Afternoon. My name is Christine, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Planet Fitness Second Quarter 2018 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
Thank you. Brendan Frey, you may begin your conference.
Thank you for joining us today to discuss Planet Fitness' Q2 2018 earnings results. On today's call are Chris Rondeau, Chief Executive Officer and Dorvin Lively, President and Chief Financial Officer. A copy of today's press release is available on the Investor Relations section of Planet Fitness' website at planetfitness dotcom. I would like to remind you that certain statements we will make in this presentation are forward looking statements. These forward looking statements reflect Planet Fitness' judgment and analysis only as of today, and actual results may differ materially from current expectations based on a number of factors affecting Planet Fitness' business.
Accordingly, you should not place undue reliance on these forward looking statements. For a more thorough discussion of the risks and uncertainties associated with the forward looking statements to be made in this conference call and webcast, we refer you to the disclaimer regarding forward looking statements that is included in our Q2 2018 earnings release, which was furnished to the SEC today on Form 8 ks as well as our filings with the SEC referenced in that disclaimer. We do not undertake any obligation to update or alter any forward looking statements, whether as a result of new information, future events or otherwise. In addition, the company may refer to certain adjusted non GAAP metrics on this call. Explanation of these metrics can be found in the earnings release filed earlier today.
With that, I'll turn the call over to Chris Rondeau, Chief Executive Officer of Planet Fitness. Chris?
You, Brendan, and thank you everyone for joining us for our Q2 earnings call. We had a great second quarter highlighted by another strong financial performance. System wide same store sales increased 10.2% on top of a 9% gain a year ago and adjusted earnings per share grew 55% to $0.34 compared with $0.22 in the prior year period. Bennett Fitness' differentiated approach to fitness providing a high quality judgment free experience first time and casual gym users at a great value continues to resonate strongly with consumers. Our growing membership base exceeded 12,100,000 at the end of the quarter, up from over $10,400,000 a year ago.
Consumers' passion for what we offer in addition to our well capitalized franchisees continues to fuel growth in both new and existing markets. We opened a total of 44 new franchise locations in Q2, ending the quarter with 1608 stores in the U. S, Puerto Rico, Canada, Dominican Republic, Panama and most recently Mexico as our first store officially opened in Monterrey, Mexico in April. To help lead our continued growth in development, Ray Maiola joined Planet Fitness in June as Chief Development Officer. Ray brings over 20 years of real estate development experience in domestic and international franchising from global brands like Gap Inc, Burger King and Jumbo Juice.
We are thrilled to have him on our management team to support our franchisees and internal teams. We're able to work to build upon our current momentum as brick and mortar retail continues to be under pressure from online businesses and landlords are increasingly looking to Planet Fitness to drive traffic in their centers. Further adding to the strength of our management team, we recently announced that Roger Chocko has joined Plant Based as Chief Commercial Officer, overseeing the company's demand generating functions such as marketing, branding, PR and communications, sales and corporate partnerships, channel management, corporate strategy, analytics and consumer research. This newly created leadership role will position us well to execute against our vision of putting the member at the center of everything we do and our mission to deliver exceptional 3 60 degree branded omnichannel member experiences that create sustainable, profitable growth for the company. We've had a pleasure of working with Roger on a consulting basis since March, where he has served as Interim Chief Marketing Officer.
In that capacity, he has proven to be a tremendous asset to the company, positively impacting several areas of our business. Roger brings with him more than 25 years of deep consumer marketing and strategy leadership experience at global brands like Carlson Hotel Group, Bloomin' Brands, USAA, Mars, Danan and Kellogg's. I'm extremely pleased to officially welcome him to the management team and I'm confident that he will play an instrumental role in helping propel the business and brand forward. Now turning to an update on the equipment RFP. After a thorough evaluation process, we have made a decision to add Matrix and Precor to our existing equipment provider offering, which already includes our longtime partner Life Fitness.
This means that since July 1, franchisees have the ability to purchase equipment from each of the 3 vendors. This decision came as a result of a lengthy and detailed vendor evaluation process that included franchisee leaders. Several important factors were taken into account such as price, warranty levels, service and technological capabilities today. More importantly, their ability and willingness to innovate and evolve to align with our ultimate vision to provide a more personalized and connected member experience leveraging technology in our clubs in the future. I am pleased that we are able to leverage our volume with each of the 3 vendors to get the best possible price for our franchisees, while keeping our margins similar to the previous agreement.
We anticipate using this contract cycle to assess each of the 3 vendors and monitor their technology developments moving forward. Shifting gears a bit, I'm excited that in June, we launched an exciting pilot program in our home state of New Hampshire called the Teen Summer Challenge in partnership with Governor Chris Inou and the New Hampshire Department of Health and Human Services that allows all teenagers ages 15 to 18 in the state to work out for free in any of our 17 locations. With inactivity obesity rates continuing to be a concern, this program gives younger consumers the opportunity to incorporate regular exercise into their lifestyles potentially the first time while on summer break. Response has been extremely positive and we've facilitated thousands of teen workouts since the program's inception. We look forward to potentially expanding this initiative beyond New Hampshire next summer.
