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.

Thanks, Ben, and thank you all for taking the time to join our call today. I'll start today's discussion by reviewing Q2 results and network performance, and then provide detail on revenue recognition and key accounting protocols. I will also walk through a high level build to run rate revenue and adjusted EBITDA and conclude with a brief summary of our financial guidance. Starting with Q2 results. Second quarter total revenues increased by 11.9% to 30 million compared to 26.8 million in the prior period. The increase was primarily driven by a significant increase in equipment revenues which increased 74.8% to $10.9 million compared to $6.3 million in the prior period. Franchise revenues decreased by 7.2% to $19.1 million from $20.6 million in the prior period after adjusting for the cumulative franchise revenue catch-up of $3.5 million in Q2 2021 from the recognition of revenues previously unrecognised under promotional deals Franchise revenues increased 2 million, an increase of 11.9% from the prior period. Equipment revenues increased by 74.8% to 10.9 million from 6.3 million in the prior period. The increase was primarily driven by the delivery of approximately 100 well packs during the quarter. During the quarter, new studio openings equaled 92, increasing total studios to 1,958, Net total franchises sold declined by 173 to 3,834 due to cancellations of multi-studio agreements executed during Q1, which I'll explain momentarily. Next, we will discuss the results by geography, starting with the US. US franchise revenues declined by 6.2% to $12.1 million, compared to $13 million in the prior period. The decrease was primarily attributable to one-time adjustments of $1.3 million and $0.9 million during the three-month end of June 30, 2021, related to deferred collection of fees required in certain states and limited-time promotional deals, as described in Note 2 of the financial statements in our 10Q. This was primarily offset by an increase in total studios in the United States, driven by the increase in the number of franchise sales, as well as the increase in studios opening in the United States during the second half of 2021. During the quarter, total studios opened increased by 56 and total franchises sold declined by 175 in the region. The franchises sold in the US were comprised of 132 gross franchise sales, less 307 terminations during the quarter. The terminations were due to the inability of franchisees to access the financing facility we announced at the end of Q1 2022. As I'll describe later in the call, we did not recognise any revenue associated with the franchise agreements that were terminated as a result of the inability to access financing. Despite these terminations, we remain encouraged by the fact that our franchise partners continue to show strong interest in expanding their portfolios. We believe that the demand will convert into franchise sales in the future, in particular if we're successful in assisting our franchise partners in accessing capital. Compared to the prior year, total franchises sold in the US increased by 848 total franchises sold. or 61%, to 2,227 total franchises sold as of June 30, 2022. Total open studios increased by 227 total studios, or 41%, to 783 total open studios.

U.S.

