F45 Training Holdings Inc.

Good afternoon. Thank you for attending today's F45 Training Holdings Incorporated second quarter 2022 earnings call. My name is Megan and I'll be your moderator for today's call. All lines will be metered during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star followed by one on your telephone keypad. I would now like to pass the conference over to our host, Bruce Williams with ICR. Bruce?

Good afternoon, everyone, and thank you for joining the call to discuss F45 training second quarter results, which we released this afternoon and can be found on the investor relations section of our website at F45training.com. Today's call will be hosted by Interim Chief Executive Officer Ben Coates and Chief Financial Officer Chris Payne. Before we get started, I want to remind everyone that the management's remarks on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on the current management's expectations. These may include, without limitations, predictions, expectations, targets, or estimates, including regarding our anticipated financial performance and liquidity. And the actual results could differ materially from those mentioned. Words such as may, will, should, expects, plans, anticipates, could, intends, target, projects, contemplates, believes, estimates, predicts, potential, or continue, or negatives of these words and variations of such words and similar expressions are intended to identify such forward-looking statements. Those forward-looking statements involve substantial risks and uncertainties, many of which may be outside of our control that can cause the actual results to differ materially from those expressed in or implied by such statements. These factors and uncertainties, among others, are discussed in our filings with the SEC. We encourage you to review these filings for a discussion of these factors, including in our earnings release, our annual report on Form 10-K, for the year ended December 31st, 2021, and our file quarterly report on form 10Q for the quarter ended June 30th. You should not place undue reliance on these forward-looking statements which speak only as of today, and we undertake no obligation to update or revise them for any new information. This call will also contain certain non-GAAP financial measures such as adjusted EBITDA and free cash flow, which we believe are useful supplemental measures that assist in evaluating our ability to generate earnings and facilitate period-to-period comparisons of our core operating results and the results of peer companies. Such non-GAAP measures should be considered in addition to and not as a substitute for the comparable GAAP measure. Reconciliations of these non-GAAP measures to the most comparable GAAP measures and definitions of these indicators are included in our earnings release. With that, I'll turn the call over to Ben.