Programs like these continue to raise awareness of our brand with younger consumers while having a positive impact on their lives. Furthermore, I am proud of the share that Forbes recently ranked Planet Fitness on their 8 2018 Best Franchise as a Buy list with breaking number 3 in the high investment category. This is a terrific endorsement of our brand and operating model and speaks to the great returns we are generating for our franchisees, many of which are reinvesting their capital and expanding their businesses. Finally, as we announced on August 1, we completed the refinancing of our debt with a new $1,200,000,000 risk accrualization facility. Dovin will go into more details about this deal shortly, but I do want to share that we are very pleased with the outcome of the transaction, which was the first of its kind for our industry and allowed us to take advantage of the current interest rate environment and put into place a fixed rate debt facility.
In summary, I'm very pleased with all of our recent accomplishments. We continue to post strong financial results across the board, following reaching the lives of our 12 plus 1,000,000 members With a long runway for growth and new opportunities, we're enhancing the membership experience. The future looks incredibly bright for Planet Fitness and all of our stakeholders. I'll now turn the call over to Doran.
Thanks, Chris, and good afternoon, everyone. I'll begin by reviewing the details of our Q2 results and then discuss our full year 2018 outlook. For the Q2 of 2018, total revenue increased 31 percent to $140,600,000 from $107,300,000 in the prior year period. Total system wide same store sales increased 10.2%. From a segment perspective, franchisees same store sales increased 10.4% and our corporate store same store sales increased 5.7%.
Approximately 70% of our Q2 comp increase was driven by net member growth with the balance being rate growth. The rate growth was driven by a 40 basis point increase in our Black Card penetration to 60.5% compared with last year, combined with the $2 increase in black card pricing for new joins that was put in place system wide on October 1, 2017. During the quarter, the increased Black Card pricing drove approximately 250 basis points of this increase in same store sales. Our franchise segment revenue, which beginning in 2018 now includes national advertising fund revenue, was $58,200,000 an increase of 53.9 percent from $37,800,000 in the prior year period. Let me break down the drivers of our fastest growing revenue segment.
Royalty revenue was $38,300,000 which consists of royalties on monthly membership dues and annual membership fees. This compares to royalty revenue of $23,600,000 in the same quarter of last year, an increase of 62.6%. This year over year increase had 3 drivers. 1st, we opened 2 0 6 new franchise stores since the Q2 of last year. 2nd, as I mentioned, our franchisee owned same store sales increased by 10.4 percent.
And then 3rd, a higher overall average royalty rate. For the Q2, the average royalty rate was 5.5%, up from 3.9% in the same period last year, driven by more stores at higher royalty rates, including stores that amended their franchise agreement. Next, our franchise and other fees were $4,000,000 compared to $6,300,000 in the prior year period. These fees are received from processing dues through our point of sale system, fees from online new member sign ups, fees paid to us for new franchise agreements and area development agreements, as well as fees related to the transfer of existing stores. The decrease is due to the number of stores that have amended their existing franchise agreements and increased their royalty rate instead of paying higher operational expenses.
In addition, the change in how we recognize ADA and FA fee revenue was about $700,000 headwind in Q2 of this year compared to the prior year quarter. As we outlined previously, we now need to recognize these fees over a 10 year period versus at the same time the related franchise agreement and lease is signed. Also within franchise segment revenue is our placement revenue, which was $3,100,000 in the 2nd quarter compared to $2,900,000 last year. These are fees we received for assembly and placement equipment sales to our franchisee owned stores. Our commission income, which are commissions from 3rd party preferred vendor arrangements and equipment commissions for international new store openings, was $1,600,000 compared with $5,000,000 a year ago.
The decrease was attributable to the number of stores that have amended their existing franchise agreements and increased the royalty rate instead of paying the higher operational expenses as discussed above. And then finally, national advertising fund revenue was $11,200,000 compared to 0 last year as the new GAAP rules related to how we account for NAV contributions went into effect on January 1, 2018. As a reminder, prior to this year, the NAV contributions really only had an impact on our balance sheet. Due to the recent accounting changes, we must now recognize these contributions as revenue and record the expenses associated with managing the National Ad Fund as marketing expenses. Our corporate owned store segment revenue increased 21.1 percent to $34,300,000 from $28,300,000 in the prior year period.
Of the $6,000,000 increase, dollars 2,700,000 was driven by the 6 franchise stores in Eastern Long Island we acquired in January, dollars 1,300,000 was due to the 4 corporate stores we opened in late 2017 and $2,000,000 was driven by corporate owned same store sales increase of 5.7%. Turning to our Equipment segment. Revenue increased by $6,900,000 or 16.8 percent to $48,100,000 from $41,200,000 The increase was driven by higher replacement equipment sales to existing franchise owned stores and 4 additional new store equipment sales in the U. S. Versus a year ago.
For the quarter, replacement equipment sales were 56% of total equipment sales compared to 53% a year ago. Our cost of revenue, which primarily relates to direct cost of equipment sales to new and existing franchise owned stores, amounted to $36,700,000 compared to $31,500,000 a year ago, an increase of 16.8%, which was driven by the increase in equipment sales during the quarter. Store operation expenses, which are associated with our corporate owned stores, increased to $18,000,000 compared to $14,600,000 a year ago. The increase was primarily driven by costs associated with the 6 stores acquired on January 1, 2018, the 4 new stores opened in Q4 of last year and costs associated with stores planned to open this year. SG and A for the quarter was $17,200,000 compared to $14,800,000 a year ago.