equipment revenue increased by 44.9% to $6.6 million, compared to $4.5 million in the prior year period, primarily driven by the increase in equipment and merchandise deliveries. The increase in deliveries was driven by the purchase from studios under development agreement entered into during 2021, as well as delivery of required top-up pack equipment. Next, let's discuss Australia. Australia franchise revenue increased by 29.2% to 3.5 million compared to 2.7 million in the prior period. The increase was primarily attributable to the increase in the number of franchise sales in Australia and the acquisition of Vive during the second half of 2021. During the quarter, total open studios increased by 11 and total franchises sold declined by 1. Compared to the prior year period, total studios increased by 46, or 7%, to 674, and total franchises sold increased by 18, or 2%, to 803. Equipment sales in Australia increased by 59.5% to $1.1 million, compared to $0.7 million in the prior year period, driven by increases in equipment deliveries and the launch of FS8 and associated equipment deliveries for the FS8 studios. Finally, let's discuss our Rest of World segment. In the Rest of World, franchise revenue decreased by 29.5% to $3.5 million from $4.9 million, primarily attributable to the impact of one-time adjustments related to limited-time promotional deals of $1.2 million, as discussed in Note 2 of the financial statements in our 10Q, and credits provided to studios impacted by COVID during the second half of 2021 which are amortised over the franchise's remaining contractual term, partially offset by the increase in the number of franchise sales as well as the increase in studio openings in ROW. During the quarter, total studios increased by 25 studios and total franchises sold increased by three. Compared to the prior year period, total studios increased by 130 or 35%, 501, and total franchises sold increased by 167, or 26%, to 804. Equipment revenues for ROW increased 215% to $3.3 million compared to $1 million in the prior year period, driven by the purchase from studios under development agreements entered into during 2021 and the delivery of required top-up equipment. Next, I'd like to discuss metrics detailing our franchise network performance. Global same-store sales growth for the quarter increased by 6%, including same-store sales growth of 20% in the US and 56% in ROW. Global system-wide sales increased by 23% to a record $127 million in the second quarter. US system-wide sales increased by 44% to a record $58 million in the second quarter. and rest of world system-wide sales increased by 100%, to a record $27 million in the second quarter. Global system-wide visits increased by 5%, with a 15% increase in US system-wide sales, and a 95% increase in rest of world system-wide visits in the second quarter. On our last call, COVID-related restrictions in Australia had been lifted, resulting in improved operating performance. But subsequently, during the second quarter, the government reinstated restrictive policies that negatively impacted our results in the region. As a result of these restrictions, Australia system-wide sales decreased by 15% and system-wide visits decreased by 27%. Despite these declines, we believe the system-wide visits and same-store sales growth in Australia will improve as the COVID restrictions are lifted. Moving to gross profit. which decreased by $2 million or 9.1% to $19.7 million from $21.6 million in the prior period. Gross profit margin of 65.5% represented a decrease from 80.6% during the prior year period, largely due to a higher mix of lower margin equipment, gross profit during the current year period. Franchise gross profit declined 8.9% to $17.4 million compared to $19.1 million in the second quarter of last year. After adjusting to the cumulative franchise revenue catch-up of $3.5 million in Q2 2021 described above, franchise gross profit increased $2.2 million, an increase of 14.5% from the prior period. Equipment and merchandise gross profit declined 10.6% to $2.2 million compared to $2.5 million. Equipment gross margins were 20.6% compared to 40.2% in the prior period. The decline in gross margin is primarily attributed to the increase in equipment costs, which we believe we'll be able to pass on to the franchisees in future quarters. SG&A expenses were $52.8 million compared to $18.6 million in the second quarter last year. The increase in SG&A expense was primarily due to significant one-time expenses, including legal matters, transaction costs, including costs with the Fortress financing facility, relocation expenses, stock-based compensation and COVID-19 concessions. Reflecting the savings of our headcount and our operational expense reductions that occurred in Q3, we expect normalised SG&A to be approximately $15 to $20 million on a quarterly basis. I'll discuss this in more detail in a few minutes. Net loss was $34.9 million. Adjusted EBITDA was a loss of $7.3 million compared to a positive $10.7 million in Q2 2021. As noted above, this was primarily due to the increase in SG&A costs during the period. Now turning to the balance sheet. we ended the quarter with approximately $8.5 million of cash and cash equivalents, and we had approximately $61.6 million drawn on our revolving credit facility. In recent weeks, we drew down additional borrowing under the revolver to bolster our liquidity position ahead of planned one-time expenses associated with the strategic reorganisation. As of August 15, we had total cash on hand of approximately $14 million, and total borrowings under the revolver of approximately $83 million. As Ben noted, we are comfortable with our liquidity position and path to cash flow generation in Q4 and going forward. It's very important to stress that we believe that we have sufficient liquidity and will generate sufficient cash flow through the remainder of the year to meet our mandatory obligations and operating needs. I will now provide commentary which I think will help address questions we often receive regarding the types of commercial agreements we generally use, the implications on revenue recognition and guidance for modelling the business. Starting with franchise revenue and sales types. We have two categories of franchise sales, franchise agreements and multi-unit development agreements. With regard to the franchise agreements, these are with single and multi-unit owners who sign standard franchise agreements. These agreements generally apply to franchisees that own between one