Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the Planet Fitness fourth quarter 2017 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key.
Thank you for joining us today to discuss Planet Fitness' fourth quarter 2017 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.com. 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, 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 fourth quarter 2017 earnings release, which was furnished to the SEC today on Form 8-K, as well as our filings with the SEC referenced in that disclaimer. We do not undertake any obligation to update or alter any forward-looking statements, whether as a result of new information, future events, or otherwise. In addition, the company may refer to certain 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?
Thank you, Brandon, and thank you everyone for joining us for our fourth quarter earnings call. 2017 marked Planet Fitness' 25th year in business, I am extremely pleased with the strong results we delivered. We capped off a great year with an outstanding fourth quarter, highlighted by system-wide same-store sales growth of 11.6%, on top of a 10.6% comp gain in the same period last year, adjusted earnings per share of $0.24, both of which exceeded expectations. For the full year, we added 1.7 million net new members and finished 2017 with approximately 10.6 million members system-wide. At the same time, we expanded our footprint domestically and internationally with the opening of a company record 210 Planet Fitness locations, bringing the system-wide total store count to 1,518 at the end of December.
With many retailers reducing their physical presence due to increasing pressure from online shopping, real estate trends continue to be in our favor. Landlords and developers are looking for Planet Fitness more and more as key tenants in their centers, giving us the luxury of being more selective with our site approvals. Of the 210 stores opened in 2017, 206 were franchise locations. These were in existing markets and new markets like Hawaii and Panama, with the Hawaii store marking Planet Fitness' presence in all 50 states and the Panama location demonstrating our continued international expansion. We are pleased with the number of new member sign-ups in both Panama and Hawaii and extremely encouraged by the demand for the brand.
As important to note, more than 95% of new stores last year were opened by existing franchisees, demonstrating the attractive returns our units generate in reinforcing their commitment to growing their individual businesses in the Planet Fitness brand. While franchise growth continues to drive our expansion strategy, we took advantage of some attractive real estate opportunities and opened four new corporate locations late in the year. In early 2018, we acquired six stores in Eastern Long Island, New York, from a longstanding Planet Fitness franchisee that decided to retire after 11 years in the system. This acquisition made great strategic sense as the western half of the market is currently all corporate stores, giving us the opportunity to leverage our existing infrastructure and drive growth and increase margins. Planet Fitness' long runway for growth and increasing brand awareness continues to reinforce my confidence for the future.
Our marketing power only continues to get stronger with each new join. Starting with our growing National Ad Fund, we spent approximately $34 million last year on national marketing campaigns and high-profile partnership opportunities like our sponsorship of Times Square's iconic New Year's Eve celebration. We estimate that approximately $100 million was spent locally by franchisees in 2017 to highlight our unique judgment-free environment that caters to casual or first-time gym-goers versus avid exercisers like stereotypical gyms. Underscoring the reach and effectiveness of our collective marketing efforts, I am pleased to report the findings of our annual brand health study in January confirmed that brand and ad awareness levels are at their highest observed levels to date. Planet Fitness continues to rank number one in aided and unaided brand awareness in the gym category, both up nine percentage points year-over-year since January 2017.
In addition, findings showed that consideration for joining Planet Fitness is higher when people are aware of our Times Square and New Year's Eve partnership, up six percentage points year-over-year. In addition to being laser-focused on attracting new members to our brand, we are working hard on enhancing member experience by leveraging the data we have from our 10.6 million members. Another huge competitive advantage for us, given our size, scale, and resources. Looking out over the next few years, we are exploring new ways to deliver a more personalized and connected fitness journey to our members via our equipment and enhanced mobile app. Our vision is for our equipment to have the ability to provide immersive entertainment and workout experiences.
For example, as a Black Card member, you could have an elevated experience where you watch your Netflix, your Hulu, listen to your Spotify, browse your Facebook, or run through the Grand Canyon. Once you choose what appeals to you get work running on the treadmill and your progress is tracked and sent to the Planet Fitness app. As you leave the gym that day, you see how far you ran, how many calories you burned, and how that compares to last week, last month, or last year. Perhaps the most exciting opportunity here isn't what I just described, but rather having the ability to develop personalized recommendations on what workout to do during your next visit based on your history and progress. By leveraging our data, we could target Classic Card members and serve them trial opportunities with the goal of getting them to upgrade.
The equipment technology could allow them to easily upgrade to the Black Card right on the machine itself, so they can have an instant access to the enhanced user experience of watching their favorite programs or running through exotic locations. I am energized and excited about collaborating with our equipment vendors and franchisees to leverage our size, scale, and data to enhance our members' experience in the years to come. We are currently in dialogue with three of our equipment manufacturers about our next equipment contract, and we look forward to sharing more details about the next generation of machines will feature. Looking back on 2017, it was extremely successful year on every front. Financially, we posted double-digit system-wide same-store sales growth for the year and achieved record adjusted EBITDA.
Strategically, we expanded our brand reach and awareness through the opening of a record 210 new locations and approximately $130 million in national and local advertising. Operationally, we added some great new talent to our executive team and bolstered our franchisee support teams to help further improve execution throughout the system. We begin 2018 with great momentum, and I'm confident that Planet Fitness is poised to deliver increased shareholder value over the long term and simultaneously continue to improve millions of people's lives each and every day. In underscoring their confidence in our future, the board of directors recently authorized an increase in our share repurchase program to $100 million. With that, I'll turn the call over to Dorvin.
