Xponential Fitness, Inc.

Greetings. Welcome to the Exponential Fitness Inc. Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Kimberly Osterkin, Investor Relations. Thank you. You may begin.

Thank you, operator. Good afternoon, and thanks to all of you for joining our conference call to discuss Exponential Fitness second quarter 2021 financial results. I am joined by Anthony Geisler, chief executive officer, and John Malone, chief financial officer. Sarah Luna, president, will also be available during the question and answer portion of this call. A recording of this call will be posted on the investor section of our website at investor.exponential.com. We remind you that during this conference call, we will make certain forward-looking statements, including discussions of our business outlook and financial projections. These forward-looking statements are based on management's current expectations and involve risks and uncertainties that could cause our actual results to differ materially from such expectations. For a more detailed description of these risks and uncertainties, please refer to our recent and subsequent filings with the SEC. We assume no obligations to update the information provided in today's call. In addition, we will be discussing certain non-GAAP financial measures in this conference call. We use non-GAAP measures because we believe they provide useful information about our operating performance that should be considered by investors in conjunction with the GAAP measures that we provide. A reconciliation of these non-GAAP measures to comparable GAAP measures is included in the earnings release that was issued earlier today prior to this call. I will now turn the call over to Anthony Geisler, Chief Executive Officer of Exponential Fitness.

