Planet Fitness Inc

NYSE:PLNT

Earnings Call Transcript 2020-Q4

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Planet Fitness Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Brendon Frey, from ICR. Thank you. Please go ahead.

[Brendon Frey, ICR, IR]

Thank you for joining us today to discuss Planet Fitness' fourth quarter quarter 2020 earnings results. On today’s call are Chris Rondeau, Chief Executive Officer; Dorvin Lively, President; and Tom Fitzgerald, Chief Financial Officer. Following Chris and Tom’s prepared remarks, we will open the call up for questions.

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 included in our fourth quarter 2020 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?

[Chris Rondeau, CEO]

Thank you, Brendon, and thank you, everyone for joining us today for Planet Fitness Q4 earnings call. 2020 has certainly been an unprecedented year for the fitness industry in our business, with our members health, safety and best interests at the forefront of our decisions combined with a strong foundation we've built with our franchisees over nearly two decades, Planet Fitness continues to face the ongoing challenges created by COVID-19 head on.

I'm extremely proud of how our franchisees, headquarter staff and co-staff continue to be agile through this ever changing environment and rally together to provide a clean and safe fitness experience for our members.

Fitness is a key component of strong physical and mental health, which is more important now than ever before in the wake of a pandemic that disproportionately impacts those with health related risk factors. While the operating environment remains fluid, we are pleased that as of today, 90% of our stores are open. The vast majority of our closed stores are in California, with state wide restrictions on reopening remain in place, as well as parts of Canada and Panama.

We are hopeful that the entire system will be open soon, as we believe that the robust safety protocols we put in place allows us to operate safely. These include enhanced cleaning and sanitization, touchless check-in, COVID-19 wellness screening questions via the Planet Fitness mobile app, our crowd meter in the app, mandatory mask requirements and physical distancing measures. We remain committed to keeping our members and staff safe and healthy in all our stores.

Our ability to successfully operate our stores and service our members relies largely on the financial health of our system. Given the historical strength of our business model and franchisees, we have had zero stores permanently closed due to COVID, and zero franchisee bankruptcies.

While we have weathered the storm well relative to the overall gym industry, we have provided franchisees with relief in the form of a 12-month extension on all development requirements, in 18-month extension on their replacements equipment commitments. We believe this will allow franchisees to rebuild their balance sheets, while continuing to invest in marketing to drive membership growth, which is our number one priority.

As we discussed on our Q3 call in November, we reviewed our national sales acquisition marketing efforts in September after pausing national promotions in mid-March when our stores temporary closed. Consumers responded positive to our message reinforcing that fitness is essential. The pandemic has negatively impacted people's physical and mental health, and we have the right environment in place to keep people motivated in robust protocols in place to keep them safe. This helps to slow the decline in total members we've experienced as a result of pent up cancellations after our stores reopened and resumed billing.

Looking back on the year, our biggest challenge in 2020 wasn't increased cancellations due to COVID, as cancellations were essentially flat to 2019 levels on a per store basis. Our challenge was the lack of gross new joins as we paused our national sales acquisition marketing for the first time ever, including very certain key signup periods last spring and early summer.

On the heels of a successful national sale in December, we conducted two more national sales in October and November, in addition to the flat sale in December. Overall, we are pleased with the results, especially given the holiday season a slower time in terms of signups for the industry.

We ended 2020 with approximately 13.5 million members compared to with 14.4 million members at the end of 2019. Building of the momentum from our successful New Year's Eve sponsorship, we kicked off 2021 with our usual January promotions. Our target audience of casual first time gym goers continue to respond favorably to our messaging and value proposition. We were unsure of what to expect for this key industry sign up period under these circumstances, and we were pleased with the results.

We ended January with 13.8 million members, up from approximately 13.5 million members at the end of December, representing our first month of overall net number growth before the pandemic. The recent uptick in membership is very encouraging and reinforces our belief that people want to return to bricks and mortar fitness. In fact, to-date 5% of our members who cancelled during COVID have already rejoined, and 28% have joined overall since COVID were prior Planet Fitness members.

In addition to driving numbers back into our stores, we continue to sell our digital efforts to further engage with our members wherever they are, and enhance their overall experience with our brand. In fact, Planet Fitness' mobile app is currently one of the top ranked free apps in the health and fitness category for both Apple and Android, reinforcing that Planet Fitness remains a trusted source for health and wellness.

Currently, 40% of our total member base has adopted the app, and new joins app adoption rate continues to climb reaching 70%. In addition, we continue to add value to the app with new features like the crowd meter, which enables members to check the capacity before coming to the gym.

Building upon our partnership with iFit in April, we continue to provide streaming and virtual fitness content in our mobile app. These workouts are some of the most popular workouts content today. We also continue to test PF Plus, our 599 per month digital only subscription membership via mobile app, we remain encouraged by the trends we're seeing.

For example, testing results so far have shown that more than 20% of PF Plus subscribers are non- Planet Fitness members. And more than 20% of them have since become bricks and mortar members in addition to their PF Plus subscription.

Additionally, other members who have subscribed, nearly 60% of them have visited their store to work out since subscribing to PF Plus. So the majority of subscribers are still engaged with a bricks and mortar offering and CPF Plus as a compliment to their membership. These trends reinforce our view that a standalone digital membership can serve as a gateway to traditional bricks and mortar membership, not a replacement for it, and provides us with an opportunity to further engage members and prospects wherever they are. We will continue to assess content, engagement and usability feedback to inform broader roll up plans down the road.

While consumers’ adoption of digital fitness has accelerated given the pandemic, I truly believe that the future of fitness industry is about bricks with clicks. The powerful combination of providing a high quality in-person fitness experience, coupled with the complimentary digital experience that consumers can experience the brand in the club and at home.

Given everything we’ve faced in 2020, I am very pleased with how our system has weathered the storm. We opened 130 new stores in line with most recent expectations, while at the same time URSA, Fitness industries trade association has predicted that about 25% of U.S. gyms and studios will permanently closed as a result of the pandemic. But we have strengthened our leadership position during the pandemic. We anticipate the near-term operating environment to remain volatile.