Thanks, Chris, and good afternoon, everyone. I'll begin by reviewing the details of our fourth quarter results, highlights from 2017, and then discuss our full year 2018 outlook. For the fourth quarter of 2017, total revenue increased 15.1% to $134 million from $116.4 million in the prior period. Total system-wide same-store sales increased 11.6%. From a segment perspective, franchisee same-store sales increased 11.9%, and our corporate store same-store sales increased 5.6%. Over 90% of our Q4 comp increase was driven by net member growth, with the balance being rate growth. The increase in pricing was driven by a 90 basis point increase in our Black Card penetration to 59.8% 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 the 1st.
During the quarter, the increased Black Card pricing drove approximately 60 basis points of the increased same-store sales. Our franchise segment revenue was $40 million, an increase of 24.6% from $32.1 million in the prior year period. Let me break down the drivers of our fastest-growing revenue segment. Royalty revenue was $27.1 million, which consists of royalties on monthly membership dues and annual membership fees. This compares to royalty revenue of $17.5 million in the same quarter of last year, an increase of 54.8%. This year-over-year increase had three drivers. First, we opened 206 new franchise stores since the fourth quarter of last year. Second, as I mentioned, our franchisee-owned same-store sales increased by 11.9%. Then third, a higher overall average royalty rate.
For the fourth quarter, the average royalty rate was 4.83%, up from 3.69% in the same period last year, driven by more stores at our current royalty rates, including stores that amended their franchise agreements. As we discussed on our last call, as of the end of Q3, approximately 400 stores had amended their existing franchise agreements to increase their existing royalty rate by an additional 1.59%, and at the same time, eliminate the commissions they pay to us on certain operational purchases, thereby reducing those operating expenses. During Q4, approximately 500 additional stores amended their existing franchise agreements, which will further accelerate the increase in our average royalty rate for 2018.
However, it is important to remember that the increased royalty revenue that we'll receive due to the additional 1.59% royalty rate change is being offset by a corresponding decline in commission income, as we will no longer receive commission income on operational expense purchases by these stores. I'll discuss our assumptions for future royalty rate growth later on in the call when I outline our 2018 guidance. Next, our franchise and other fees were $6.4 million, an increase of 2.5% or $100,000 over the prior year period. These fees are received from processing dues through our point-of-sale system, fees from online new member sign-ups, as well as fees paid to us in association with new franchise agreements, area development agreements, as well as the sale and transfer of the existing agreements.
As many of you are aware, there are new GAAP rules on revenue recognition for contracts with customers, which would apply to our area development agreements and franchise agreements that went into effect January 1, 2018. In essence, we now need to recognize these fees related to both area development agreements and franchise agreements over the life of the related franchise agreement, typically 10 years, versus recognizing it all at once at the time a lease is signed for a franchise store location. This not only applies to all future ADAs and FAs, but also certain existing agreements entered into post TSG's acquisition of Planet Fitness in 2012. Under the accounting rules, you cannot go back prior to our acquisition to reestablish a deferred revenue component prior to that date.
Similar to the change in royalty rate, I'll walk you through these changes and how it impacts 2018 later in the call. Back to our Q4 results. Also within franchise segment revenue is our placement revenue, which was $4 million versus $3.6 million in the prior year period, an increase of 11.3%. These are fees we receive for placement and assembly of equipment for our franchise-owned stores. The increase was driven primarily by higher new store equipment sales during the current year quarter. Finally, our commission income, which are commissions from third party preferred vendor arrangements and equipment commissions for international new store openings, was $2.5 million, compared with $4.8 million a year ago.
The decrease is attributable to the number of stores that have amended their existing franchise agreements and increased the royalty rate instead of paying higher cost of goods for operational expenses that I mentioned a few moments ago. Our corporate-owned store segment revenue increased 8.7% to $28.2 million from $26 million in the prior period. The $2.2 million increase was driven by the increase in corporate-owned same-store sales of 5.6% and increased annual fee revenue. Turning to our equipment segment. Revenue increased by $7.5 million or 12.8% to $65.8 million from $58.3 million. The increase was driven by higher new store equipment placements versus a year ago, and higher replacement equipment sales to existing franchisee-owned stores. For 2017, replacement revenue as a percent of total equipment revenue was approximately 38% versus 31% for the prior year.
Our cost of revenue, which primarily relates to direct cost of equipment sales to new and existing franchisee-owned stores, amounted to $50.9 million, compared to $45 million a year ago, an increase of 13.2%, which was driven by an increase in equipment sales during the quarter. Store operation expenses, which are associated with our corporate-owned stores, increased to $15.3 million, compared to $14.4 million a year ago. The increase was primarily driven by costs associated with the opening of four new stores in the quarter, including pre-opening expenses. Excluding these new store pre-opening expenses, adjusted store operation expenses would have increased slightly to $14.7 million from $14.4 million. We did not open any new stores in the prior period. SG&A for the quarter was $17.7 million compared to $13.5 million a year ago.
This increase was primarily related to higher variable compensation and equity compensation as compared to the prior year. This was also the primary driver of the increase in SG&A compared to the third quarter of 2017. In addition, on a year-over-year basis, we had some incremental payroll to support our growing operations and infrastructure, as well as some non-cash expenses related to the write-off of some capitalized IT costs. Our operating income increased $17.2 million to $42.3 million for the quarter, compared to operating income of $36.1 million in the prior period. While operating margins increased approximately 60 basis points to 31.5% in the fourth quarter of 2017, due primarily to the revenue growth and higher margins as we've continued to leverage our overall cost infrastructure.