This increase was primarily related to incremental payroll to support our growing operations and infrastructure as well as higher equity compensation. The incremental payroll is mainly attributable to additional hires the company made during the second half of twenty seventeen and mainly in our franchise segment. We'll begin to lap many of these cost increases starting in the Q3, and therefore, we don't expect SG and A dollars to grow on a year over year basis at the same rate we experienced in the first half of 2018. National advertising fund expense was $11,200,000 offsetting the aforementioned NAP revenue we generated in the quarter. Our operating income increased 27.6 percent to $48,800,000 for the quarter compared to operating income of $38,300,000 in the prior year period.
Although operating margins decreased approximately 90 basis points to 34.7% in the Q2 of 2018, this decrease was driven by the gross up on the income statement from the NAF revenue and the NAF expense mentioned earlier and negatively impacted operating margins by approximately 300 basis points compared to a year ago. On an adjusted basis and excluding the impact of NAF, adjusted operating income margins increased approximately 120 basis points to 38.6 percent. Our GAAP effective tax rate for the 2nd quarter was 23.3% compared to 36.4% in the prior year period. As we have stated before, because of the income attributable to the non controlling interest, which is not taxed at the Planet Fitness corporate level, and an appropriate adjusted income tax rate for 20 17 was approximately 39.5 percent if all the earnings of the company were taxed at the Planet Fitness Inc. Level.
For 2018, following the passage of tax reform late last year, an appropriate adjusted income tax rate would be approximately 26.3%. On a GAAP basis, for the Q2 of 2018, net income attributable to Planet Fitness Inc. Was $25,900,000 or $0.29 per diluted share compared to net income attributable to Planet Fitness Inc. Of $12,400,000 or $0.16 per diluted share in the prior year period. Net income was $30,400,000 compared to $18,000,000 a year ago.
On an adjusted basis, net income was 33 point $2,000,000 or $0.34 per diluted share, an increase of 53.3% compared with $21,700,000 or $0.22 per diluted share in the prior year period. Adjusted net income has been adjusted to exclude nonrecurring expenses and reflect a normalized tax rate of 26.3 percent and 39.5 percent for the Q2 of 2018 2017, respectively. We have provided a reconciliation of adjusted net income to GAAP net income in today's earnings release. Adjusted EBITDA, which is defined as net income before interest, taxes, depreciation and amortization, adjusted for the impact of certain non cash and other items that are not considered in the evaluation of ongoing operating performance increased 21.8% to $58,400,000 from $47,900,000 in the prior of adjusted EBITDA to GAAP net income can also be found in the earnings release. On an adjusted basis and excluding the impact of NAV, adjusted EBITDA margins increased approximately 50 basis points to 45.1%.
By segment, our franchise segment EBITDA increased 23.3 percent to $40,000,000 driven by higher royalties received from additional franchisee owned stores not included in the same store sales base and an increase in franchise owned same store sales of 10.4%, as well as a higher overall average royalty rate. Excluding NAF revenue and expense, our franchise segment adjusted EBITDA margins decreased by approximately 120 basis points to 85.9 percent, with the decrease due to higher SG and A expense compared to the prior year. As I mentioned earlier, the increase in SG and A was primarily related to the incremental payroll we added in the second half of twenty seventeen to support our fastest growing segment. As we move through the back half of twenty eighteen, we expect to start to leverage our franchise segment cost structure and drive margin expansion in the Q4. Corporate owned store segment EBITDA increased 14.2% to $14,700,000 driven primarily by the 5.7% increase in corporate same store sales, higher annual fees in the 6 franchise stores we acquired in January.
Our corporate store segment adjusted EBITDA margins decreased by approximately 140 basis points to 44.7%. This decrease in adjusted EBITDA margin was primarily the result of the 4 new corporate stores that are not yet at a mature run rate. Our Equipment segment EBITDA increased 16.8% to $11,500,000 driven by higher replacement equipment sales to existing franchisee owned stores and higher new store equipment sales versus a year ago. Our equipment segment adjusted EBITDA margins were 23.8%, flat with last year. Now turning to the balance sheet.
As of June 30, 2018, we had cash and cash equivalents of $147,800,000 and borrowing capacity under our revolving credit facility stood at $75,000,000 Total bank debt, excluding deferred financing costs, was $705,900,000 at the end of Q2, consisting solely of our senior term loan. As we announced on August 1, we completed a refinancing of our existing senior secured credit facilities with a new securitized financing facility. We are pleased to report that the deal was well received by the lending community and the interest rate we'll be paying reflects the investments community's confidence in our business. Now to the details of that transaction. We closed our whole business securitization, which includes $575,000,000 of 4 year notes due in September of 2022 notes due in September of 2022, with a fixed interest rate of 4.262 percent and $625,000,000 of 7 year notes due in September of 2025 with an interest rate of 4.666 percent.