Longer-term however, we are more optimistic about our prospects for growth than we were prior to COVID-19 for several reasons. This includes capitalizing on these industry consolidation is terrible real estate conditions we believe will emerge over the next several years to grow membership and expand our physical footprint, evolving our technological capabilities to enhance our digital engagement and utilizing our powerful marketing machines to increase demand for our non-intimidating accessible fitness offering.

I'm confident that Planet Fitness is well-positioned to resume the growth trajectory, the business was on at the start of 2020, prior to the outbreak. Once the pandemic is behind us, COVID-19 has widened the moat around our bricks and mortar business and accelerated our digital strategy, positioning us well to serve the casual first time gym goer, whichever way they want to engage with the brand.

Thank you. I'll turn the call over to Tom.

[Tom Fitzgerald, CFO]

Thanks, Chris, and good afternoon, everyone. We opened 41 stores during Q4, bringing our full year total to 130. This compares to 102 in Q4 last year, which resulted in 2019 being a record year for us with 261 new stores opened.

Our primary focus over the last several quarters has been reopening stores, restarting our national acquisition marketing efforts, which we did in September. And as a reminder, as Chris said, we provided our franchisees a 12-month extension on all new store development requirements and an 18-month extension on their equipment replacement commitments.

For the fourth quarter, total revenue was $133.8 million down $57.7 million or 30.1%, compared to $191.5 million in Q4 last year. Of the $57.7 million decline, $49.0 million or 85% was attributable to lower equipment revenue, which was the result of the development and replacement equipment dynamics, I just mentioned.

The remainder of the year-over-year change in total revenue was primarily due to the impact from temporary store closures due to COVID-19 and lower membership levels. We ended December with approximately 13.5 million members, down 0.9 million from where we ended 2019. This compares to the 15.5 million members at the end of Q1, 15.2 million at the end of Q2, and 14.1 million at the end of Q3. The decline in memberships was primarily a function of lower gross new joins as we paused our national acquisition marketing efforts between March and September, while the majority of stores were temporarily closed. In fact, the average number of cancels per store in 2020 was consistent with 2019.

With the decline in net membership we experienced starting in March when the pandemic forced the temporary closure of all of our stores, system-wide same store sales turned negative in the third quarter and declined further in Q4. Now for some context, we reported 53 consecutive quarters of positive system-wide same store sales growth before COVID hit in March and shut down all of our stores.

This simple average of our quarterly system-wide same store sales growth over those 53 quarters was 12.0%, followed by negative system-wide same-store store sales growth once we resumed reporting the metric in Q3, and Q4, primarily driven by the impact of the pandemic. Our model and historically strong same store sales results depend on the ability to continually grow net membership levels across our store base, month-over-month, quarter-over-quarter and year-over-year.

Additionally, in our recurring revenue model, our same store sales performance at any point in time is a function of what happened to our membership levels over the trailing 12-months. For the fourth quarter system-wide same store sales were down 10.6% with franchise down 10.6% and corporate-owned down 11.7%. The 10.6% decline in system-wide same store sales was largely due to a decline in membership levels, slightly offset by an increase in average rate.

Black Card penetration declined 40 basis points year-over-year to 60.5%, with the decrease attributable to the cumulative effect of not having any Black Card national sales in 2020, versus before we had in 2019.

Additionally, the impact of multiple national sales in Q4 of 2020 versus one in Q4 of 2019 increased the rate of $10 joins. Black Card penetration in Q4 of 2020 was down 20 basis points compared with the third quarter.

And we incorrectly disclosed back in November that Q3 Black Card penetration was 62.7%, up 120 basis points versus Q3 of 2019. The corrected Q3 Black Card penetration is 60.7%, down 50 basis points versus the prior year period. The calculated metric we have in our system for monthly EFT member count was erroneously factoring out frozen numbers, which never had a material impact in the past, but when we began to see a modest increase in frozen members in Q3, the fields understated our EFT member balance enough to skew the Black Card percentage.

To be clear, it was a formula error that we did not detect, and is not a fundamental shift in the perceived value of the Black Card. Given the change in Black Card promotional cadence versus the prior year and the prolonged pandemic, we are pleased with the fact that the majority of our new members choose the Black Card option, even though it is more than twice the $10 membership fee we predominantly advertise in our marketing.

Looking ahead, the way our recurring revenue model works, our same store sales growth will improve once the quarter-to-quarter growth in membership levels in our comp stores exceeds the quarter-to-quarter member growth in the same prior year period. Therefore, we expect same store sales to decline further in Q1 compared with Q4.

We would expect to see improvement during Q3 of 2021, when we cycle the prior year's most significant membership declines, depending on COVID-related developments. Note, that we will not report a same store sales metric for Q2, due to the majority of our store base being closed during the prior year period.

Moving on to a review of our segment revenue results, franchise segment revenue was $66.9 million down $6.4 million or 8.8%, compared to the $73.3 million in the prior year period. Now let me break down the components. First royalty revenue, which consists of royalties on monthly membership dues, and annual membership fees was $43.8 million compared to $48.4 million in the same quarter of last year. The $43.8 million of revenue includes $3.3 million attributable to catch up billing of annual membership fees that were not billed on their normal schedule due to COVID-related store closures. The average royalty rate for the fourth quarter, for the stores that drafted was 6.3%, consistent with the same period last year.

Next our franchise and other fees were $3.4 million compared to $4.5 million in the prior year period. These are fees received from online new member signups, the recognition of fees paid to us for franchise agreements, area development agreements and the transfer of existing stores. The decrease was primarily driven by lower ADA and FA fees during the quarter.

Also, within franchise segment revenue is our placement revenue, which was $2.6 million in the fourth quarter compared to $5.6 million a year ago. These are fees we received for the assembly and placement of equipment sales to our franchisee e-own stores within the U.S. and Canada. The decrease reflects fewer new store and reequipped placements executed in the quarter compared with a year ago. I'll discuss the number of new equipment placements later when I discuss equipment revenues.

Finally, national advertising fund revenue was $16.8 million compared to $13.2 million last year. The year-over-year increase was driven by a higher net contribution rate of 3.25% that our franchisees approved as a temporary rate increase, and was in effect from the start of September through the end of 2020.