As a result of the new Tax Reform Act, we were required to make some adjustments to deferred tax assets and our TRA liability as of year-end. Those adjustments had to be run through our income statement and affected both our net income for taxes and our GAAP tax rates. Our GAAP effective income tax rate for the quarter was 99.8%, compared to 24.6% in the prior period. Our 2017 results include an additional income tax expense of approximately $349.6 million, primarily due to the Tax Reform Act as a result of a revaluation of our deferred tax assets to reflect the new lower corporate tax rate, partially offset by $315.6 million gain from the revaluation of our TRA liability, which is included in other income and expenses. As a result of this, we reported a net loss attributable to Planet Fitness Inc.
of $3.5 million, or $0.04 per diluted share on a GAAP basis for the quarter of 2017, compared to net income attributable to Planet Fitness Inc. of $10.6 million or $0.18 per diluted share in the prior year fourth quarter. Net income was $0.8 million compared to $21.9 million a year ago. As we've stated before, because of the income attributable to the non-controlling interest and not taxed at the Planet Fitness Inc. corporate level, an appropriate adjusted income tax rate for 2017 would be approximately 39.5% if all the earnings of the company were taxed at the Planet Fitness Inc. level. On an adjusted basis, net income was $23.5 million, or $0.24 per diluted share, an increase of 19.1% compared to $19.7 million or $0.20 per diluted share in the prior period.
Adjusted net income has been adjusted to exclude non-recurring expenses, the impact from the tax reform adjustments of our deferred tax assets and liabilities, the associated TRA liabilities, and reflect a normalized tax rate of 39.5%. We have provided a reconciliation of adjusted net income to GAAP net income in today's earnings release. With the passage of tax reform late last year, we now expect our normalized tax rate, which includes federal, state, and local taxes, to be approximately 25%-26% for 2018. 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 16% to $51.2 million from $44.1 million in the prior period. A reconciliation of adjusted EBITDA to GAAP net income can also be found in the earnings release.
By segment, our franchise segment EBITDA increased 23.4% to $32 million, driven by higher royalties received from additional franchisee-owned stores not included in the same-store sales base, and an increase in franchise-owned same-store sales of 11.9%. Our franchise segment adjusted EBITDA margins increased by approximately 20 basis points to 81.1%. Corporate-owned store segment EBITDA increased 6.5% to $11.3 million, primarily driven by a 5.6% increase in corporate same-store sales and higher annual fees, partially offset by pre-opening expenses associated with the four corporate-owned stores that opened up during the quarter. Our corporate store segment adjusted EBITDA margins increased by approximately 110 basis points to 42.6%. Our equipment segment EBITDA was essentially flat year-over-year at $15 million. Adjusted EBITDA increased by $1.6 million year-over-year, and adjusted EBITDA margins were 22.7% as compared to 22.9% in the prior quarter.
Turning to the full year, let me quickly summarize the highlights for 2017. Revenue increased 13.7%. System-wide same-store sales were up 10.2%, and this marks the 11th straight year with positive same-store sales. Our fastest-growing franchise segment grew revenue by 28.9%. Our average royalty rate for the year increased 59 basis points to 4.25%. Corporate store segment revenue rose $7.4 million, driven by a 4.9% comp gain. Equipment segment revenue increased 6.8%, which included 193 new store equipment sales. This was towards the lower end of our range of 190 to 200, due to a few franchisees that were unable to complete the construction on a couple locations in time for us to place the equipment prior to year-end. Our adjusted EBITDA increased 22.7% to $184.7 million, with margins up 315 basis points to 43%. Lastly, our adjusted net income was up 21.8%.
Now turning to the balance sheet. As of December 31, 2017, we had cash and cash equivalents of $113.1 million, and borrowing capacity under our revolving credit facility stood at $75 million. Total bank debt, excluding deferred financing costs, was $709.5 million at year-end, consisting solely of our senior term loan. As you're aware from the press release we issued on January the 2nd of 2018, we utilized approximately $29 million of our year-ending cash to complete the six-store acquisition from a franchisee, stores located on Long Island, that Chris mentioned earlier. As we announced today, the board of directors has authorized an increase in our share repurchase program to $100 million. Future share purchases could be funded by a portion of our current cash position, future cash flows, or borrowings under our credit facility.
With respect to CapEx, our total spend in 2017 was $37.7 million, which included approximately $6 million for our new corporate offices. Additionally, we incurred approximately $8 million for four new corporate stores, as well as $7 million for replacement equipment for our corporate store base. The remaining CapEx was primarily associated with store renovations and IT projects. For 2018, we anticipate CapEx to be approximately $30 million on an apples-to-apples basis with a target of four to five new corporate stores. We will incur CapEx for replacement equipment similar to the prior year. Now on to our outlook. For the year ended December 31, 2018, we currently expect revenue to increase approximately 20%.
However, included in this guidance is the impact of additional revenue from the 2% of monthly dues we collect from all of our franchisees for the National Ad Fund, including our corporate stores, and as required by the new GAAP rules beginning January 1 of this year. Prior to 2018, the NAF contributions really only had an impact on our balance sheet as restricted cash or as a liability. Due to the recent accounting changes, we must now recognize these contributions as revenue and book the expenses associated with managing the National Ad Fund as marketing expenses in our SG&A line. While we expect there will be no impact quarterly or for the full year to our bottom line from this change, it is contributing approximately 8%-10% to our 2018 top-line growth rate.