The blended weighted average life is 5.5 years at a blended weighted average interest rate of 4.47%. Additionally, the securitization transaction includes a variable funding note of $75,000,000 that was undrawn at the closing and functioned similarly to the previous $75,000,000 revolver. After expenses related to the transaction of approximately $27,000,000 as well as the prepayment of the existing debt facility of approximately $706,000,000 The net proceeds from this transaction are approximately $467,000,000 Our debt to adjusted EBITDA leverage ratio using Q2 trailing 12 month adjusted EBITDA, pro form a for this transaction is approximately 5.9 times. Based on the current outlook for the business and long runway for growth, we're now targeting a leverage ratio in the range of 4 to 6 times on an adjusted EBITDA basis. We believe given our free cash flow generation, our asset light model and our long runway for growth that this targeted debt to adjusted EBITDA range is the appropriate capital policy for the company.
With the net proceeds of approximately $467,000,000 from this securitization, combined with our current cash position of $147,800,000 we plan to return capital to shareholders from time to time. To that end, I am pleased to announce that the board recently approved a $500,000,000 share repurchase authorization, up from the company's previous level of $100,000,000 Now to the full year outlook. Based on our confidence in our business and as a result of the new financing, we are updating our full year guidance. 1st, we now expect revenue to increase by approximately 26%, up from approximately 20%. We now expect adjusted EBITDA to grow in the 16% range with D and A in the neighborhood of $35,000,000 Net interest expense is now expected to be $49,000,000 for the year, which includes an approximately $5,000,000 write off of previously capitalized deferred financing cost, considered a nonrecurring cost and therefore not impacting adjusted net income and adjusted EPS guidance and expense of approximately $1,000,000 related to the new capitalized deferred financing cost.
We now expect adjusted net income and adjusted EPS to grow approximately 33%, down from our previous guidance of approximately 40%, reflecting the above mentioned revenue growth and the incremental costs associated with the new financing, which is expected to reduce adjusted EPS by approximately 0 point 0 $7 Our adjusted EPS guidance is based on an adjusted weighted average shares outstanding of 98,800,000 shares and assumes no share We are also tightening the assumptions used in developing our full year guidance. System wide same store sales are now forecasted to increase in the 9% to 10% range, and we are expecting to sell and place equipment in approximately 200 new stores. We still anticipate replacement equipment sales to be approximately 40% of total equipment sales. And finally, we're assuming an effective tax rate of 26.3%. I'll now turn the call back to the operator for questions.
Thank you. Your first question comes from the line of John Heinenbockel from Guggenheim Securities. Your line is open.
So I want to 2 topics. So first, I know you guys do check with your franchisees periodically about their replacement equipment intentions. So where are we in that cycle, right, the replacement equipment cycle? Are we sort of hitting the sweet spot of that ramping up? And then with the way new equipment is being developed, I guess, particularly cardio, does that have the potential to accelerate the cycle, right?
And so instead of waiting 5 or 6 years, people will do that, franchisees will bring the new equipment in somewhat sooner?
Sure, John. Hi, this is Chris. I'll take the technology part now. So as I mentioned in my script, we're going to go 1 year with all 3 manufacturers, more so to check to see how they scale with our technology endeavors, if you will, and how we build out our ecosystem. So it is a little bit of a process before we get from point A to point B to figure out who is the best partner and how do we integrate it all.
We're also launching our app, which will have some integration as well and possibly a wearable so that ecosystem builds out so that the member has an experience that's intertwined with all of their dealings. So with that being said, fast forward a year or 2, if it proves that it's a great benefit and members like it and does cause you to blackout upgrade or stickiness, I think it could accelerate some. I don't think it'd be greatly, I mean, not only something that will replace the Cardio after year 2, but why wait till year 5 if it's already paid off? They might do a little sooner. So possibly, yes, I think maybe a little bit.
Yes. I think, John, on the replacement cycle, I think we're kind of at a normal run rate in terms of franchisees hitting that 5 year cycle and 7 year cycle. And if you go back 3 or 4 years ago, I think there were some reluctance as we started really emphasizing the branding and to make sure that we're keeping our stores as fresh as possible, etcetera. But if you look in the last couple of years or so, it can vary a bit by quarter just depending on when the store opened and what the franchisee might be doing with other store development going on, maybe some remodeling taking place, etcetera. So that can vary a bit.
We like to push as much of it in the summer months, kind of late early to late Q2 and then into Q3. But frankly, franchisees do it throughout the year. So it's I'd say we're in a pretty normal state in terms of how you would compare it to other time periods.
Do you is the idea that after the 1 year period, you go back to an exclusive with someone or it could be all 3 or 2 or totally open whiteboard?
Yes, I'd say it could go back down to 1 or 2. I don't think maybe 3 probably makes that
much sense,
but definitely 1, possibly 2, but time will tell over the next year. It was a great negotiation and it worked out really well for the franchisees behalf this last round here. And they're all the manufacturers are very eager to work with us on our technology and what we want to accomplish as well as some integration with a possible wearable and our app so that it's completely intertwined. So while their members' data is really gathered in one spot, if you will, and we can see the data and what they accomplish as a member of our clubs.