Our corporate-owned store segment revenue was $38.9 million compared with $41.2 million in the prior year period. The $2.3 million decrease was due to lower membership fees from temporary COVID-related store closures and lower membership levels, partially offset by revenue from nine new stores that opened since the beginning of Q4, 2019, and 12 stores that were acquired in December of 2019.

Turning to our equipment segment, revenue decreased $49.0 million or 63.7% to $28.0 million from $77.0 million. The decrease was driven by both the reduced new store openings versus last year that I mentioned earlier in the call, along with lower replacement equipment sales to existing franchisee-owned stores.

Replacement equipment sales in Q4 were $8.4 million compared to $20.6 million in Q4 last year. In the fourth quarter, we had 45 new store equipment replacements, which was down 63 from the prior year period. An additional driver of the decline was the 15% discount offer we launched beginning in Q2 on all equipment orders to support our new store development and replacement orders. This offer applied to all equipment purchased and placed by the end of 2020.

Our cost of revenue, which primarily relates to direct cost of equipment sales to new and existing franchisee owned stores, amounted to $25.3 million compared to $59.4 million a year ago. A decrease of 57.3% similar to the equipment segment revenue decrease, I previously discussed.

Store operation expenses which are associated with our corporate-owned stores increased to $25.6 million compared to $22.7 million a year ago. The increase was primarily driven by higher rent and occupancy expense, associated with nine new stores open since the beginning of Q4 2019, and the 12 stores that were acquired in December of 2019.

SG&A for the quarter was $17.4 million, compared to $20.9 million a year ago. The decrease was primarily driven by lower compensation and travel expenses, partially offset by higher marketing expense.

National advertising fund expense was $15.0 million compared to $13.1 million in the prior year period. The higher expense reflects the portion of the $10 million incremental investment we made in national advertising from October through December that was recognized in the fourth quarter.

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 was $51.1 million, compared to $76.6 million in the prior year period. A reconciliation of adjusted EBITDA to GAAP, net income or loss can be found in the earnings release.

I'll now summarize Q4 adjusted EBITDA by segment. Franchise adjusted EBITDA was $43.6 million down $7.3 million or 14.3%. Corporate store adjusted EBITDA was $12.7 million, down $5.1 million or 28.9%. And equipment adjusted EBITDA was $3.1 million down $15.5 million or 83.2%. Adjusted net income was $15.1 million and adjusted net income per diluted share was $0.17, down from $0.44 per diluted share in the year ago period.

Now, let me turn to the balance sheet. As of December 31, 2020, we had $515.8 million in total cash, with cash and cash equivalents of $439.5 million, compared to $419.7 million on September 30, 2020.

In addition, we ended the quarter with $76.3 million of restricted cash compared to $81.9 million at the end of Q3. We took some aggressive measures in 2020 to bolster our liquidity, and are pleased with our cash position at the end of 2020, which should allow us to weather continued uncertainty related COVID, but to also be able to invest in growth opportunities where appropriate.

Total long-term debt excluding deferred financing costs was $1.8 billion as of December 31, 2020, consisting of our three chances of securitized debt and $75.0 million of variable funding notes. Our securitized debt structure is covenant light, we have two maintenance covenants, a debt service coverage ratio and a total system-wide sales threshold. Both of these are tested quarterly, calculated on a trailing 12-month basis and reported on roughly a two months lag.

In our most recent debt covenant reporting period of December 5, 2020, we had a 32% and a 98% cushion to the first triggering event for our debt service coverage ratio, and our system-wide sales covenant, respectively. We believe we have sufficient headroom for our two maintenance covenants.

While we are refraining from providing guidance due to the uncertainty surrounding the evolving nature of the pandemic, we do want to share current thoughts on development for 2021. As we announced last May, we provided franchisees with a 12-month extension on all their development requirements. With 130 stores opening in 2020, the vast majority of which signed leases prior to the outbreak of COVID. There are very few stores required to open in 2021.

Until there is more certainty that there will not be further large scale COVID-related temporary gym closures, franchisees are proceeding cautiously on development. Once conditions normalized, we expect franchisees to capitalize on the industry consolidation and more favorable real estate trends that are starting to emerge.

Based on ADA schedules and the number of leases currently signed, combined with the fact that it takes between six to nine months to open a store once the lease is signed, our current view is that the new store openings will likely be in the range of 75 to 100 for 2021. Near-term development is still a very fluid situation due to the pandemic, so we will update this view as the year progresses.

While new development will be modest this year based on what we have heard regarding vaccines, we believe we will get back to 200 plus new store openings per year that we experienced for the last few years pre-COVID. We think it's just a question of when, not if.

While the near-term is difficult to predict, we believe that we are well-positioned financially and strategically compared to the rest of the industry to capitalize on the many value creating opportunities, we believe will emerge over the mid to long-term as the country comes out of the pandemic. And as the country collectively navigates towards the new normal, we believe that eventually the post-pandemic future will be similar and possibly better compared to the pre-pandemic levels, as it relates to the strong margins and the returns on investment our model producers.

I'll now turn the call back to the operator for questions.

[Operator]

[Operator Instructions] Your first question comes from Oliver Chen from Cowen.

[Oliver Chen, Cowen]

Hi, thank you very much. Regarding -- look forward for new member adds. The membership compares are still fairly tough in Q1, Q2. What are the dynamics you see happening with new member adds? And how that may interplay with your decisions around marketing investments?

I would also just love your take on the Black Card view ahead and how we should think about year-over-year, Black Card changes in terms of how that may impact modeling as we go forward? Thank you.

[Chris Rondeau, CEO]

Sure. Thanks, Oliver. This is Chris. Yes, as you see here, as I mentioned in January, and as I talked about on the Q3 call, we anticipated a slowdown in the decrease in member base here in Q4, which we saw. So we had the 1.2 million negative in Q3 and then a 600,000 negative here in Q4. And as I mentioned now we're starting seeing first turnaround against if you will hitting that traffic cancels, it seems like it was added 300,000 net members in January and continuing to see some net growth here in February as well. So, some good news there.

And naturally, the January wasn't as strong as we normally would see in January. But I think the fact that we're finally turning the corners is a good sign. The map in marketing budget for the local advertising fund too is a plan is set for the year. Pretty similar to what we'd normally see from sale days for the rest of this year set today. But it does break the question, do we think we should add extra dollars to it, like we did here in Q4 to help bolster the marketing efforts, no plan yet to do so.