Incorporated in our top-line outlook is the impact from the change in how we recognize ADA and FA fee revenue, which will be about a $4 million headwind this year compared with 2017. As I mentioned earlier, we now need to recognize these fees over a 10-year period versus the time the related store and lease is signed. For example, in 2017, we typically recognized $30,000 for each new store location, $10,000 for the ADA and $20,000 for the FA when the store lease is signed. In 2018, under the new rules for each ADA and FA that we sell, we'll recognize $3,000 for the first year of the agreement for each franchise store opening and the remaining $27,000 in equal installments over the next nine years.
Helping to partially offset this headwind is the fact that we need to re-recognize the remaining portion of ADA and FA fees associated with the existing agreements signed since 2012, which were reestablished on our balance sheet as deferred revenue. We recognized approximately $6.8 million for these related fees in 2017 under the prior old GAAP rules. If we had been under the current 2018 GAAP rules, we would have recognized $1.2 million. In 2018, under current GAAP, we anticipate to recognize approximately $2.3 million. As I stated earlier, approximately $4 million less than reported in 2017, which under previous GAAP, would've dropped to the bottom line of our P&L. In terms of profitability, we expect adjusted EBITDA growth to increase in the mid-teens percentage range. Adjusted net income and adjusted EPS is projected to increase by approximately 40%.
This guidance assumes an effective tax rate of approximately 25%-26%, which includes the new federal, state, and local rates following the recent tax reform. As a comparison to the prior year and before the Tax Reform Act rate reductions, adjusted net income and adjusted EPS would've grown by approximately 20%. We plan to reinvest a portion of our tax savings back into the business in 2018, primarily in infrastructure and technology for our stores and systems to ensure Planet Fitness is well-positioned to capitalize on the current industry trends in order to benefit our business and enhance the member experience. These investments, which are estimated to be in the $7 million-$8 million range, are in addition to the CapEx spend already outlined. The following are the assumptions used in developing our full-year guidance.
First, with respect to sales, system-wide same-store sales are expected to increase in the high single-digit percentage range. We are also expecting to sell and place equipment in approximately 190-200 new stores again this year and anticipate replacement equipment sales to be approximately 40% of total equipment sales. Want to point out that our EPS guidance doesn't include any potential future share repurchases. Finally, based on the approximately 900 stores that have amended their existing franchise agreements and increased their royalty rate by 1.59% as of December 31 of 2017, coupled with the new stores opening up at the current rate, we expect the average royalty rate to increase approximately 125 basis points in 2018. The majority of this increase being the estimated impact of stores amending their franchise agreements with a corresponding decrease in commission income.
I'll now turn the call back to the operator for questions.
At this time, I'd like to remind everyone, in order to ask a question, press *1 on your telephone keypad. We will pause for a moment to compile the Q&A roster. Your first question is from Oliver Chen with Cowen and Company.
Hi. Congratulations on a great quarter and outlook. We had a question generally on the unit economics of the new gyms. As you're building in more markets and you've had really impressive unit growth, how are the unit economics trending? As we look ahead with the national marketing budget, it's been a real powerful part of your story, how would you expect that dollar amount to trend on a long-term basis, as it's quite an important part of what's been driving a lot of the awareness. Just curious about how we should model that. Thank you.
Sure, Oliver. In terms of new stores, the way we look at our new stores, we look at them by class year. We look at them in the months they open. You see from our same-store sales, we've talked about in the past that new stores tend to drive a fairly high percentage of the comps. The first year in comp, year two in operation, they're going to comp at, call it 40%-50%. Your second year is going to be in that 20%-25% range. Once you get into the fourth year and older, they tend to be in the mid-single digit range. Those are still very similar in terms of stores that we opened in 2017. From an EFT perspective, from a same-store sales perspective, very similar to our previous vintage years.
I think, Oliver, as Chris said, I think on the, as far as the marketing standpoint, in the U.S., you have again kicked it off. This is our third year. We auto-renewed for an additional 2 years to that contract. That's already done. On aided brand awareness, as mentioned, ADA is at an all-time high. We had dethroned Gold's Gym the first year we did that, so ever since then, we've been number 1, which I think is, again, continuing to drive these comps that we're seeing is that the marketing budget isn't static. It continues to grow with each new member. 1.7 million members added net new last year is all incremental marketing dollars that continue to fund this year.
I think it's what we're seeing is the momentum we're driving, and a lot of the data-driven decisions that we're using to formulate our marketing to continue to drive those comps.
Okay. Lastly, Chris, the digital innovation is really impressive and sounds exciting. How do you expect a lot of the changes there to impact how we should think about the model? Do you think it will continue to increase traffic, increase customer satisfaction, or decrease churn? What are your thoughts on where digital will play into the customer experience.
Yeah
The members?
Yeah. You're talking about the premium consoles and the cardio that we're testing, right?
Yes.
Yeah. Again, first I'll say it's still really early. We just put them in Q4, 15 sites, five of each of the three manufacturer sites. One, unfortunately, has yet to be put in, which will be shortly here. There's a delay in construction. It's still early, so we're cautious with that. What I will say, and that being said, is the early read on the early data is they are driving more Classic Card upgrades than their peer clubs and driving a little more usage than their peer clubs. Evidently, people like running through New Zealand.
I've been doing this for 25 years, Oliver, honestly, and to be able to now actually know the habits of our members and to be able to see an increase and enhance those experiences based on what we learn, is just something that this industry has never seen, and we're in the forefront of figuring that out.