to five franchises. Under these agreements, franchisees pay an initial establishment fee for each agreement and agree to standard terms such as fee start date and equipment ordering date. We generally begin to charge monthly royalties in month nine of the agreement and recognise revenue beginning one month after the franchisee signs a franchise agreement. This type of agreement accounts for approximately 95% of our total studio footprint and 55% of our total backlog. The second type is a multi-unit development agreement where franchisees are granted the right to develop multiple territories within an area defined by that development agreement over a certain period of time. usually three to five years. These deals typically require an upfront payment. As part of the development agreement, the development partner enters into a single franchise agreement for each territory when development commences. Finally, earlier this year, in connection with the previously announced financing facility, we entered into multi-unit development agreements to select existing franchisees that contemplated access to new financing facilities the company had arranged. As we touched on earlier, the negative net franchises sold during the second quarter was related to the termination of a number of these commitments by our franchise partners. As of today, we have approximately 300 remaining multi-unit development agreements that contemplate access to these financing facilities. However, I do want to note that one, we continue to explore financing options for our franchise partners and two, a number of these franchise partners are working with unaffiliated third-party lenders to secure financing to support their development plans. As a result, we do not currently believe that the entire remaining balance of these commitments will be terminated. We do not recognise any revenue on multi-unit development agreements until an underlying franchise agreement is executed. Thereafter, revenue recognition is in line with that of our regular way franchise agreements. This type of agreement accounts for approximately 5% of our total studio footprint and 45% of our total backlog. Going forward, we will provide updates regarding when a multi-unit development agreement converts into a franchise agreement. Now moving on to SG&A. As we disclosed in our strategic update on July 26, as a result of our changing business conditions and the inability for our franchisees to access our previously announced financing facilities, We have made a number of reductions to our cost base in an effort to right-size the business. The changes include a reduction to our global workforce and a reduction to our non-headcount related SG&A expenses. Regarding headcount, we made the tough decision to reduce our workforce by approximately 110 full-time employees or approximately 45% of our full-time employee base. We expect that this will help bring target normalized headcount costs to approximately 7 to 10 million per quarter. We expect this adjustment to bring the size of our global workforce and our headcount related SG&A expense in line with the cost base at the time of our IPO. Our most substantial headcount reductions were related to non-core concepts, channels and business operations that we have deprioritized. We are also targeting a reduction in non-headcount SG&A of approximately 50% by the end of 2022. The largest reductions will come primarily from the reduced investment in non-core concepts and channels, lower marketing expenses and a decrease in professional service costs. We believe this will help bring the target normalised operational expenditure, excluding headcount, to seven to 10 million per quarter. and we will continue to evaluate additional levers we can pull to further reduce non-essential costs. With these cost reduction measures being implemented, we're targeting overall normalised SG&A expense at between $15 to $20 million per quarter. I also want to note that despite these cuts, we will continue to prioritise investment in innovation and fitness programming that will allow us to maintain our competitive differentiation and continue to deliver the world's best workout. Next, I'll provide some commentary on high level build to reoccurring revenue and adjusted EBITDA for the business on a normalized basis. Based on the units we already have open today, we generate approximately 20 million per quarter in reoccurring franchise revenue, which will grow as we continue to expand our franchise network. On an annualized basis, This equates to approximately $80 million of reoccurring franchise revenue. After accounting for operating expenses of roughly $60 to $80 million a year, we currently expect the business to be profitable on total adjusted EBITDA basis before including any contribution of world pack and top-up pack equipment, ancillary product revenue, or the contribution of additional franchise revenue growth. This does not include any one-time or non-recurring expenses. It goes without saying, but with a sold but not yet opened backlog of approximately 1,500 total franchises, excluding any multi-unit development agreements that contemplate access to the financing facilities, we believe we have a meaningful opportunity to drive significant revenue and earnings from the sale of well-packed and franchised revenues as these studios open. Again, this analysis is for illustrative purposes only, but hopefully it provides the basis for how to think about run rate adjusted EBITDA on a zero studio growth basis following the cost reduction initiatives. Finally, moving on to guidance, we are maintaining the guidance provided with our pre-announcement that was released in July. We continue to expect full year net franchises sold between $350 and $450. Full year net initial studio openings between 350 and 450. Full year revenues between 120 million and 130 million. Full year adjusted EBITDA between 25 million and 30 million. As a reminder, a reconciliation of non-GAAP measures to the most comparable GAAP measure and definitions of these indicators and our key performance measures are included in our quarterly report from our 10Q and in our earnings release. In conclusion, we've reset our growth outlook and right-sized our cost structure. As discussed, we believe these decisions will allow us to prioritise profitability and free cash flow generation. We also believe that these changes will help position the company for long-term sustainable success. I'll now turn the call back over to Ben for closing remarks.