But, depending on what we see here -- the big question Oliver is, as the as the vaccine is broadly distributed here call it next few months, do we begin to see more demand in the summer and fall than we typically would see, just because people are feeling less anxious out there. So, that would definitely probably make us feel more confident, maybe putting extra dollars to work if we start to see that trend. But we're really just laser focused right now on sequential member growth month-to-month. Hopefully, this is the beginning here we're seeing of that turnaround.

As far as the Black Card percentage, actually, we had no Black Card sales. And then fourth quarter you said we had a Black Card sale in December of 2019, which we did not have. So some of it is a decrease of the stall of the growth in the Black Card, just because of lack of Black Card sales, as well as an increase in regular $10 month sales, because they were coming at average $10 a month. We compressed the Black Card acquisition some during those periods. So, we had more White Card sale days in fourth quarter than we typically had, so that kind of didn't help as well. But we're not seeing any increase in cancel rate of the Black Card. Well, that's for sure. So that's some good news.

[Oliver Chen, Cowen]

Okay. Finally, Chris on usage. I’d just love your take on what you've been noticing with usage trends, and if it's relevant to know about how that's been trending by different vintages of the gym base? And any usage thoughts around different states having different vaccination ramps, if there are any insights there? Thank you very much. Best regards.

[Chris Rondeau, CEO]

Sure. Thanks, Oliver. Yes, the usage, we ended December with about 75% of last year's workouts, which is up from about I think mid 60s here at the end of Q3, so it did see a decline in Q4. The January usage is about 70% of last year's workouts. But that was mostly impacted by the decrease in new joins, which typically use the club a lot more when they first join us. So we didn't really see it and that was a never a really an impact of just what's going on in the world is more just the new joined volume was down so that usage came back some.

But, yes, we did see in fourth quarter continue to go up as time goes. We haven't seen anything that I can call out that is vaccination-related that the usage is picking up, but the vintage stores like the first May cohort that opened up, which has been opened the longest. We've talked a lot about in the last couple quarters here. The longer the stores are open, the more normal they act, in almost all aspects. And those stores are accomplishing north of 80% of last year's workouts. So, the longer they're open to the more normal they act.

[Oliver Chen, Cowen]

Thank you very much.

[Chris Rondeau, CEO]

Thank you.

[Operator]

Your next question comes from Jonathan Komp from Baird.

[Jonathan Komp, Baird]

Yes. Hi, thank you. Maybe just one question going back when you look at the member trends in, November and December, I think you had previously said October was down like 100,000. So, it implies a few more cancellations in November, December. So just wanted to ask you about that if there's anything unique to those months. And then, when you look forward, -- curious if there's any observations from the demographics within the signups that you're seeing, and any thoughts going forward once the vaccine rolls out?

[Chris Rondeau, CEO]

The cancels, you're right, yes, October was a little over 100,000, I think we saw when we reported last time. No big call outs is what was the big increase, like it wasn't breakouts in different states or anything like that. But one thing that was attributed to the increase in cancels from like the Q1 report, or October report would have been the billing cancellations meaning like involuntary cancels Jon, where somebody's check-in account doesn't go through for a number of months, we give it six months, and then we involuntary just cancel a member because we're not going to keep trying the bank account.

So because of the May, summer time openings, we began to circle that process. So then, because in December, we had to clean those up. So, that was really the only thing that causes that one there.

For the vaccine, I think, hopefully, I mean, time will tell, but I extended the reason that as it becomes more broadly distributed, and more people of all ages are getting it that, like I said, with all of our I think we could feel or see better trends from a joining perspective in months, that we typically wouldn't from summer to fall, because people are now just getting on with normal life. So, the time will tell. And I think that will also, like I said earlier, probably the more determining factor, if we put more marketing dollars to work to capitalize on that, and also capitalize on more gym closures.

The industry has reported roughly about 17% of the gyms have permanently closed already. And as I mentioned in my opening remarks that the industry, trade organizations saying about 25% they think could close, which is all said and done. So, we're seeing right now about 4% of our new joins are coming from a gym that they're reporting that they're old gym closed permanently, and they're coming to us. So we're starting to just barely see the -- reap the benefits of the gym consolidation.

[Jonathan Komp, Baird]

Okay, great. And then just one follow-up on the unit development comments. Any thoughts on how we should think about the year progressing? And then just with the return to net member growth here, how much of our role that plays in the franchisees overall morale, and then really midst start to think about that reacceleration forward looking on the development side?

[Dorvin Lively, President]

Jon, it's Dorvin. One of the things, I think when we talked about at this point was, as we were going into the pandemic and stores closing, and we still had a lot of stores in the pipeline, and various stages of construction. And so, when we ended up opening the 130 in 2020, that towards the summertime period most of our stores were closed, we weren't putting a lot of new projects or sites into the pipeline. And a lot of that filtered on out towards the end of the year.

There's, a handful franchisees that are out there doing deals now in markets where, real estate is very attractive and they're getting some good deals. But by and large, a lot of the franchisees and then kind of waiting to see with all of the concerns around potential reclosure that they had in kind of the back half of 2020, the anticipation of the vaccine and when that might get to a point of where more and more of the population are just kind of getting out and doing normal things, including wanting to join a gym. So, that pipeline period of development, from beginning to end about a six to nine month process. By the time that you start looking for a real estate deal and negotiating and permitting and a lot of those kinds of things, quite frankly, just taking longer now than they did pre-pandemic, all the way from fewer people to towns and municipalities for permitting, you name it, tradesmen skills, et cetera. So I think where we stand now and the comments that Tom made is somewhere between, say, 75 or 100 stores for '21. It's kind of how we see it at the moment. Obviously, there's a lot of months to go over the balance of the year, and we'll certainly provide updates, as we do our quarterly calls.

I think, maybe just tying that into Chris' comment, which I think was part of your question is that, obviously if we start to see more and more people joining the gyms and people feeling more comfortable because of what's going on in their everyday lives, and then, to the extent that we've also believed the competition has had a more severe impact that we had.

I think that all of those are the kinds of things that will allow the franchisees to really start filling up the pipeline, but the deals that are being done now are certainly very attractive and there's quite a bit of real estate out there. So it gives us a lot of confidence and it's just a matter of when it's not, not yet.