Wow, great. Thank you very much. Best regards.
Thank you.
Thanks.
Your next question is from John Heinbockel with Guggenheim Securities.
Let me start with the $7 million to $8 million that you're going to reinvest in the business. Can you go into that in a little more detail? Where is that going? I guess it looks like were it not for that, EBITDA growth would be close to 20%. Is that about right?
Yeah. When it comes to the premium consoles and all the technology side, it really comes down to that complete ecosystem, which I've talked about in the past, that we never had, neither did the industry. I think when we work with these manufacturers of the equipment, which we're in the process of, is how do we enhance the member's experience to tee that data up back to the member, so that they know what they did and how to then, with algorithms, figure out what they should do tomorrow. When you think about all the wearables and apps out there, a lot of them track, not many recommend. That's really the missing link, is what people need to do tomorrow to get their fitness journey started and to get results.
Capturing that data, how do we use that with insurance companies and corporations to show that their employees or subscribers are getting healthier and working out? How do we use that for advertising purposes for other businesses that say, we have these members, 10 million members doing over 300 million workouts a year, and how do we get them what they're doing, what they like, what they not like, what their experiences are, and how do we get the right products in front of them, based on their likes and dislikes for advertising purposes? It's that whole technology ecosystem, John, that we're looking at building to capture all that and then leverage our 10 million members and growing.
Yeah. John, I think your question was in terms of our guidance. I think I said we expected our adjusted EBITDA to grow in the mid-teens as a percentage basis year-over-year.
Right. That includes the $7 million-$8 million investment, right?
Yeah. The $7 million-$8 million is going to be mostly CapEx. There's going to be a little bit of it that's going to be OpEx. A good chunk of it will be CapEx.
All right. Secondly, if you think about your pace of openings, is there still the idea here that you want to hold to that 200 or so because of what's happening on the real estate market? Do you get any pushback from franchisees who want to grow faster, right? Given the performance of their boxes and the brand awareness that's building, you would think you could go faster and pick up more share. Does a tension exist there or not really?
No, there's really no tension. In fact, there's a number of franchisees that are ahead of their development schedule, and we'll keep building in terms of site availability. I guess I'd go back and maybe address it a little bit as we've talked about in the past, and I think you alluded to, is that we still see significant favorability for us on the real estate site availability front. Just the latest is Toys R Us and others that are out there, and we don't see that doing anything but to continue to benefit us. Given that there's not a lot of retailers, particularly with the big REITs that are spread out geographically, there's not a lot of other retailers that are taking down call it a couple hundred sites.
To me, the way we look at it is that we're not holding them back. We do have sites that we will not approve for a couple reasons. One, we think that maybe the market is not developed to an extent that it's ready for that additional club that's going to be pulling members to that club. Second, we don't think the site's kind of main and main, and we want to be at main and main. We believe, and we're certainly seeing it, that if you just hold on a little bit, some of those sites will become available. Then the third element I would say, is that more and more franchisees are doing ground ups, and that's about an 18-month time lag.
We have franchisees right now today that are out there doing ground ups. A couple of them are in the process right now. That won't open until probably early in 2019, as an example. We believe that 200 a year. We've called it, kind of labeled it thoughtful growth. We still think that's kind of the right number. If we have franchisees who are bringing in more sites in 2018 than they did in 2017, They are available sites that we think they should open. We will approve them. We really go at it from that angle.
The last point I will make is, we've had now more and more, what I'd call top-down approach to whether it's Chris or myself or Rob Sopkin, our Chief Development Officer, of meeting directly with REITs and then taking sites in their portfolio, one, that's either available now, or two, that's coming up on lease expiration with the existing tenant in the next 24 to 36 months, and we're starting to push those sites now down to the franchisees. We didn't do that 12, 18 months ago, and we're doing much more of that today.
Okay. Thank you.
Thanks, John.
Thanks, John.
The next question comes from Jonathan Komp with Baird.
Yeah. Hi. Thanks, guys. Chris, I want to follow up on a statement you made in the press release about carrying over significant brand momentum into 2018, just wanted to ask a broader question, what you've seen so far in the key signup periods. I think the high single-digit comps guidance for the year is a little above what you guided to initially for last year. Could you just talk about the sustainability of what you're currently seeing?
Yeah. I think the momentum, everything from our comps, still high single to low double-digit comps here for the first quarter. Development pipeline, uncertain to locations, everything is filling up nicely for the year. I see the momentum carrying on for sure as you've seen in the last couple of years. Do you want to bring it over there?
Yeah. John, the only thing I'd add to that is, we guided full year. Obviously, we're not talking about the quarter here, but we guided full year in that high single digit range. We think Q1 will be clearly on the high end of that, maybe low double digit. We have that much visibility into Q1, we still feel comfortable with that kind of high single digit for the year.
Okay, great. Then in terms of some of the drivers, I know you talked a lot about some of the technology and the digital component, more the app component. Is there potential for loyalty to be included in that? I know it's something you've talked about a little bit over the past year or so, but any updates there?
Not heavily, but no doubt with the app and the technology and being able to house what people are doing, you can see how we could easily tie achievements to some sort of rewards program, or partnerships with other brands. Other companies that we get partnered with are bundling. That would be the case too. But that's why we're spending the $7.8 million. Then I think one thing with the technology we think about is, it's not something that's one and done. It's an evolution, and it will be as we learn and fine-tune over the years ahead of how we use it and how we enhance the members' experience. I think what it looks like in six, 12 months will be very different than what it'll look like at 36 months.