And then just lastly, what are your thoughts on marketing spend longer term, right? You look out 3 to 5 years, right? At some point, you reach a level where you don't need to keep growing that double digit. So thoughts on that? And then if you were to dial that back, do you combine the 2 marketing buckets?
Do you treat each one separately? What's your early thought on that?
Yes. I
think because we continue to comp as we are and you see the momentum here in our comps over the last over 10 years now. And I think it's really a factor of the ever expanding marketing budget. So I guess the question is how high is too high. And I don't know if and when we get there, if it's really that number. And I think it comes back down to the whole 4,000 club potential.
If 4,000, yes, I think that's definitely doable for sure, even more so now than ever. I really strongly that by how we get to 4,000, it's probably going to be higher than that. Just from evidence of what we've seen in New Hampshire, where we just opened our 17 stores and there's probably 3 more coming down the pike here in the next year or so. So I think it's just the increased marketing spend continues to grow and continues to just dig deeper into that 80% of the population that doesn't have a gym membership. So I think if anything, John, what you may see, which I think could be doable is that instead of having it 7 local and 2 national that maybe you slice them more to national and get better economies of scale, better leverage on buying.
Okay. Thank you. Thanks, John.
Your next question comes from the line of Jonathan Komp from Baird. Your line is open.
Yes. Hi. Thank you. Couple of questions. First, Dorvin, I might have missed it.
Did you give updated full year guidance for adjusted EBITDA?
I said that we expected it to grow in the 16% range. And we had said previously kind of mid teens. So we kind of took it to the upper end of where we had been before.
Okay, great. Thank you. That's helpful. And maybe backing up within the guidance, could you just clarify in terms of the revenue guidance increase, the moving parts
there? Yes. We were at approximately 20, we moved it to approximately 26. Frankly, it really a major portion of that relates to the equipment side of the business, which as you know is our lowest margin piece. We had previously said about 190 to 200 new store placements and we upped that to approximately 200.
So we're feeling more confident in that range. As you also know, here we are now in August, and we certainly have more insight. But the big question really is now in many cases, they will. And franchisees are looking in and many of our franchisees have more than one area development agreement. So they're constantly working with the broker network, working with our real estate folks that we have corporately in the field to find the next best spot in their particular markets.
But with that said, I mean, we certainly can easily accommodate that average number per store in most of our stores. We build generally a 20,000 square foot box. We have a lot of stores that have more than 10,000 members. But with that said, obviously, we want to and our franchisees want to maximize the market to get the most market penetration you can get. But I would say that the fact that we're going members per store certainly it helps the overall economics of the 4 wall, but it doesn't necessarily mean that just because of that you're going to see an acceleration of store openings.
But we continue to work with our franchisees with respect to their ADAs and to try to find the best optimum real estate available for that next door.
All right. I appreciate the detail. Just a quick follow-up. So as you do open new stores in existing higher volume markets, how do you feel about the cannibalization impact that may occur? How do you work and what things you look at to mitigate that?
Thank you.
Sure. So we have the benefit in our model. With the membership model, we know where every single member lives that's a member of a particular store. So if you take a multi store market that still has development opportunities within that market, we can plot those members of each individual store, see how far they're driving to get to that store. We can utilize a lot of 3rd party data on drive times using economic levels of those particular markets, adjacencies with respect to other retail in the market.
And then with franchisees, boots on the ground, our real estate people in the field, we know where new shopping centers may be being redeveloped or built, etcetera. So that's how we take all of those factors into consideration when we're we and the franchisees are working to find that next particular location. But I think the benefit we have is that because we know where they live, we can abut up as close to, but maybe not too much. And in some cases, you want to have a little bit of overlap if that particular store is over deciling in terms of members per store. Maybe you're not effectively maximizing that market, if you have more than the average number of store.
But anyway, that's the benefit we have and those are the factors we take into consideration as we plan further penetration in the market.
All right, great. Thanks guys.
Thank you. Your
next question comes from the line of Rafe Jadarski from Bank of America Merrill Lynch. Your line is open.
Hi, good afternoon. Thanks for taking my question. Dorvin, I just wanted to follow-up on your comments about the franchise segment margins for the year. Can you talk about how we should think about that segment's margins longer term? And then give a little bit more color about what drove the kind of why the margins are down in the first half of the year and then what drive the improvement in the back half?
Yes. Rafe, as we talked about in Q1, very similar to Q2, the comparison on a year over year basis was that we had some additional labor and stock compensation expenses in that particular segment that were in the back half of last year. So we were comping over this year's Q1 and Q2 a little bit of an apples and oranges comparison. So we had a little bit of extra expense in the 1st two quarters. What I've said was that as we get to the back half of this year and particularly in Q4, we should see then a more favorable comparison on a year over year basis from a total expense perspective.
Additionally, as I've said in the past, I think this is a mid-80s margin business. And yes, you can get some leverage, I think, over time. But we also believe that we're at 1600 stores today. And if you go back 3, 4 years ago, the fleet was smaller. And I think one of the benefits of our business and the economics of the model is that we continue to work diligently with franchisees in planning out that market and providing whether it's training or support or etcetera to be able to have the best four wall model out there.