[Operator]

Your next question comes from Sharon Zackfia from William Blair.

[Sharon Zackfia, William Blair]

Hi, good afternoon. I'd actually like to talk about PF Plus and kind of understanding it's still in test, really what the gating factors are, as you look at that towards a broader rollout? And then how would you anticipate the revenue share there to really breakout between yourselves [indiscernible] in your franchisees?

[Chris Rondeau, CEO]

Sure. Sharon, how are you doing? This is Chris. Yes, that question there, without releasing any subscription numbers just yet, but what we're seeing is some trends there. As I mentioned, in my opening remarks, we’ve seen about the same trend we saw from the free content consumption is that the PF Plus subscription that 599, about 20% of those are non-Planet Fitness members, and about 25% of those have gone on to join bricks and mortar, and keep their PF Plus even after that, which is a great sign as we talked about our gateway to bricks and mortar.

Also, we're seeing about 75% of all the subscriptions today are actually current Black Card members. And many of the members for two, three, four years, and actually often to pay more for something else, which is a great sign, I think, for us, especially when we've talked about the passes there a situation we wrapped in the PF Plus in a bundle for the Black Card, and maybe get a little bit more price requisition for the Black Card.

So just a lot of learnings around math piece of it. As far as a broader and more marketing push around the PF Plus, we're taking this time to really just figure out what content people are consuming the most, what traders they like the most, what's really driving the consumption, and who people are really taking to it. So we know who the market to, and what's the market. So real time learning going on with it, but like the trends that we're seeing with it, as we continue to evolve the content and release more stuff in the app real time.

[Sharon Zackfia, William Blair]

I guess one follow-up question here. I don't recall, you guys have been given January number as before. So I appreciate you're doing so. But having said that, I mean, what percent of typical first quarter adds come in January?

[Chris Rondeau, CEO]

We usually do -- it actually generates a big part of it. About 10% of the annual adds I believe are in the month of January. We have -- and use as the following quarters, actually in the following quarters usually in a single low-single-digits per adds. So January in the first quarter is big for us. But we do add generally throughout the year. But first quarter is the largest.

A real quick too in the revenue share for the app. Right now, we haven't nailed exactly down how we're going to revenue share with the franchisees. But in everything we've done and have done in the past, we always look to do what's in the best interest of the franchisees and it's a win-win for both of us, because we want them to push the app as well. So it will definitely be a revenue share, all or portion of for sure. And then drive their ultimate profitability at the store level within, always leads to the fact and the question we get all the time is could you ever raise royalty again in the future. No plans, now to do so, but even more profitable, we can make the franchisees and the ability we have in the future to do something like that.

[Sharon Zackfia, William Blair]

Thank you so much.

[Chris Rondeau, CEO]

Thank you.

[Operator]

Your next question comes from Peter Keith from Piper Jaffray.

[Peter Keith, Piper Jaffray]

Hi, thanks. Good afternoon, everyone. I wanted to just ask about the equipment sales. And I believe you're saying there's a 18 month grace period, I was wondering if that was extended an extra six months recently, I seem to remember or recall previously I think it was at 12-months.

And then furthermore, it sounds like the 15% discount has expired here as we've gotten into the New Year. So, is it possible that the equipment sales actually get a little bit worse on a year-on-year basis before they get better, as potentially some sales have pulled forward into Q4?

[Tom Fitzgerald, CFO]

Yes. Hey, Peter, it's Tom. I'll take that, Dorvin may add to it. Yes, so the 15% discount that we offered expired at the end of the year as we talked about, and I think it was at ICR, that we disclosed that we had extended the initial 12-month extension on the equipment re-equipped, essentially, to 18-months. And again, it was just more of a reflection of our discussions, ongoing discussions with franchisees. We kept the 12-month extension in place for the new stores in the ADA development agreements. But we did elect to add that six months on, and I'm pretty sure that's where we disclosed, it was at ICR.

And I don't think that -- we typically have a couple of periods during the year where we do offer a slight discount on the equipment that's kind of pre-COVID, been doing it for a long time that way. And we'll continue to do that. We sort of stopped the 15% at the end of the year, and kind of more back on our normal cadence. And we'll talk more about where that equipment business goes on our first quarter call.

But clearly, they're still franchisees who are going to reequip their stores, because they want to take care of their current member base, and make sure, especially in stores that have a lot of members that the equipment gets pretty beat up over five, six years that they give those members a great experience. So they're going to protect their assets and make the investment where it makes sense.

[Peter Keith, Piper Jaffray]

Okay, that's helpful, Tom. Maybe a competitive question for Chris. You've talked about 25% of gyms closing, I think you said 17%, you think it's closed thus far. You have any perspective on timing? We've heard that it's maybe a lot of closures as of late as gyms didn't get the normal January signup. So, I guess broadly speaking, can we see an acceleration of closures in '21? Do you see that continuing?

[Chris Rondeau, CEO]

I mean, anecdotal, I think what we're going to see is probably over the next 12 months, I believe as stores have reopened, probably waiting to see what happens with the summer join, I mean, the winter join period, right, kind of to your point. But I think also what's going to happen here is as stores reopen a lot of its deferred rent that the landlords were accommodating through this closed period, and now you're opening up with less revenue and you're opening up with more expense. Now your rent is, rent plus 50% or something like that to make up for your months of background, and maybe also to your lenders as well.

So, I think that's when -- we will make it go, like we have a weak winter. And then your expenses are higher and into the summer months, and we will probably see more closures coming I would imagine.

Time will tell. And I think the other side of that too is, as I mentioned, our usage now is at 70% for the month of January, and we ended December with 75% of last year's workouts. In most of this industry survives, part of that revenue about 30% roughly is from ancillary services. So, each member visit coming in, they're banging on people buying personal training and buying a juice bar drink and buying daycare hours and so on. So not only is their membership down, but now their usage is down, so they're not selling their ancillary profits in either. So, their revenue model is much worse.

[Peter Keith, Piper Jaffray]

Okay. Thanks so much, and good luck, guys.

[Chris Rondeau, CEO]

Thanks, Peter.