I think, John, just to add onto that is that, with Craig Miller, our Chief Digital & Information Officer, one of the things we're doing is we're building that plumbing and that infrastructure to be able to do a lot more things from a technology perspective, as Chris has been talking about, even prior to this call, but certainly today. To have the ability to pretty easily then link our systems into some partnership with somebody on a loyalty program, as an example. Whereas today, it would take us months, if not years, to be able to build something like that. We will have the flexibility down the road, to Chris's point, whatever the technology is and whatever it's evolved to be able to have the flexibility to do that with our existing systems and partner up with others, whatever that case may be.
Okay, great. Then last one from me. I don't think this was covered, but when you think about the new equipment technology you're talking about, obviously, I think that would be incorporated into new equipment sales, but would there also be potential to sell the console as a standalone that could be retrofitted to existing equipment? Is that an incremental opportunity outside of the normal replenishment or reequipment cycle?
Not necessarily, no. The newer cardio that's going in today is retrofittable with these consoles. A franchisee, if they're buying equipment today and wants to retrofit the new stuff, they're not going to hold out buying stuff because they're waiting for the consoles because they can retrofit them, which is a good thing. It would did have to upgrade. I would say it could push, if the trends continue and the data continues to be positive as we see today, even though it's early, I would see that as a franchisee, you might not wait the full five years on cardio.
Okay, great. That's helpful. Thank you.
You're welcome, John.
Thanks, John.
The next question comes from John Ivankoe with JPMorgan.
Hi, thanks. First, a housekeeping question, then a different one. Is there any change to the average equipment package sold per placement in 2018 in your estimates?
I'm sorry, John. Say that again. Any change in what?
I apologize. Is there any change in the average price per equipment package sold per placement in 2018?
No.
Okay. It's the same level as 2017. All right, great. Thank you.
Yeah.
Secondly, are there any defining characteristics that you see in the system, whether in terms of higher than average volumes or higher than average profitability that you're seeing for your new stores, Regional, whether it's urban, suburban, rural, freestanding, what have you. Are you really beginning to see a certain type of store really rise to the top, maybe in 2016 and 2017? Is the company doing, with its franchisees, anything to particularly pursue those type of sites in 2018 and 2019? In other words, what I'm getting to is there an opportunity to significantly change the trajectory of new unit opening volumes?
Yeah. I would say, there's always outliers, John, a little bit. The extremes could be, say, a high urban area. As an example, a corporate store in Oakland, California, over-indexes in members and monthly EFT, and certainly EBITDA, to more rural markets or markets outside of a metropolitan area that dial down a bit. We've built a few more smaller stores in the last 12 months than we did the previous 12 months. When I say smaller on a square footage basis, not significantly, but a little bit smaller. Sometimes that's because the only space you can get, and sometimes it's because it's a little bit of a smaller market.
The way I look at it, John, is how are franchisees' portfolio doing, knowing they're not going to hit a grand slam on every single one, and knowing they might, to a certain extent, maybe do what we call a fill-in, to get a store into a market where you want to get one in there, maybe get it in before the competition might get there, but it might be a smaller store. It might be one that you might not even expect to be up at your average. From talking to our franchisees, looking at our corporate store portfolio, we opened four stores in Q4 last year. There's no major outliers out there.
With our Black Card percentage being slightly higher, with the $2 price point being higher, albeit it just started October 1 with new member sign-ups on the Black Card perspective, we continue to see very good profitabilities at the four-wall basis.
I think the only thing I'd add, John, is we have seen, in the past 12 months, a slight uptick in better attrition, which has been promising.
That's okay. That's great. Certainly, a lot of systems that I cover do have some different economic performance across geographies. There's a lot of different reasons that markets can perform materially different from, if not an average unit volume perspective, but from a profitability perspective. Have you seen any real surprises, whether on the high side or on the low side, that you're seeing as you're continuing this fully national expansion?
John, there really isn't any. The ends of the spectrum could be a higher urban area with higher rent that, for some reason, might not draw the higher volume to offset it. Many do. Whether you're in a Dallas, Chicago, Orlando, a Phoenix, a Denver, you go across these different geographies where you might say the ethnicities in a market might be different. You might say the income levels might be different. The weather might be. You can go through all those. John, we really don't see that. Now, as I said earlier, there's always outliers that might perform a bit different, but not in the kinds of percentages that ever worry us whatsoever. What we see is that you will have some more rural markets or smaller population markets. They typically have very low rents.
You might have 10%, 15% less in members, but you may be paying, instead of high teens or $20 a square foot rent all in, you may be paying five or six or seven. There's some of those markets that'll actually generate a higher EBITDA dollar-wise than a store in another market that have more members and more EFT. It's not like what you're referring to where you see where a particular portfolio operates differently in the South, the East, or the West or something. That's the beauty. The model doesn't work that way.
Real-time, I'd say, John, is Hawaii, for example, is off to a bang-up start. That club's the first one there is killing it.
We opened up a corporate store in Berlin, Vermont. It's a very, very small town, rural area that frankly, people in places like this, they're used to driving 30-45 minutes to go to the grocery store or to a dentist. It pulls, the club pulls from that kind of a range, and that club is exceptional well.
Yeah. That's inside an enclosed mall, actually, where the Walmart
That's great, guys. Thanks.
Yeah. Thanks, John.
Thanks, John.
The next question comes from Rafe Jadrosich with Bank of America Merrill Lynch.