Thanks, Bruce, and thank you, everyone, for joining us today for F45's second quarter earnings call. Three weeks ago, we announced a strategic reorganisation plan that addressed several key updates that are underway at F45. These updates include a CEO transition and a corporate reorganisation and cost reduction plan, all of which are designed to support the company for the next chapter of growth and position F45 for long-term sustainable success. I'm both honored and excited that the board has placed their confidence and trust in me to lead the company during this important transition period. While the strategic reset has been difficult, we believe that it aligns the company more closely with macroeconomic and business conditions and will ultimately position the company for stronger profitability and more consistent growth in the years to come. In addition, the management team and I remain fully committed to our core mission, which is to offer the world's best workout to help change lives, and to create opportunities for individuals who are passionate about fitness and entrepreneurship. By delivering on these objectives, we believe we can create tremendous value for our shareholders. As mentioned in the strategic update, the board has commenced a process to identify candidates for the permanent CEO position. Until this process concludes, I will be serving as interim CEO, and in this role, I intend to be deeply involved in the day-to-day operations of the company. To that end, I've based myself at our headquarters in Austin, Texas, where I'm currently working closely with the rest of the management team. I've been working with the team on the various priorities and opportunities facing the company. While I already have a great deal of passion for F45, having served on the board over the last year, I'm now even more enthusiastic about the many opportunities we have ahead of us. Today, I will share some perspectives with you on the following near-term business priorities. liquidity and cash flow generation, two, our employees, and three, the franchise network. Starting with liquidity and cash flow generation. My key priority since assuming the role has been to assess the liquidity requirements for the business and report back to the board, which I will be doing on a regular basis. I have, alongside our CFO, Chris Payne, assessed our capital structure and liquidity position, And I believe that we are sufficiently capitalized to successfully implement the strategic changes we have announced and can effectively navigate the period ahead. As Chris will discuss in more detail, we expect the benefits of our recent actions to kick in the fourth quarter where we believe we will start generating positive free cash flow. One of the most attractive aspects of our business is our capital light, high margin financial model. On a normalised basis, the business is built to generate strong, positive free cash flow and strong profitability. As you are aware, we had negative free cash flow during the first half of the year. The primary reason for the negative free cash flow during this period was due to significant investments in inventories and global headcount to support our previous new initial studio opening strategy, where we connected our best franchisees with readily accessible capital and real estate. Our decision to make these investments was partially due to the $250 million of committed capital from two financing facilities we announced earlier this year. However, recent market conditions and share price performance meant that we could not make this facility available to our franchisees. As a result, we have made the decision to terminate the $150 million financing facility which we announced in an 8K filed today. Underpinning our immediate focus on liquidity and cash flow generation is a focus on cost reduction and our core business. As we announced three weeks ago, we have made significant reductions to global headcount to align our cost structure to a more conservative growth outlook. In addition, we have made the strategic decision to reduce or defer investments in non-core channels as well as our more nascent concepts in order to concentrate our resources on our core F45 business. Although we continue to have confidence in the long-term opportunity to deepen penetration of F45 across adjacent channels, as well as expand the footprint of other concepts, we have chosen to delay these investments until we demonstrate the core pillars of our financial model, sustainable growth, profitability, and cash flow generation. While these were difficult decisions, we believe they are appropriate to right-size the cost structure and position the company for success. Finally, we remain comfortable with our liquidity position and the path to positive cash flow generation by the fourth quarter of this year, which Chris will expand on shortly. Next, our employees. The second of my immediate priorities has been to meet with management and employees. As an active board member over the last year, I was already familiar with the key executives and operations of the business. We believe that we have built good working relationships among all members of the executive team, many of whom have worked for F45 since establishment. My job is to provide leadership to this team and establish a structure and environment that allows these experienced business managers to continue to do what is their passion, which is to successfully manage and grow the F45 business. I am very happy with what we have achieved in a short period of time and the renewed enthusiasm and energy within the team. One of the key concerns with leadership and organisational change is the impact on staff morale and the consequential risk to retention. To this point, we have worked with our management team to communicate regularly with all staff and have put in place a communication plan and retention package to assist with maintaining our key talent. I'm pleased to report that feedback from the team has been very positive and that morale and general enthusiasm for the business is high. They are excited and energised about the focus on our core business and have confidence in our leadership. We are doing everything we can to support employees that have been impacted by the recent cuts and to also support the ones that have been asked to assume broader responsibilities. We have provided an outplacement service that will work with departing employees until they find a role and a counselling service for both exiting and remaining staff. I want to personally note the professionalism of all members of the F45 family that have been impacted by the changes. It is important to reiterate that although we have reset future growth expectations for unit openings and sales, we do not believe that these changes will impact current studio operations. The third key priority for us is the franchise network. Over the last few weeks, the senior management team and I have had many one-on-one conversations with franchisees and have provided updates to the network more broadly. The general sentiment from our franchise partners remains very positive. In fact, there has been much unsolicited positive feedback and support from our network and their F45ers who remain as committed as ever to the business. They feel both excited and confident about the future. Above all, we remain committed to our franchisees and are refocusing on supporting the performance of their studios, as well as providing them with the resources to help them drive profitable growth. Despite distracting headlines following the recent announcements, I am extremely pleased by the robust consumer demand for F45 and our franchise partners are as energized as ever, demonstrating that our underlying business fundamentals continue to remain as strong as ever. During the quarter, system-wide sales increased 23% globally as compared to Q2 of 2021 to a record $127 million, with the United States segment experiencing 44% growth. Additionally, system-wide visits increased 5% globally and 15% in the United States segment as compared to Q2 of 2021. These results were strong despite global macroeconomic headwinds and continued pressure on our Australian studios due to closures from COVID restrictions. On a personal note, I've met with franchisees across the regions, and recently I had the opportunity to attend several F45 sessions with our board and management at our local franchisee studios. I can report that all parties are engaged and re-energised about the business. I now more deeply appreciate the passion for the brand and the unique quality of the underlying product that is F45, which gives me the confidence to know that this business is built on a solid foundation and we believe it will endure and thrive. Fears of change give people the opportunity to demonstrate their loyalty and commitment. I am thankful for the renewed support and efforts I have received from our entire team. With that, I will turn over the call to Chris.