[Tom Fitzgerald, CFO]

Thanks, Peter.

[Operator]

Your next question comes from Randy Konik from Jefferies.

[Randy Konik, Jefferies]

Yes, thanks a lot. Good evening, everybody. Chris, I want to focus my questions around the bricks with clicks kind of commentary. How do you think about the ultimate long term vision on how that would work? Obviously, you've got the stores, you've got the PF Plus in beta and the free content. Just how are you -- what's your vision? Like how it all kind of comes together down the line? What would you see as the ultimate scenario? And how this would kind of look in your eyes for the industry?

[Chris Rondeau, CEO]

Sure. Yes. I think, in fact, you might have heard me talking about how we -- right now, we're top five in the iOS store as well as the Android as far as fitness app. So, we think about with now our 13.5 million members, we have about 41% of our total member base has the app today. But new joins, though, we're getting about a 70% half adoption of new joins. So, we're just driving people to the app constantly because of the bricks and mortar part of that component to this. So we're not trying to compete with necessarily other apps in the app store, we're actually driving usage just because they are as part of their membership.

Longer-term, we think we have a platform now where we'd have other content, which is exercise content, and we have live classes as well, and we grow that library for the platform built now that now you start going into offering things around yoga and meditation and diet, nutrition, and cooking and all kinds of other stuff that you cannot build off of. So that hopefully, now we can not only service the members inside the facility, but also at home and also their full circle wellness journey.

If you think about the gyms or bricks and mortar, for example, I mean, all we really where was, hopefully they come to the front door so we can service them. But that's the extent of it. They are not walking into a facility, we can't service the members. And then if they're looking for other components of their wellness journey, they are having to go search for it themselves. And they have four different apps or what have you to close that circle on their wellness journey, whether it's meditation or outdoor running with a bricks and mortar and diet, nutrition. And I think we can close the circle and just be a one stop shop.

Coupled with the fact is most of the industry, especially in the digital space, it was about the fit getting fitter, which is just like the bricks and mortar. The Gold's Gym, the LA Fitness, the CrossFit, Orangetheory, they're not catering to the 80% of the population that doesn't have a gym membership, or to our fact is a 40% of the members that joined that never wanted to join the gym in their life. So we are really getting people off the couch for the first time. And the content is geared towards them too.

So, I think we can really be, not only the attrition component of first timers, people really trying to get healthy for the first time, we can close a circle to them and make it easy for them, but they don't really know where to go. But honestly, we want to ease the burden of [Indiscernible] on their own and do that. And then with the PF Plus subscription, we didn’t leverage that piece.

It also, we haven't gotten into merchandise and nutrition, as far as the nutrition drinks or at home rubber bands and things that traders are using at home that we can sell products through the app. And just there is boatload of things that we can do within the app itself.

And acquisition is always a key component of the app. And right now, between the referrals we're seeing a great outcome. We have big slew of joins coming through, the members are referring their friends to join. We're seeing referral, joins coming through with a great conversion rate. We've seen Black Card upgrades come through the app, the Black Card guests and I log in there, Black Card gets into the app so we can market to them. So, a lot of low hanging fruit now that didn't really exist even a year ago that we're able to leverage to continue to grow members.

And from a competitive advantage, if you think about, back to the talking about the competition with Peter a minute ago, I mean, they're just trying to keep their lights on at this point, and our digital acceleration is so much further ahead of what everybody else is doing in bricks and mortar, that we just, again, builds a stronger mode, they'll get wider mode from our competition once they finally are able to determine how to keep the lights on or not.

[Randy Konik, Jefferies]

Great. So, it's clear that the membership is obviously impact, and you're building this member base of the app its over 40% have the app. How do you think about basically the next leg of your -- because you have the digital capabilities, you're changing the type of equipment you have in the gym. I think I went to the one gym or one of the two gyms that has the equipment where it kind of tracks what I'm doing on the treadmill, and then throws it into my Planet Fitness app. Can you kind of elaborate on that?

And then, I've always seen clear opportunity for you guys to attack the insurance companies or employers directly for more of a B2B relationship and drive that value add to everyone want to get more fit and well. How do you guys think about attacking those different angles going forward? Thanks, guys.

[Chris Rondeau, CEO]

Sure. Yes, good question. So yes, even from the cardio standpoint in the app, and then the visits and check-in in the front desk and your business are also in the app, which you then can export in PDF to your insurance company for reimbursement. And on top of that, you may have noticed any of the QR codes on equipment and strength equipment, so now the QR code reader that's in the app so that members can learn how to use different apparatus within the store.

We're now able to track what people are doing, by age and gender, what machines they're scanning the most, what people like the most. So, that we can, one, is to make sure we have the right makeup of equipment in the store. But also now begin to see what journeys different people are taking, at different market segments, and what's driving results and what's driving 10-year base and what they're doing, so they're getting a better exercise there. They have more fun in the gym because they're teaching and learning more things. So now, the next time somebody joins, we know exactly the journey that put them on and what to recommend in the app, because we know what people like at certain ages and genders, for example.

So it's going to be really interesting to be able to now coach people the right way on what people are doing to the assuming members using the equipment now, and what we know they like. So we know how to get people on their journey, because this industry somebody joins, we don't know what makes people stay necessarily or what makes people leave. We don't know what they're doing in the facility. Now we can see what they're doing in the facility and see what's driving 10 year longer-term. So that's going to be interesting thing that will happen over the future, but it's really exciting to see.

In terms of your insurance question, we reimburse for insurance just like, most other clubs in the industry. But all we are able to tell insurance companies is that somebody checked in, we have no idea how long you were there, we don't know what could you use, we don't know how many calories you burn, we don't know what your heart rate was, and so on. So capturing all that data, we might be the only, at this point, probably the only gym company in the country that can actually supply insurance companies with the data that really matters. Not that they get checked in, with all the other staffs for you that could get to the point where reimbursement comes from insurance, you have to go to clinic if no one else can really supply us the data that we really want. And no one has the money to put -- resources to put together to develop it from the other gym companies.

So more to come on that, but it could be an interesting that we're able to give insurance companies true data that shows true results for their subscribers.

[Operator]

Your next question comes from Simeon Siegel from BMO Capital Markets.