Hi, good afternoon. Thanks for taking my question.
Hey, Rafe.
You finished the year at the low end of your historical leverage range. Can you talk about how you're thinking about a potential debt recap in 2018?
Sure. Yeah, Rafe. We talked about this, I think, in Q4 or Q3 when we did that release. As you guys know, we've stated that our range has always been that 3 to 5 range. We are getting towards the low end of that range. By the end of this year, we would certainly be down at the low end or not below that. We have had and are having conversations with our board about what the right refinancing option should be. We said before that's something we would do sometime early in 2018, and we still expect to do so.
Okay. When you look at the comp acceleration, are you seeing that in newer clubs ramping faster, or is it in mature clubs that are seeing the uptick? What do you think is driving that's different now than it was maybe earlier this year? Same question for your corporate clubs. You've seen the comps accelerate and those are all mature. What's the change that you are seeing?
It's pretty much across the board, whether it's mature clubs, all age clubs. You have remodels in there and you have re-equips in there and a lot of more stores doing that. A lot of it too, not a lot, but quite a bit is driven too by the annual fee timing, is driving some as well as the secondary billing option is driving some, which is a backup billing method for the members.
I think the one thing which we've said in the past a bit is that, I think some of this has to do with clubs expanding, putting in older clubs, expanding, putting in a Black Card area, or maybe clubs that came up on lease expiration that relocated across the street or down to the next shopping center. Things like that. I think our operators are much better today than they've ever been. I think that as they've gotten larger, they have gotten more sophisticated with their operations team and their marketing teams, and real estate. You go back four or five years ago, Rafe, we didn't have hardly any of our franchisees that had a head of real estate, a CMO, a CFO, and frankly, probably an operator outside of the franchisee.
Today, many of our larger groups have that talent, I think they're just dialing it in a lot more than they used to. The net of that is mature clubs are doing much better, too.
I was surprised to see the Black Card penetration went up in the quarter that you increased the pricing. I think the last quarter you talked about you were expecting a 70 basis points benefit. Can you talk about after having it in place for a quarter, what's your expectation going forward and what you're seeing in terms of the penetration?
Yeah. As I said, it was about a 60 basis point impact in Q4. It began October 1. It was for new Black Card members. We said when we did the pilot that we saw little to no negative impact in the acquisition side of it. It wasn't unexpected as to how that kind of came out, but it was about 70 basis points. I think that as we look at 2018, the pricing should have probably 175, 200 basis points embedded into our guidance.
Great. Thank you.
Thanks, Rafe.
Your next question comes from James Hardiman with Wedbush Securities.
Hi, good evening. Thanks for taking my call here.
Sure thing.
I wanted to touch on the cash impact of tax reform. You gave us the impact that it's going to have on your income statement, non-GAAP, the 39.5% to maybe 25.5%. Then walk us through how your cash tax rate changes before and after tax reform, then the TRA impact, if there is any. I know that's a delayed impact. You gave us a schedule. Just curious how that schedule is going to change as a result of different tax rates. Then maybe talk a little bit about your franchisees, how tax reform is affecting them. I guess I don't even know if they're mainly paying the corporate rate or if a lot of these guys are paying the pass-through rate. Ultimately, what do you expect them to do with those savings, and does any of that benefit you?
Previous to the tax reform, our adjusted tax rate of, call it 39%-40%, was based upon assuming all of our shares were Class A shares and all those shares, therefore, all of the income was taxed at the Planet Fitness Inc. level. Today, we're roughly about, call it 90%, 89%-90% of our income is taxed at Planet Fitness Inc. because we still have about, call it 10%-11% of our shares are Class B shares. At a 39%-40% tax rate, we were getting a tax deduction from the step-up basis from those stock sales, most of which were from TSG as they sold out. We were getting that benefit at, call it $0.40 on the dollar.
Of that $0.40 on the dollar, which reduced our cash taxes to the government, 85% of those savings of that benefit went to the TRA holders, 15% of it stayed in the company. The way I've always talked about it is think about that our 39% tax rate was roughly, because of the step-up, we got about a 15% reduction off of that. That was kind of the benefit to the company by having this Up-C tax structure in place. Now if you fast-forward to, call it 25%-26% tax rate now with our federal, state, and local tax rate that we're estimating will be our full rate for 2018.
Those deductions, which that's why there was that huge deferred tax expense, which I talked about that went through our P&L, is that we, in essence, we remeasured that future benefit because it's no longer worth $0.40 on the dollar, it's only worth, call it $0.25 on the dollar. We'll be paying a lower cash tax rate using that 25%-26%. The way to think about it is because we will, with the taxable income we have, albeit reduced by this tax basis deduction that we get at a 25% rate, we'll pay significantly less in cash taxes to the IRS, but we'll still pay 85% of those savings at that 25% tax rate, we'll pay those to the TRA holders. Again, it's about a 15% benefit to Planet Fitness Inc. off of that 25%-26% tax rate.
Let me pause there and see if that is clear in the way that the, kind of, in essence, cash taxes and the adjusted tax rates, as I just walked through, if that makes sense.
It does. I guess bottom line it for me, from a free cash flow, after-tax free cash flow, how is that being affected by the new rates?
If you look at our free cash flow, what you still have to look at is that TRA payment, because it's not in your P&L because you're only taxed at, call it, a 25% tax rate on lower income because of the tax deduction. You'll go to the cash flow statement and you'll see a payment that goes to the TRA holders, albeit in the following year. For example, in 2018, when we take a tax deduction that's only worth $0.25 on the dollar, I'll reduce my taxes that I pay throughout this year, because you have to make quarterly payments. I'll pay less taxes to the IRS, less cash taxes, and then in 2019, I'll pay 85% of those savings out to the TRA holders.
