgerald: The other thing I'd say, in some cases, we have exclusionary clauses where people don't allow fitness centers into the space. Another retailer will block it. And so, our real estate team and the leadership team there are doing top to tops with some of those brands, to see if we can get around those exclusions because as you've heard us say, we're very different than the typical gym or fitness center in that our traffic patterns are flipped from what the center usually experiences. Our busiest days are Monday and Tuesday, not Saturday. So, it's a lot of work and a lot of activity, but we're fighting the fight on all fronts.

<unk> to see if we can get around those exclusions, because as you've heard us say, we're very different than the typical Jim or fitness center and that are our traffic patterns are.

Flipped from what to what.

What the center, usually experiences our busiest days or Monday, and Tuesday night Saturday and Sunday. So it's a lot of work and a lot of activity, but we're fighting the fight on all fronts.

Sharon Zackfia: Ok. And then, you mentioned playing with the White Card membership that you're doing some tests there. Are there other ways you're looking at monetizing the membership base beyond just changing price points of members? You've been very disciplined in the past about kind of keeping the revenue just coming from equipment and really the dues and the royalties associated with that. Is there - are there other ancillary streams of revenue that you could introduce that would it increase franchisee complexity?

And Sanjay on price points of members I mean, you've been very disciplined in the past about kind of keeping the revenue just coming from equipment and and really.

He is on the royalties associated with that I mean is there are there are other ancillary streams of revenue that you could introduce that would add increase franchisee complexity.

Thomas J. Fitzgerald: So we - you heard me say earlier about innovation, and innovation includes price. And so, we're getting a lot of information and using the Flynn Group as an example. They may be helpful in figuring out how to be even more creative and the way we go to market. And so, we're going to be testing things, and I've got a lot of franchisees that have some experience here as well in looking at it, but our first foray is what we've already announced.

And innovation includes price.

And so we're getting a lot of information using the Flynn group as an example.

May be helpful in figuring out how to be.

Even more creative in.

The way we go to market.

So we're going to be testing things and I've gotten a lot of franchisees that have some experience here as well.

And looking at it but our first forays, what we've already announced but in.

Thomas J. Fitzgerald: But in the longer run, we're going to be constantly innovating in different areas, including price, to see if we can't find the sweet spots of places that we need to be. But at this point in time, there's no add-on service or something like that we're looking at.

Constantly innovating in different areas, including price to see if we can't find the sweet spots of places that we need to be but at this point in time there is no.

Add on service or something like that we're looking at.

Sharon Zackfia: Ok, thank you.

Thomas J. Fitzgerald: Thanks, Sharon.

Operator: Thank you. Our final question comes from the line of Alex Perry from Bank of America. Please, go ahead with your question.

Alexander Thomas Perry: Hi. Thanks for taking my questions here. Just first, how are you thinking about Black Card penetration from here, what gets that going in the right direction? Does the potential move to a higher pricing tier on Classic Card sort of help narrow the gap between the two pricing tiers? Just how are you thinking about Black Card?

Thomas J. Fitzgerald: Yeah, I'll start that, and maybe Craig will answer or add to it. So, I think, Alex, you probably heard us talk about, we think the Black Card mix being down year on year is due to a couple of things. One is the Gen Z penetration. They have a lower Black Card mix.

So I think Alex you probably heard US talk about we think the black card.

Mix being down year on year is due to a couple of things one is the gen Z penetration.

They have a lower black card mix, the second thing, though and we feel this may be actually bigger than the first part is last year in Q2, sorry in Q1 Omicron was hitting so our classic card sale was really muted so our penetration or the mix of.

They have a lower black card mix,

Thomas J. Fitzgerald: The second thing though, and we feel this may be actually bigger than the first part, is last year in Q2, sorry, in Q1, Omicron was hitting. So, our Classic Card sale was really muted. So, our penetration or the mix of Black Card to Classic Card in the first half of Q2 was really unique in that Black Card was a bigger part of the mix. And that's what we've been up against and that carried through the rest of the year.

Black card to classic card in the first half of Q2 was really unique in that black card.

It's a bigger part of the mix and that's what we've been up against and that carried through the rest of the year. So I think we'll get a better gauge on all of that.

It's a bigger part of the mix and that's what we've been up against and that carried through the rest of the year.

Thomas J. Fitzgerald: So, I think we'll get a better gauge on all of that when we are in Q1 of next year, assuming everything is ok, and our January sale is not affected by anything like it was in '22. So, I think that will be a true read-up against this year's Q1, which was much more typical. In terms of the spread between Black Card and Classic Card, that's clearly something we're looking at in the test. As you can imagine, our goal in test is to raise the member dues versus the control stores, but in a way that doesn't sacrifice number growth, as I mentioned earlier.