And so I don't see us necessarily pulling back on expenses, but I think as revenue grows, we should be able to get some leverage there. But in general, the way we model it, it's a mid-80s EBITDA margin business.
Thank you. That's really helpful. And then I also wanted to follow-up on your comments about your comfort with the 4 to 6 times leverage range going forward. Think historically you've let your leverage ratio come down to around 2.5 times and then you'd add more debt. Just going forward, should we read that as you'll stay within that 4 to 6 range?
And then if you do, as you keep increasing your debt, what are the priorities of capital allocation? Will you continue to return capital to shareholders?
Yes. I mean, we obviously will work with our Board over the longer term on what's the right use of cash from a capital perspective. But given that we put this particular structure in place, I think it does a lot of things for us. Number 1 is it extended our tenure because we were getting close in terms of the existing credit facility. Number 2 is we have a fixed rate facility in place, which is certainly beneficial within this rising interest rate environment.
But it also then gives us the benefit of as we grow EBITDA, if we want to add on another tranche to the WBS, it's very flexible to be able to do that. And in putting this together, we look at our business and the fact that it's pretty capital light, it's going to naturally delever just as it has in the past. And we had stated that we felt like that range was kind of 3% to 5% ish. Part of that was given that we were in a variable rate structure facility, etcetera. And I think the way we're looking at it longer term now is that our model can support more leverage than it has in the past.
And given that we've, with our board, have increased our buyback plan now to $500,000,000 I think over the longer term as we generate more cash flow and grow EBITDA, I think you'll probably see additional tranches and it will just be increased capital return to shareholders. I think that over time, the board will probably consider, in addition to share repurchases, could likely consider other ways such as quarterly dividends, etcetera. But at this point in time, the board chose to increase the share repurchase plan. And as I said in my remarks from time to time we expect that to execute against that.
Thank you. That's really helpful.
Thanks.
The next question comes from the line of Dave King from Roth Capital Partners. Your line is open.
Thanks. On the corporate owned comp, the strongest I think it's been in a while. Can you talk about what drove the acceleration there? And then on the revenue guidance, did you say how much we should expect from NAF? And then how much should black card pricing contribute to the Q3?
Thanks.
Yes. This is Dorvin. We did not say in terms of how much of that was driven in that. I guess what I'd say on your first question was from a comp store perspective, I mean our corporate stores are lower than the franchises they've historically been because they're a more mature fleet, if you will. But it is probably one of the higher points it's been in the past.
And I think it's a combination of a couple of things in particular. I think running and operating those stores really right now, I think our management team is doing a great job to execute against our plan. I think that our marketing efforts in terms of how we're in the market, we're continuing to execute against that. I think that we've invested some money over the past probably 2 to 3 years in renovations in some of our stores, which would include not just renovating the store, but also replacing equipment on schedule like other franchisees have done. And I just think that with a good focus on running those corporate stores within the markets we're in, we've been doing a really good job of executing.
And yes, I think our comps were pretty good a year ago, but they continue to get better and we'll continue to execute against our marketing strategies.
Okay. And then you cut out a bit. Did you say what the pricing benefit should be in the Q3?
Yes. We said that in Q2, it was about 25% was due to the pricing increase. We did not indicate what it would be for Q3 or Q4. But what we said was that we expect to be into on a full year basis 9% to 10%. On a full year to date, roughly pricing has been right around that 20% to 25% range.
I would expect it to probably be somewhere to that. What we don't know is obviously going up, as I mentioned to the earlier caller, how Q4 will be versus the prior year since it will then be apples to apples on a pricing basis. But that is implied within our guidance of 9% to 10% comps.
Okay, understood. And then on the RFP, how should we be thinking about average price per equipment package? And then are retrofits still going to be a part of the new kind of tech driven offerings? What sort of timeframe should those start to come in? And then are you is it too early or have your franchisees indicated at all how they're thinking about doing some of the tech driven stuff?
Is it through these retrofits? Or is it through new installs? What are the thoughts there?
Yes, sure. The margin and the pricing is very, very similar to what we've seen in the past. Nothing really has changed there. For the technology part of it it's still in the pilot process. So the new orders coming through aren't technology orders.
They're just typical cardio and strength equipment orders that they would normally be getting, although now through 3 different manufacturers depending which one they choose to use. But right now, the pilot is in 15 stores and we probably look to probably expand that to some more new stores this year, but nothing large scale, probably another 5 to 10 more stores. So but they're all just ordering the normal equipment at this point.
Okay. Thanks for taking my questions.
Thank you. Thank you.
Your next question comes from the line of George Kelly from Imperial Capital. Your line is open. George Kelly from Imperial Capital, your line is open.
Can you hear me now?
Yes. Yes, we can.
Okay, great. Thanks for taking my question. So first of all, on Black Card pricing and the changes you made last year, it sounds like the market it was received sort of as expected or even better than your test showed. Is that a fair statement? And I guess the more important question is, how often can you revisit that pricing?
Do you feel like it's in a good spot right now? Or is it something you could come back to in 2019 and look at again?
Yes. I'd say it's probably acting as expected in the test and the pilot. Glad to see that now it's in all 50 states and nationwide that it's reacting the same as the 100 Club test pilot we did last year. So that's great news. The one big reason we changed it was reciprocity.