Thanks, Chris. I'm extremely confident and excited about the future of F45s. I want to reiterate the importance of the decisions we have made, and we believe that these were necessary to put the business on the right footing for sustainable growth into the future. In summary, we are focusing on the key immediate priorities of, one, our liquidity and capital requirements, focusing on cost reduction and a return to core business. Two, our employees, leading and managing them successfully. Three, the health of the franchise network. with the aim of achieving a business that delivers sustainable growth, profitability, and cash flow generation. With that, I'll turn the call over to the operator for Q&A.

If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. We do ask that you limit yourself to one question and one follow-up. We will pause here briefly as questions are registered. Our first question comes from the line of John Heinbuckle with Guggenheim. Your line is now open.

I wanted to start with, of the 300, I guess 300 studios sold, right, that might still be subject to cancellation, do you have any sense, kind of worst case, what that would be, you know, would be half of that 300. And then secondly, where do we stand with the, I know last year, right, you had three large mud agreements totaling 450 studios. Where do we stand with those in terms of how many have opened and how many you think might open, you know, this year and next year?

Sure. Thanks, John. I'll take that one, Ben. Of the 300 that remain, Just to put a conservative approach on it, our guidance of 350 to 450 sales for the year, that assumes that all 300 would cancel. Again, per my prepared remarks, we're not expecting that. The franchisees are the ones that have remained in those arrangements, are committed to finding alternative financing arrangements and we'll work with them on developing a longer development runway for them if required. But I think there will potentially be some drop-off, but we're certainly not expecting the full 300 as we sit here today. In regards to your second question, I believe you were talking about the club franchise group and the 300 studios that they are required to roll out over 36 months. Look, they're doing a phenomenal job. I think I mentioned last quarter they've gone with an acquisition strategy. So they've spent, you know, a lot of effort and time in acquiring actual operating studios. And now they're really starting to meaningfully this quarter and next roll out their greenfield locations. It's our expectation that they'll have by the end of the year, you know, 100 studios open that they're operating. And it's also expectations that they're honoring all the terms of their agreements, paying all of their fees when they're due. And certainly, given the pace that they're accelerating at now, I feel very confident that by the end of the 36-month period, they'll have their 300 units open.

And then maybe high level for Ben, right? You know, one of the things I think maybe got you in a little bit of trouble, right, was the pace of expansion, right? Taxing the organization. You know, as you think about, you have to start thinking about 23 soon, you know, as you think about a go forward basis, what's the right level of expansion, right? Obviously there'll be something that the organization and the balance sheet can handle, you know, and not, not kind of tax it, you know, as we've seen it happen here over the past six months. What's your thought on that? If I,

I think we're comfortable with that 350 to 450 sales number and openings number for the year at this stage. I know we went on that fairly aggressive multi-unit franchise sales strategy backed by funding. I think we wouldn't look to do that again so heavily in the short term if the right opportunity presented itself with a vanilla style facility that we could utilise on behalf of our franchisees we would look to perhaps

boost the growth on that basis.

Thank you.

Our next question comes from the line of Warren Chang with Evercore ISI. Your line is now open.

Thanks. Good afternoon. I was wondering if you could just give a bit more self-reflection on what really led to this strategic reorganization. What were the lessons learned from an organizational perspective, and what are the key priority areas for change for you and the team going forward?