[Simeon Siegel, BMO]

Thanks. Hey, guys, I hope you're all doing well. Chris, just given that Black Card conversation, any change around your thoughts around how you're going to approach Black Card sales? And any view on where the penetration should trend over the year? And then Tom, just to your point, can you help us what percent of members are on frozen memberships now versus previously? Thanks.

[Chris Rondeau, CEO]

Yes, I think on the DC percentage, we weren't pushing the Black Card sales volume, because we wanted to try to grab more volume. So we were doing just $10 sales through the second half of last year. We'll begin probably the fact testing some Black Card sales flagship that we have in previous years here coming up. So I don't think -- I think it should -- I'm not sure it's going to surge forward. But I think we should probably hold our own here for 2021.

[Tom Fitzgerald, CFO]

Yes, Simeon. On the frozen side, and I think we talked to those before, but we typically would only allow people to freeze for medical reasons, or if they were deployed in the military. And with all the pandemic, we were much more forgiving, if you will, on just people weren't comfortable coming back to the gym to freeze their membership once their store reopened.

And really, it's still an insignificant component of our membership base. It's just that the way the math works in that particular calculation, it moves enough to throw it off, but it's still -- and it certainly climbed in Q3 and then into Q4, as a percentage of the member base, as the virus resurged. And thankfully, all the numbers are going in the right direction now, but back then they were going in the wrong direction in terms of cases and deaths across the country.

So, while they were up, they were still a low-single-digit percentage of our member base. And we're encouraged to see now in January that the percent of frozen members, the percent of membership that's frozen is declining. But still, it's relatively insignificant, low-single-digit, it's just spiked up from what it had been historically.

[Simeon Siegel, BMO]

Perfect. Thanks. And then appreciate the unit color. You might just want to pass on this. But just given a lot of the moving pieces and the cost around the gym is different than it was pre-COVID. Any help at all with how you're thinking about any of the different expense line items over the next year, or anything we should keep in mind?

[Tom Fitzgerald, CFO]

In terms of us as a franchisor, or you mean for the franchisees and their units?

[Simeon Siegel, BMO]

Chip away, you want to approach it I guess. I'm just trying to think through as we think about the way for a while and as we run flow through the business hasn't any of the COVID -- what sticks and what goes away? What were the extra savings? What were the extra costs, just anything to keep in mind as we -- yes?

[Tom Fitzgerald, CFO]

I got it. Thanks for clarifying. Yes, the incremental costs, I think way back when we were first in this -- we talked about what the impact could be in it sort of 100 bps on four wall profit. I think we might have said 100, 150 bps. And we were still at that point not really fully reopened by any means, or there was a small percentage of clubs, stores that were reopened. So we were kind of estimating at the time.

Now that we've got 90% of the system reopened for a while now and 80%, 90% we've got much more of a usage pattern, and those costs are really pretty de minimis. Thankfully, in part, because the costs have come down for some of those things that we were buying early and paying high prices, when everyone was trying to buy and we were doing all that we could just to make sure we could secure it, so we could reopen the club and implement our playbook that we established. So thankfully, it's pretty de minimis.

[Operator]

Your next question comes from John Ivankoe from JP Morgan.

[John Ivankoe, JP Morgan]

Hi, thank you. I wanted to talk about the 75 to 100 stores, that were guided to open this year. If you I guess were to add that store growth to '20, you'd have something actually pretty close to a normal Planet Fitness development year, just kind of adding '20 and '21. So first, I mean, is there a reason I shouldn't think about it like that? I mean, in other words, the units backlog being opened in '21, are the units that were basically planned, to be opened in 2020?

And really, the context of the question is, do you see a meaningful pipeline beyond that 75 to 100? Or after that, is it possible that that's where the relatively short-term pause might come, whether from the franchisees intentions, or perhaps even the lenders that have recently given some waivers?

[Dorvin Lively, President]

No, John, I don't see a correlation to, let's say, deferred stores that maybe would have opened earlier, got pushed out, but to be a little bit of that, that it wouldn't be obviously spread out all throughout 2021. So, maybe we had some stores open in January, that would have opened without COVID could have opened in November, December, or something like that. So there could be a handful of that.

But if you go back to the comments we've been making, at least for the last two quarters, and some of the comments I made earlier, what franchisees, they just didn't go out and kept putting new sites into the pipeline. And so what we saw in 2020 was a slowdown in adding more sites into the development pipeline, and then ultimately, obviously, not opening, and slowing down a little bit on some good development. They weren't going to open stores in June or July, if their fleet were closed, they couldn't have any members come into a gym.

So, naturally, things just got kind of pushed out and pushed out or deferred or ways. But in general, most all of the sites that were in development, or most all the sites they got opened, were in development, or certainly on the drawing boards pre-COVID. So, that's why I wouldn’t correlate these together.

But what I would say, though, in terms of you obviously did the math, and it does get that close to what maybe a normal year would have been, is that, it's just that there's a handful franchisees out there that are looking at sites. There's some leases already signed. So, commitments are being made. It's not like, every single franchisee and every single market where they could put a potential location that they've already identified as a potential Planet side. It's not like that they're working in a mall, but they're also looking at some of them. And so we just see it as a, here we are in with one month, a month and a half into the year, versus where we may have been in historical years, when there was a full pipeline of activity going on. Let's say right now, that would be for, September, October, November kind of timeframe, we don't have the same level of insight and the same level activity going on by franchisees.

Now, one thing I didn't say earlier, if we get into, let's just say we get into the summer months, and all of a sudden, the majority of the people that are going to be vaccinated with the medication that are out there, and they're immunized, will franchisees then -- and things are looking normal like normal can be in everyday life. If they really started working, so that’s really hard the risk we have when you get past June, July, August, is it's going to be very difficult to get those open by the end of December.

So, if the pipeline really starts to fill up later in the year, a lot of those sites then will fall into 2022. So, that's I think, hopefully I answered your question.

[John Ivankoe, JP Morgan]

You did. Thank you, Dorvin. We previously talked about new unit volumes, that's not an easy calculation anymore for obvious reasons, like store closures, memberships being frozen, the difficulty, as you've said of attracting new members, which is something different than your cancellations, which were in line. So can you comment either qualitatively or quantitatively just kind of how the fiscal '20 development class has been?