We invented a Black Card. We had 100 stores and now we had 1500, 1400 last year we came up with making the change. But I think it's probably I'd hold Pat for now for probably a little bit here. We had 2,000 stores that probably revisited or technology or a better or a different type of amenity in the Blackheart Spire that really drives a lot of attention, then maybe yes, you'd maybe look to change it. But I think for this
Okay, got you. And then next question, in your prepared remarks, you mentioned a new app and wearable. Will those could there be new revenue streams through either of those?
Possibly. And I think with now with Roger Traco, the new Chief Commercial Officer, I think there's a lot of benefits he could have and him working with our CDIO as well on how we integrate and use our 12,000,000 members and whether it's if they bought wearables, right now you're on a bike, for example, The wearable, the things you're sitting down, doesn't know you're even moving or exercising. So the integration between the equipment and the app so that the customer has a full ecosystem of whether they're working out at home or they're on a bike or they're walking down the street is fully connected and tracking at all their activities. So I think it's pretty powerful because right now that's really not being done. So I think that's something in the future.
But it is something we're working on. I think that you're right. I think there is some benefits there that we could drive more adoption, hopefully need maybe stickiness or maybe a Black Card perk that's built in there that does drive more Black Card pricing or acquisition.
Okay. Okay. And then last question from me. You've talked a lot about returning cash to shareholders and the free cash flow profile of the business. Do you historically, you haven't been very acquisitive.
Not really sure what you can say to it, but are you looking for other assets out there that you think would be helpful to own? Just any kind of discussion about that would be helpful. Thank you.
Sure. I mean, our focus has been on really the big market here in the U. S. We're obviously in Canada, and Chris talked earlier about some other development. But the biggest opportunity frankly is here in the U.
S. Because we still believe that the opportunity is in that 4,000 range and we don't want to take our kind of eyes off the ball in doing that. Now with that said, we made the acquisition back on January 1 this year of Eastern Long Island stores. We made a that was of an existing franchisee that was retiring. We made another acquisition back in Q1 of 'fourteen.
Again, some similar situations where that franchisee wanted to go in that case and build out some other markets. We have a ROFR on all of those as I think you probably know. So we have the ability to exercise that if we so chose. So far, we've certainly been looking at it when it's synergistic with our existing corporate store fleet. We'll always look at opportunities like that within the franchise segment when a seller transfer would come to about.
I think in terms of outside of that, we certainly haven't really pursued an M and A strategy. I'm not I wouldn't say that we would never do that. But at the moment, I think our focus is clearly on continuing to help our franchisees build out their markets, do a lot of these other things that Chris talked about earlier with opportunities that we think we have ahead of us, whether it's in technology or whether it's some of the other revenue types of opportunities. But that's our focus today. If the right opportunity came along, we might look at it, but it's not a strategy today.
Thanks. Thank you.
Your next question comes from the line of Matthew Brooks from Macquarie. Your line is open.
Good afternoon, guys. I understand the U. S. Is a big goal here. But can you give a little bit more color or some data on the performance of the brand in Canada?
And I know it's early, but in Mexico as well.
Yes. I mean, it's clearly early in Mexico. I think we and our franchisees opened the store. We're certainly pleased with that one store, and we'll test another 1 or 2 there that particular city. But Mexico will be a big opportunity if we continue to roll that out.
I think in terms of Canada, you got to think about it a little bit in terms of how the system in the U. S. Worked years ago. One of the benefits we have today is the National Advertising Fund, which is a huge fund today with all the stores. Obviously, it's a smaller fund up there now as we continue to build out those stores.
We're like between 25 30 stores now. But the overall economic model, I think initially there were some supply chain kind of ForEx issues with some of the product, not just the equipment, but some of the other build out and some of the operational expenses going across the border from the U. S. To Canada. We've aligned now with some local vendors to help support some of those kinds of expenses or capital items up there.
But I think the view by our franchisees Canada, we have the 2 corporate stores in Toronto and then the balance of the stores are franchise stores. I would say that they're just as excited about continuing to build out their air development agreements up there as well. And we think over time as the
scale gets
bigger, it'll even have additional benefits to it.
And it's correct, right, that the U. S. Franchisees, some of them are funding the development in Canada and Mexico?
Yes. All of the Canadian franchisees also are domestic franchisees and as well as our Mexico franchisee, he's also a U. S. Franchisee as well as Dominican Republic and also in Panama. So they're all U.
S. Franchisees. And frankly, it's they're wanting more territory and that's why it's U. S.-based franchisees.
That sounds good. And just one one quickly. On the buyback, how do you think about when you're going to return capital? Does it depend on where the share price is? Or is the goal really just to continue to return the capital slowly over time because you're going to have an ongoing need to do that?
Yes. I mean, we didn't comment about that. I think you'll as we report Q3 and Q4, you'll obviously see what actions we took in terms of that. But I think the as I said to the caller earlier, the fact that we did the transaction, the fact that we've kind of stated our overall capital policy with respect to leverage ranges and with that cash on the balance sheet, the intent is certainly to execute against that plan.
Thank you very much guys.
Thank you. Thanks, Matt.