I'll take the first part of the question, and then I'll hand it over to Ben for two and three. Look, we really identified a need from approaches from our top franchisees in our network to access the capital so they could accelerate their growth. from three to five to 10 to 20 locations. And we really like that idea because having your best operators help fill out your TAN is a really efficient way for us to scale because they know the winning formula. So, you know, we obviously want to keep this business asset light. So we went on the path of, so we didn't want to use our own balance sheets. in full force. So we went on the path to creating a bespoke financing solution for these franchisees and threading the needle between, you know, the top tier franchisees, real estate and financing. I think we did that quite successfully, but unfortunately, you know, we had the whole, you know, organisation positioned around that occurring. And obviously the market cap provisions of our arrangements with Fortress kicked in and we were unable to let our franchisees draw on those financing facilities. So that was really what was the catalyst for the market reset and I think that we have a fantastic business here and our ability to continue to grow even without bespoke financing facilities is proven and really strong. But I'll hand it over to Ben to address the second and third part of the question.

Thank you. Just in terms of what we think the priorities and the opportunity is going forward, I think the reset in itself is an opportunity for us to reset as a conservative growth company. That will allow us to refocus on the core business and perhaps put some structure and disciplines in place that will put us in a position to make the right decisions for the long-term growth of the business and put us on the right footing.

Got it. Okay. And my follow-up was, I was wondering if you can get a little more color on the underlying studio performance. Would you be able to contextualize for us where membership or visits or AEV sit today versus pre-pandemic levels on a per-studio basis?

Sure. So if we focus on our U.S. segment, obviously, you know, we've got our statistics out there in this release. But I think probably the one statistic that, you know, we haven't historically put out there public since the S1 is AUV. You can see across the US network with system-wide sales, same-store sales and visitation, there's been meaningful growth there. And I'm happy to also inform you that our AUV growth here in the US is really strong as well. It's at a level that is above The run rate that we previously disclosed in the S1, currently the US average AUV is around $380,000 per unit. So this is also in line with where we're on our investor site. We also guide to a target year three AUV of $380,000. The current AUV in the US network is $380,000.

Thanks. That's really good insight. Good luck.

Thanks.

Thank you. Our next question comes from the line of Jonathan Komp with Baird. But first, as a reminder, it is star 1 on your telephone keypad to register for questions. We do ask that you limit yourself to one question and one follow-up. Jonathan, your line is now open.

Yeah. Hi. Thank you. I want to just follow up on the G&A spending that you're targeting. If I think about traditional spend as a percentage of system sales, the run rate you're targeting still looks quite high. So could you just give a little more color in some of the bigger buckets? I know you broke out headcount and other operating, but what else are you planning to spend on? And are there any ways to tighten the spend more so than what you've communicated? And then On the balance sheet, could you maybe walk through a little bit more? Obviously, the last few quarters don't look asset-light so much here. So could you walk through, especially from a working capital standpoint, some of the major moving parts on the balance sheet? Thank you.

Sure. Thanks, John. Yes, there's definitely other areas of G&A that we can pull back on if required. I think the important thing to note is that we are targeting the low end of that. That range, that is where we're targeting. And I think that there is absolutely some other avenues within G&A that we can pull back on if required. This G&A reduction gets us back into a position where we should be generating around $10 million a quarter in free cash flow by the end of Q4. And we think that's a sustainable level in terms of We don't want to just apply the brakes and be an annuity business. We want to continue to grow. But if required, there are some other areas that we can pull back on. But we're continuing to invest in athletics and the product. We're continuing to invest in network performance and network health and education. We think they're hugely important. And look, as we continue to grow, we want to target that 17%. SG&A margin. So that is what we're going to be working towards as our revenues grow. I think what we're building here is a scalable, a platform for scalable growth in the future. In relation to the balance sheet and working capital, obviously the heaviest spends that we've had this year related to equipment and inventory that we did, we've purchased around $40 million of equipment, gym equipment, which has been a real drain on the business. However, we can obviously, we do have the ability to turn that and deliver that equipment to our franchisees. It is evergreen equipment. And it is, you know, every year we just add to our equipment packs. So it's never going to have an obsolete issue. But when we sell that to our franchisees, we get to obviously participate in the margins. on those sales. So I think the working capital as it relates to equipment is probably the biggest call out that I have.

And then just one follow up on the adjusted EBITDA guidance. I know you delivered 10.3 million in the first half. Second quarter was negative. Can you share more detail on what you're assuming to get to 25 to 30 million for the year and Are you at a point where the business is stable and easy to project or sort of what's your confidence level in being able to project a business sitting here today?