That will go through the cash flow statement, you'll need to look, in essence, at free cash flow, less the taxes paid under the tax benefit arrangement, i.e., the TRA.
That's significant, it sounds. At the end of the day, the net of all that, I don't know if you want to give us a dollar number, but it sounds like it's going to be pretty significant?
The net of it, I think, is the point I made a minute ago, that is that in essence, we'll be paying basically about a 15%-- we'll get about a 15% benefit off of the 25% tax rate when you get right down to it. Because if you take my lower taxes to the government, when you add in the 85% of the TRA, you're in essence getting about a 15% benefit off of your statutory tax rate.
That's helpful. On the franchisee side, any thoughts there?
I think a couple things is, obviously we'll get this on a corporate basis as well, where capital assets outside of leaseholds, you'll get 100% deduction, if they're placed in service. We'll get that as a corporate entity. A franchisee, whether they're a LLC entity or a corporate entity, will get immediate deduction of their CapEx assets, less leaseholds. In addition, there's about 20% of their income that is, if they're an LLC entity, that gets passed through at a zero tax rate subject to a limitation that's 50% of their W-2 wages.
The idea there, if you go back and you think about what the Trump Tax Reform Act did, is it basically said, "We're going to incent you to invest in building assets and generating jobs." In essence, that's what I believe they're doing by this immediate write-off of an asset. They're saying that what you've got to do is you've got to be employing people. If you employ people, you're paying them wages, we're going to give you a zero tax on 20% of your income, but only if you have W-2 wages. They put that limitation of 50% of your W-2 wages in there. I don't know what percentage of these, James, have LLCs. I'd say a fairly high percentage do, particularly the smaller guys. I think the net of it is there is going to be incentive to build stores.
There's going to be incentive to replace equipment, with their stores that are coming up that need to have their reequips done. They'll be able to save taxes at the end of the day by doing so. Net-net to our business, from a franchisee perspective, I think it's positive, win-win.
That makes a lot of sense. I appreciate it. Good luck this year, guys.
All right.
Great. Thanks.
Thanks. Thank you.
The next question comes from George Kelly with Imperial Capital.
Hi, guys. Just a couple of questions for you. First I wanted to follow up on the equipment stuff. You've talked about the enhanced equipment coming soon.
Yeah.
The question is, How important is it for you to internally develop parts of that? Will you own a lot of the enhanced software?
Yeah, that kind of has that investment in the plumbing that Dorvin talked about. We want to be sure that a lot of what's captured and learned from is internal us. Regardless of what manufacturer we use today or in five years, it's our stuff that we can bolt on to whoever we use in the future. Not to mention, it stays proprietary to us, too, which is important.
Okay. That relates to the data, but also the sort of interaction that you tie the media stuff you'll offer and everything else?
Netflix is Netflix, right? How we learn from what male or female or age ranges, what they're doing, what they're using, how they're using it, what their duration is. How we drive their experience going forward is stuff that we use and we know, that we can then have the cardio react and change accordingly. Some of that will be us, but naturally, there's a triple S Netflix. I think triple S Netflix. It's how we manipulate the data, mine it, that we change our experience in the future. Not unlike the people running through New Zealand or L.A. and how we change that going forward.
Where it could go, George, is that with our plans from a technology perspective of having this infrastructure and plumbing in place, so to speak, would be that we would then have the ability to just link up from an API perspective into, if it's another app, if it's a loyalty company program we wanted to link into, things like that would be kind of plug and play, so to speak. We'd have the ability to do that very easily and not time-consuming.
Okay, thanks. Just one last question from me. It seems like your expansion into where you've gone international, into other countries, it's been successful. I know it's early in places, what do you think about Europe? Whatever you can say there, what is the competitive dynamic? If you could say anything on that would be great. Thank you.
Sure. Yeah. We've really mostly focused on mostly Latin America to this point, except for Canada. We've looked at Europe briefly. It seems like each country over there kind of has their low-cost chain. There's a Basic-Fit, there's a McFIT, each country kind of has their own. There's The Gym Group and PureGym in U.K. I think in some of those instances, they're probably more low price. They're not necessarily our model, meaning judgment free and so on and so forth, that you paid into the first timer. They are low cost. The big question is, if you look at PureGym's got 180 stores in the U.K., that's probably like having 500 or 600 here in the States. The question is, do we look to acquire or do we try to go in there one at a time and compete that way?
I think when we get there, we'll make that decision. It might be more of a roll-up strategy in Europe, just because each country's got a pretty significant player.
Okay, thanks.
You're welcome.
Thanks, George.
The last question is from Matthew Brooks with Macquarie. Matthew Brooks, your line is open. There are no further questions at this time. I will turn the call back over to the presenters.
Great. Thank you. This is Chris. Thanks, everybody, for joining us today for the fourth quarter call and year-end. As you see, it was a great 2017. A lot of good stuff happening here as a brand with this technology front. Granted, it's going to be a few years to fine-tune it and work through it, but I'd say in 25 years doing this is, for me, some really exciting times of how we look to leverage this in the future, which is something that to be able to know what people are actually doing in our clubs is pretty substantial. Look forward to working on this in the future, and thanks for the call.
This concludes today's conference call. You may now disconnect.