And our last question comes from the line of Brennan Matthews from Berenberg. Your line is open.
Hi. Thank you for taking my call. I just wanted to ask about, I guess, you've been seeing some more consolidation among franchisees, particularly with some of the private equity guys continuing to get involved and kind of grow their store base. As you've maybe had conversations with some of them, I mean, are there any key concerns that they've expressed to you? Or maybe even more generally kind of what the feedback is that you've gotten from them as their store bases have grown?
Yes. I think it's interesting and I think it comes back to the fact that TSG, who was our sponsor as the franchisor back, they came onboard 2012 with myself and the original partners And the fact that after they've gotten out of their stock after the IPO and now they became a franchisee of ours is a testament to why all the private equity guys are involved is the cash returns of these businesses is better than what we hear from them is better than anything they've ever seen. So which is why they're so hungry to do this is why TSG got back in. So they love the business. They love the simplicity or hate to use the word simplistic, but streamlined business model when they're used to investing in fast food or what have you, all moving parts and pieces, and how they can scale this with 12 to 15 employees and really be able to grow this business.
They really like it. And we really like it in the fact that these franchisees of ours have been great advocates for the brand and have built their businesses, be able to monetize some of their hard work and stay in the business. Not one of these groups has the franchisee really necessarily retired. They all kind of went back to doing what they were best at, whether it's building stores or construction, what have you. And they got to the point where they had 20 or 30 stores in their portfolio, and they're still trying to be the marketing guy, the development guy and the finance guy.
So private equity guys groups have come in and brought in some sophistication to the back office and allow the franchisee to do what they're best at. So I think it's a perfect world in all our aspects.
All right. That's great. Thank you very much.
Thank you. Thanks a lot.
And we have time for one more question from Jonathan Komp from Baird. Your line is open.
Hi, thank you for taking a follow-up. Dorvin, I just wanted to circle back and make sure I'm sorry to re ask the question, so to speak. But in terms of the profit increase for the year relative to the revenue increase, Is there anything else offsetting it? Just even if the upside is driven by equipment that seems somewhat low in terms of the implied flow through. So I just wanted to ask, if there's any other costs you're embedded in that outlook?
No. It's I mean, I think the way if you think about comments from Q1 to Q2 now, and then the answer to our I gave you in terms of kind of the tying into now the full year updated guidance. The a good chunk of that upside, as I mentioned, is really related to the equipment side. Obviously, you have the increased interest expense and I gave specific guidance for that. Also gave guidance on specific D and A.
I'm not sure if where your model was John, but I think there were a couple of others that maybe the D and A was a bit out of line with kind of where our run rate is and where we expect to be full year. And then just the last comment, I guess, I'd make is that in terms of the EBITDA piece is we had when we gave guidance, we had said kind of that $190,000,000 to $200,000,000 Now we're saying $200,000,000 So that's a good chunk of the revenue upside. And the EBITDA, we had said kind of mid single digits, so more of 'fourteen, 'fifteen, maybe 'sixteen. We're at the high end of that now 'sixteen. So I think that from a flow through perspective, we feel comfortable with that EBITDA growth of the 16% and then the implied EPS growth with the D and A in there using the tax rate that I told you that we would use.
So I think the answer to your question is that that's kind of flowing through the way we model our business that way. But if you have anything further on that, I'd be glad to chat with you later.
Understood. We'll work through it. And if I could, just the last one, big given the legislative victory for the Personal Health Investment Today Act recently. Obviously, still some hurdles there, but any thoughts, big pictures being a potential party who could really push and promote the cause if it were successfully brought into legislation?
Yes. I think it's really good. And I think this all comes back to what I talk about a lot where just the acceleration of the general awareness and wellness over the last few years is just acceleration has been great between wearables and farm to table restaurants and Whole Foods. And you look at wearables and fitness apps that iPhone was around 10 years ago, barely, and then there was 70,000 fitness apps or something. So this is just one more notch in that belt of just awareness and making it's all exposure to wellness.
And the more exposure that I feel the population has, the perfect storm for the industry and especially us because we were the first time casual gym user, you're going to start with us first. So I think it's great. I think it will pass. We'll see. But I'm positive that
you could
help us for sure as this changes.
Okay, great. Thanks for taking all the questions.
Great.
And there are no further questions at this time. Mr. Chris Rondeau, I turn the call back over to you.
Great. Thank you. So thank you for joining the call today. It's been great. I'm actually, believe it or not, in Grand Canyon on a 3 week tour, cross country with the family, and it's been great to see clubs in every state along the way.
And I'll tell you what I've seen, I couldn't be more proud of the brand consistency, the judgment free zone and how our franchisees execute in our business plan in all 50 states, and I've seen about 15 states at this time. So it's been really something to see. It's exciting. And I'm also really excited with the momentum we have so far, the first half of the year and how this momentum will carry the rest of this year. And our new Chief Development Officer as well as our new Chief Commercial Officer and our CDO, Craig Miller, who came on board about shy of a year ago here.
And now that all seats are filled the next couple of years, it's going to be really exciting. I'm looking forward to scaling this business even more so. So thanks for the call today and look forward to Q3.
This concludes today's conference call. You may now disconnect.