F45 Training Holdings Inc.

Ladies and gentlemen, thank you for your patience and thank you for attending today's F45 Training Holdings Incorporated third quarter 2022 earnings call. My name is Amber and I will be your operator for today's call. All lines will be muted 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 one on your telephone keypad at any time. It is now my pleasure to hand the conference over to our host, Bruce Williams. Managing Director of ICR Investor Relations. Bruce, please proceed.

Good afternoon, everyone, and thank you for joining the call to discuss F45 Training's third 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 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, targets, 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 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 filed quarterly report on Form 10-Q for the quarter ended September 30th. We 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. So, non-GAAP measures should be considered in addition to and not as a substitute for the comparable GAAP measures. 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 will turn the call over to Ben.

Thank you, Bruce, and thanks, everyone, for joining us today for our third quarter earnings call. I'm pleased to share our Q3 results with you today, which came in above expectations on revenue and adjusted EBITDA. In addition, I want to thank our team and our franchise network for their ongoing commitment towards 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 various stakeholders. During the quarter, we implemented several organizational changes, which we discussed on our last call, including a significant headcount rationalization and cost reduction plan that were important to aligning the business more closely with current macroeconomic and business conditions. These changes position the company for stronger profitability and more consistent growth as we move forward. Despite the uncertainty regarding the macroeconomic backdrop, consumers continue to prioritize health and fitness as an essential part of their daily lives. F45 remains a critical partner for our members in helping them achieve their goals. To this end, membership trends remain strong as total membership continue to grow globally during the quarter, reaching new highs. We have also seen continued member engagement globally in line with historical trends, which demonstrates the importance of F45 to our members in their daily routines. These trends ultimately benefit our franchisees who continue to engage in discussions with us around growing their studio footprint. Today, I will recap our third quarter results and share with you an update on our business, including commentary on our recent corporate reorganization and cost reduction strategy, our liquidity position, the health of the franchise network, and other strategic updates. Then I'll turn it over to Chris to provide a summary of our financial performance during the quarter, as well as a summary of our full year financial guidance. We will then conclude with Q&A. Starting with results. For the third quarter, total revenues increased by 8% to $29.3 million compared to $27.2 million in the prior year period. Total system-wide sales increased 31% and same-store sales increased 15%. Adjusted EBITDA for the quarter came in at $6.1 million compared to $10.1 million in the prior year period. Chris will expand on our Q3 results during his remarks. Moving on to our corporate reorganisation. During the quarter, we completed the previously announced corporate reorganisation, which includes a significant reduction in our headcount, as well as the reorganisation of certain departments to streamline our operations. While these initiatives are never easy, I'm pleased to report that the changes have been successfully implemented, which has resulted in meaningful ongoing cost savings. Importantly, the transition has not had any significant disruptions on the core business and our corporate team remains focused and fully aligned around the company's strategic priorities. Moving on to liquidity. I'm pleased to report that we're on target with our cost reduction plans. Following the recent cost optimization measures, we are now operating within our targeted level of operating expense on a normalized basis. Chris will expand on this shortly. As we discussed on our last call, we remain focused on pursuing a disciplined financial strategy that prioritises profitability, cash flow generation and sustainable growth. As a franchise business, our model is fundamentally capital efficient and positions the company to generate strong margins, robust free cash flow and solid returns on capital on a normalised basis. Following the implementation of the cost reduction plan and our more disciplined financial approach, we believe we are well positioned to capture these financial benefits. Next, I will provide an update on the health of our franchise network. During the quarter, total system-wide sales increased 31% compared to the prior year period to a record $131 million, driven by broad-based strength across the globe. In the US segment, system-wide sales increased 32%, while our Australian and rest of the world segments increased 20% and 50% from the prior year period, respectively. In addition, system-wide visits during the quarter increased 19% globally, driven by 10% growth in the US, 22% growth in Australia, and 38% growth in the rest of the world. These strong results validate the strength and resilience of the franchise network, despite ongoing inflationary pressures and macroeconomic uncertainty. Our franchises are highly engaged and excited about the future of F45. Despite these economic headwinds, we continue to see demand from investors and operators for new F45 franchise locations. Moving on to our backlog. Our backlog of sold but not yet open studios remains robust with a healthy mix of larger multi-unit development partners and smaller independent operators focused on building studio portfolios of scale. While we continue to experience industry-wide delays related to permitting and construction, unit openings for the quarter met our expectations. and we remain comfortable with our unit opening guidance for the year. However, we do expect that our franchises may continue to experience delays in opening their locations due to these issues and the continuing tightening of global credit markets. Furthermore, to help combat some of these issues, we continue to develop our pre-open services platform, which will assist our franchisees in opening studios more quickly by providing support across real estate, construction and pre-open marketing. Importantly, we will be leveraging our existing operating infrastructure supported by third-party partners to provide these services in a cost-efficient manner with no material incremental OPEX while providing significant value to our franchisees. Moving on to other strategic updates. During Q3, we executed a master franchise agreement in Europe with Club Sports Group. This arrangement builds on the existing multi-unit development deal with Club in the U.S., Under this agreement, our partner will inherit primary responsibilities for servicing new and existing franchises throughout the UK and Europe. Through the existing multi-unit development agreement in the US, Club already has significant experience with F45 and is a proven operator. Under this agreement, Club is committed to opening over 300 F45 studios in the US over the next couple of years. With approximately 50 F45 studios currently open and many more in development, expected to open by year-end, Club brings deep franchise-level operational knowledge and significant infrastructure to support the expanded partnership. We will continue to strategically evaluate master franchise agreements in certain markets. We believe these agreements allow us to leverage local partners to drive success for the F45 brand globally.