I mean, I know, gyms are at 70% of previous usage system-wide and 80% or 65% or 70%, whatever you want to say, 80% for the markets that have been May. How are those new unit volumes trending in? I guess, as the past the breakeven for those stores, as a materially change based on where the new unit volume might be?

[Dorvin Lively, President]

Yes, I'll take a stab at this first and then maybe Tom can add to it. If we go back and look at the sites we opened in majority of our Q1 last year, because [Indiscernible] really didn't happen till right around the middle of March or so. Our stores reopened late Q4 of '19, and the majority of Q1 of '20. We're following very similar patterns to what it had been historically. So, no change in the model.

And then, when we get into shutdown and all the clubs are closed, and you very well know the rolling opening schedules that we had throughout the year and still now California is so closed, the stores that we open throughout the year, they certainly opened up with fewer members than what they had historically, because a lot of cases we didn't even do presales. And that's a key marketing tactics that we have used in the past, where you would typically get into a virtual presale, anywhere from 60 to 75 days preopening. And you continue that virtual presale, all the way to opening, but you typically roll into a physical presale about 30 days opening. And we didn't do that in very many cases at all last year, just because of COVID and what was going on and the execution and ability to be able to do that.

Now, from the conversations that we have with franchisees and the data we look at, we still believe that there is a significant return to the investment. But if you look at the commentary that we've been making, and some of the comments that Chris made earlier in his remarks, and some of the ones Tom made, is that the amount of usage in the club and the amount of member growth is certainly different than it had been historically. January is a great example or even if you go back to look at the last half of 2020.

But from conversations that we have with franchisees of deploying capital, this is not a situation of not opening stores to get to return, it's a matter of when at the right time, given we're still in the middle of COVID.

[Operator]

Your next question comes from Paul Golding from Macquarie Capital.

[Paul Golding, Macquarie]

Thanks so much for taking my question. I guess the first one goes back to the cadence of any cancellations. I know in the past, you've talked about how there may be a pop from California reopening and we're still seeing closures in California. Should we expect anything around that as far as just to continue to be vigilant for a pop in cancellations when California reopens? And then I have a follow up along the same lines.

[Chris Rondeau, CEO]

Yes, based on all of the different opening cohorts we saw throughout 2020, we would expect in California is finally allowed to open, we probably see the same when the rebuilding resumes. Question is if it's the middle of February and March, for example, or April, is it still, because it's more of winter months and not. Before we were opening clubs in the middle of July. So maybe some seasonality could help them a little bit, but I would imagine once the rebuilding resumes, we would see that spike there. Granted, it's 150 or so store, that's not the -- it’s not a big 500 club public we saw when the other cohorts were opening by chunks.

[Tom Fitzgerald, CFO]

Yes. And I maybe would just add one thing on that one is, we have seen more cancellations during the closure period in California than we saw in the other states during their closure period. I think part of that is because, unfortunately in our scanning of the market, most of our competitors are not following guidelines to remain closed, we are. And so, we believe some of our cancellations are probably going to gyms where they're running and operating, even though they're against the local guidelines, which is unfortunate that the state can enforce the mandates they put out.

[Paul Golding, Macquarie]

Interesting. I appreciate that color. And then my second question is around, I guess, in part the expectation of maybe 75 to 100 stores, but also just the financial impact of maybe a pause in new adds from the extreme weather we've seen lately. Have you modeled that into some of these expectations? Is there anything that we should be considering when we look at that as far as whether being implement and giving some sort of difficulty to net adds in the period?

[Chris Rondeau, CEO]

Yes, I don't see. We haven't seen it. I mean, Texas has had some clubs close down there because of the weather, less no power, or frozen. But we haven't seen any big number changes, that's drastic in this point in joins.

[Tom Fitzgerald, CFO]

Paul, if your question goes to does that affect our outlook on the 75 to 100, the answer would be no.

[Operator]

Your last question comes from Joe Altobello from Raymond James.

[Joseph Altobello, Raymond James]

Thanks. Hey, guys, good afternoon. So, first question is if it's one to clarify something that I think you said earlier, Chris. I think you said 10% of annual net adds are typically occurring in January, is that the right number?

[Tom Fitzgerald, CFO]

It's about a third for the year in Q1, and the highest month of the quarter is January, for sure.

[Joseph Altobello, Raymond James]

Okay. And then in terms of overall membership, I think you guys have said in the past that the hope was to get back to year-end '19 levels, call it the 14.4 million, sometime in early '21. And I'm curious if that's still the case? Or does the 75 to 100 new stores this year impacted at all, the timing of that?

[Chris Rondeau, CEO]

I mean, that would be the hope, but I think it's still too early in the year to figure out where things all pan out to definitely get there. We are finally adding members for our stores, as we mentioned, and we are probably going in the right direction. I think as long as we have sequential member growth, which is the ultimate goal, we really like to get back there soon as we can. I don't know if we'll make it this year. But that's going to be our goal, but I don't think it depends again, depends what happens when California opens and adds to it or if we get re-shutdown. But I think being here just February is hard to really predict it just yet.

[Joseph Altobello, Raymond James]

Okay, great. Thank you.

[Operator]

I will now turn the call over to Chris Rondeau for closing comments.

[Chris Rondeau, CEO]

Well, thanks everybody for dialing in today. And 2020 was definitely a trying year for the industry for sure, but extremely happy with our franchisees and club staff and our corporate staff for staying strong and getting us through it. And we couldn't be happier with that the strength of this model has gotten us through that year and into Q1 here, without any closures because of COVID which is a testament to the strength of our franchisees and the business model at hand. And it’s a questions of a matter of if, but when. And our competitive advantage coming out of this with more closures in the industry and trends in the industry here of a lot of different players out there will just give us more runway and more room to exceeded to grow to that 4,000 unit potential and possibly more and so on.

I do believe that COVID will definitely -- people will walk out of this with a definitely a more appreciation for health and wellness, and taking better care of themselves in the future. And the fact that 20% of the U.S. even has a gym membership and that's only moved 5% in 25 years. I think it's a good chance this could all pan out move this 5% next five or 10 years, so I think could accelerate that greatly.

So thanks again for dialing-in, and I look forward to our next call. Thank you.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.