When we are in.

Q1 of next year, assuming everything is okay in our January sale is.

<unk> not affected by anything like it was in 'twenty. Two so I think that'll be a truer read up against this year's Q1, which was much much more.

Typical.

In terms of the spread between Black card and classic card, that's clearly something we're looking at in the test.

As you can imagine our Golan test is to raise the member dues versus the control stores.

But in a way that doesn't sacrifice member growth as I mentioned earlier and so we're looking at the joined trends to cancel trends to Craig's earlier point as well as the black card mix and how that changes. So there is.

But in a way that doesn't sacrifice member growth as I mentioned earlier

Thomas J. Fitzgerald: And so, we're looking at the joint trends, to cancel trends to Craig's earlier point, as well as the Black Card mix and how that changes. So, there's a lot to factor in there. And up until now, we've had an increasing gap between Classic Card and Black Card, but the Black Card amenities were so attractive that it enabled 6/10 people who thought they were going to come in for a US$10 membership come in for the Black Card membership. At one point, it was US$19.99, and it made its way all the way to US$24.99.

There is a lot to factor in there.

Up until now we've had.

An increasing gap between between classic carbon black card, but the black card amenities.

We are.

So attractive that enabled six out of 10 people, who thought they were going to come in for $10 membership come in for the Black card membership at one point. It was $19 99 and have made its way all the way to $24 99. So we'll see how the test goes and continue to evaluate that and other options to see if we can't find a better mix of price points to drive.

Thomas J. Fitzgerald: So, we'll see how the test goes and continue to evaluate that and other options to see if we can find a better mix of price points to drive more dues, but also without sacrificing member growth.

More more dues, but also without sacrificing member growth.

Alexander Thomas Perry: Perfect. And then just my final question. Are there any sort of quick modeling implications with the transition to the new store growth model that you think would be sort of helpful for people on the call just in terms of like, it sounds like some of the near-term impacts are pretty muted. But is there anything that we should be incorporating in our models as we move forward?

That we should be incorporating in our models.

As we move forward. Thanks, yes.

Thomas J. Fitzgerald: Yeah. No. Sure thing, Alex. And maybe just the high points here. So, any stores that were built 2019 and prior, they all got an 18-month extension on their reequipped cycles. And any stores that were built in 2020 and 2021 as we were making our way through those changes, they got a 12-month extension on those cycles. And then anything built in 2022 forward, they were back to the five and seven years. So, those are the stores that are changing to what we described six and eight on cardio and strength.

The high points here so.

So any stores that were built 2019 and Pryor. They all got an 18 month extension on their re equip cycles.

And any stores that were built in 2020 in 2021, as we're making our way through those changes they've got a 12 month extension on those cycles.

And then anything built in 2022 forward they were back to the five to seven years. So those are the stores that are changing too to what we described six to eight.

Cardio and strength.

Thomas J. Fitzgerald: So really, the way we see it is the impact isn't until 2026 when some of the stores that were equipped on cardio in 2021, they would be due in 2026, that's the five-year cycle. But now they're being pushed a year. So, that's really the first impact there. So, it's not - I think if you work through your modeling and what stores opened when and it's not always exact, but it will get you close enough on what that impact might be.

The impact isn't until 2026 when.

Some of the stores that were.

Equipped on cardio in 2021 that will be due in 2026, that's the five year cycle, but now theyre being pushed a year. So thats really the first impact there. So it is not.

I think if you work through your modeling and what what stores opened one in.

Not always exact but it will get you close enough on what that impact might be and then it carries forward from there, but we think in the trade of what we're talking about here and the new growth model.

Not always exact but it will get you close enough on what that impact might be

Thomas J. Fitzgerald: And then, it carries forward from there. But we think in the trade of what we're talking about here in the new growth model, that was the best way to sort out how we could free up some cash and liquidity for reinvestment, recognizing not one size fits all, recognizing equipment usage is changing and shifting from cardio to strength and all the things we talked about. We thought at the end of the day, the outcome, the benefits far outweighed the reequip impact in the out-years.

The best way to sort out how we could free up.

Free up some cash and liquidity for reinvestment recognizing not one size fits all recognizing equipment usage is changing and shifting from cardio to strength and all the things we talked about we thought at the end of the day the outcome the benefits far outweigh the.

The.

Re equip impact in the out years.

Perfect. That's incredibly helpful Best of luck going forward, Okay. Thanks, Alex.

Alexander Thomas Perry: Perfect. That's incredibly helpful. Best of luck going forward.

Thomas J. Fitzgerald: Okay. Thanks, Alex.

Operator: Thank you, ladies and gentlemen, this does conclude today's conference call. Thank you for participating, you may now disconnect.

Unknown: Please wait, the conference will begin shortly.

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