Yeah, look, we've really, we obviously acknowledge that, you know, we only get one chance of bringing our guidance down and I think we did that in a very conservative way in that we've built a visible pathway to achieving that guidance. So we feel very comfortable with the guidance that we have out there. I think you'll see an improvement in our results in Q3. And I think I've given a range on free cash flow generation in Q4 of around $10 million. So I think that you'll also be able to extrapolate that we should be fine on an EBITDA range. Obviously, if you're looking at the revenue line, I think given where our just our franchise, reoccurring franchise revenue is run rating at, that we feel comfortable that we'll certainly be well in range of our revenue guidance as well.

Okay. Understood. Thanks.

Thank you. Our next question comes from the line of John Ivanko with JP Morgan. Your line is now open.

Hi, thank you. Just trying to look at this high level, just in the last six months, I think the cash, or maybe I think I have this through the middle of August at this point, but the cash fell by $28 million. Inventory is up by something like $24 million. That's a six-month number. And Revolver was up $83 million. So you have really become a very intensely user of capital and very specifically the revolver. So I just wanted to, I guess, you know, highlight or understand the importance of that revolver, the stability of it. I don't know what the covenants are or not, but, you know, I mean, if you can, you know, just kind of highlight like various triggers that we should be sensitive to, you know, that would, you know, make some of that obviously very essential paper, you know, come due in the relatively near term.

Yeah. Thanks. We were, uh, aware that SG&A was increasing. We obviously were anticipating approximately a $75 million injection by the way of establishment fees and well-packed fees via the access to the financing facilities. We have quickly modified our business back to, as Ben said in his remarks, the core F45 business, so pausing any spend on other modalities and products that we were aggressively trying to grow. We've obviously, as you can see, we've paired our cost base back to, quite frankly, where we were at IPO as it relates to headcount and spend. So we've been able to pull those levers back really quickly to adjust for this change in our business. And we are through a lot of the one-time expenditure as well. So we had a lot of transaction-related costs in the first half of the year. And we also had some legal matters that have also impacted our cost base as well, which hopefully we're through those. So we're feeling really comfortable with our ability to have this business in a few short weeks, spinning off through cash flow again. In relation to our debt covenants, We are, on an LTM basis, we do not come anywhere near tripping our leverage ratio and our fixed charge ratio. We feel very comfortable with our place, with our facility, with JP Morgan and our lending group.

Can you remind us of those numbers, and especially since it's LTM, you know, that gets harder, I guess, over the next couple of quarters, not necessarily easier?

Yeah, even under our current run rate scenarios, we don't get anywhere close to tripping covenants. And in fact, obviously, we will be looking to, as we're generating free cash flow, we'll be looking to repay down that facility in the future quarters.

Thank you. Our next question comes from the line of Max Raklinko with Cowan. Your line is now open.

Great. Thanks a lot. So first question, just when we think about the pre-IPO model that we were all looking at previously, was financing always a part of the growth path or when did that change?

Yeah, so we were always

We're always mindful of the fact that if we could combine financing with real estate and franchisees, that that would really enable us to obviously accelerate our growth. And that's been a strategy that we've been working on now for many, many months. Got it.

Okay. And then I guess as a follow-up, so when we think about 3Q versus 4Q REVs and EBITDA margins, Anything that we should be mindful of? Should margins accelerate sequentially? How should we think about, you know, 3Q versus 4Q split? And then separately, how long do you think it would take you to pay down the revolver?

Thanks a lot. Max, sorry, did you say equipment margins or EBITDA margins?

It does seem that Max had disconnected.

Okay.

I think moving through Q3 and Q4, we expect our EBITDA margins to be more in line with what we would historically have thought in that 30% range by Q4. In respect to paying down the revolver, we're going to, you know, we have to continue to assess our capital allocation and that's something that we will be focusing on in the coming quarters.

There are currently no additional questions waiting at this time, so I pass the conference over to the management team for closing remarks.

All right. Thank you, everyone, for joining us today. We look forward to speaking with you in the near future.

That concludes the F45 Training Holdings Incorporated second quarter 2022 earnings call. Thank you for your participation. You may now disconnect your line.