Thanks, Kimberly, and good afternoon, everyone. We appreciate you joining our second quarter 2021 earnings conference call. I'm thrilled to be able to speak with you all today for our first call as a public company. By way of background, Exponential Fitness is the largest boutique fitness franchisor in the United States. And as of today, we have over 1,850 studios operating across nine leading brands globally. Our brands offer consumers energetic, accessible, and personalized workout experiences led by highly qualified instructors. Most importantly, each brand emphasizes a community-oriented culture. Our customers truly feel like they are a part of something unique. and it keeps them coming back, which is an accomplishment we take particular pride in as we successfully weather the pandemic. As a curator of leading brands across fitness modalities, our mission is to make boutique fitness accessible to everyone. I'd like to thank the entire Exponential Fitness team, our employees, management, and especially our franchisees for your hard work and dedication that has enabled us to bring this mission to life. Your commitment, passion, and execution have been the driving forces behind our successful operations and growth since our founding in 2017. Becoming a public company last month was a significant milestone and positions us to continue to execute our strategy and mission for years to come. Exponential had a very strong second quarter, highlighted by our North American performance with 197 franchise licenses sold, 59 studio openings, and 179% increase in system-wide sales year over year for a total of $171.6 million. We recorded net revenues of $35.8 million, up 67% year over year, and adjusted EBITDA of $8.3 million versus a loss of $3.1 million in the prior year period. As is evident from these results, our business is rapidly rebounding to pre-COVID-19 levels, and we remain confident in our ability to reach pre-pandemic run rate AUVs by early 2022. When comparing the end of second quarter of 2021 to January 31st, 2020, without even taking into account our newest brand rumble, our business has recovered to 103% of actively paying members, 98% of total visits in nearly 90% run rate AUVs. Speaking of AUVs, on a year-to-date basis, our 2021 franchise cohort is on average outperforming our as-designed studio revenue curves, indicating strong consumer demand for our boutique offerings, driving studio recovery, and making us feel confident about our ongoing performance. For our newest brand, Rumble, I'm particularly pleased to note that we recently completed our first master franchise agreement in Australia, which calls for a minimum of 50 studios to be developed over the initial 10-year term of the agreement. This accomplishment truly speaks to the international recognition of Exponential and our Rumble brand. Franchisees are excited to open new Rumble studios, even as Australia abides by one of the strictest lockdowns in the world. While we are certainly not in the clear when it comes to COVID-19, as of the date of this call, we've experienced minimal effects across our studio base as a result of the Delta variant. After a record performance in July in which we posted our highest system-wide sales in company history, our August results to date have remained solid with strong system-wide sales, franchise license sales, and membership metrics. So far in August, compared to the end of Q2, we've seen an increase in our total memberships and our actively paying members, both overall and at a per studio level. As part of our standard operating procedures, we track core KPIs, such as our membership levels, very closely. And we're leveraging our strong technology capabilities and data analytical tools to stay well ahead of the curve. Should we begin to see any shift in trends, we have the tools in place to respond immediately and assure that our franchisees drive continued member engagement, whether through in-person classes or through our digital platform Go, which allows our members to engage in the exponential experience whenever and wherever they'd like. Our experience management team and the power of our exponential playbook set us apart from our peers and are the keys to our successful business model. These two factors have enabled us to provide robust and ongoing support to franchisees even in the midst of a global pandemic. As I just mentioned, our membership base continues to grow in the third quarter, which I believe is due in large part to the exponential playbook and our very selective franchisee process. From the initial phases of studio planning to leveraging technology to uncover data-driven insights across our system once a studio is open, the exponential playbook ensures that our franchisees can maximize their studio performance and enhance their return on investment. John Malone, our CFO, will discuss our 2021 outlook in more detail shortly. But suffice to say, we remain very confident in our growth trajectory. Through our franchise model that combines multiple brands, strong unit economics, and extensive franchisee support, we have gained a leading market position in the United States boutique fitness industry. So how will we continue to grow this market position? Our growth initiatives center around four simple goals. First, we plan to grow our franchise studio base across all brands in North America. Throughout our company's history, including during the COVID-19 pandemic, we have never had a single permanent studio closure. In fact, from January of 2020 through July of 2021, we have successfully opened 354 new studios across our nine brands in North America and sold an additional 554 new licenses, including 338 licenses sold year to date in 2021. Today, we have over 1,500 licenses contractually obligated to open in North America. If we were to never sell an additional license, we'd still be able to nearly double our North American studio count over the next several years on these 1,500 plus license obligations alone. That said, we have an extremely healthy and rapidly growing pipeline of interested franchisees and anticipate continued strong license sales. Our second goal is to drive system-wide sales, same-store sales, and grow our AUVs. We will achieve this by acquiring new customers through sales and marketing strategies at the brand and franchisee level and by increasing penetration with our existing members. We're particularly excited about our new XPAS offering, which provides access to all of our nine brands under a single monthly membership. We began our XPath rollout in December of 2020 and currently have over 1,000 studios across 40 states launched on the platform. Early data has shown that XPath is not only enabling us to attract and retain current consumers, but it is also helping introduce consumers to new brands and verticals within our platform. We are very pleased with these results and expect XPath will be fully implemented across our entire North American studio base by the end of this year. Further, as I noted previously, we will continue to stay engaged with our customers outside the four walls of our studio through our digital platform, which offers live and on-demand programming from a library of more than 2,500 workouts, all of which are produced in our state-of-the-art in-house studio. Users on our Go platform help exponential and franchisees reach new consumers and generate incremental revenues without increasing overhead costs. Providing this digital offering will not replace the benefits of in-studio boutique fitness, but it will certainly offer customers flexibility when it comes to maintaining their workout regimens and ensure ongoing engagement with our exponential brands. Our third growth strategy is to grow our brand's international studio footprint. As of June 30th, our master franchisees were contractually obligated to open or sell licenses to open over 730 studios across nine countries. We have decided to focus on expanding into a smaller number of countries first, which have attractive demographics such as household income, level of education, and fitness participation levels. This will enable us to learn from key trends and KPIs and then to tweak our model as needed. At the end of the second quarter, we had 15 international studios open across Australia, Dominican Republic, Japan, Saudi Arabia, and South Korea. We also have agreements in place to open studios in Austria, Germany, Spain, and Singapore. We're extremely confident in our runway, both in North America and globally. And as we drive further growth, we will continue to unlock the power of our exponential platforms. This ultimately brings me to our fourth strategic growth initiative, improving operating margins and driving free cash flow conversion. The asset-like nature of our franchise model, coupled with the many benefits we experience because of our scale, has supported our margins to date. Our platform and scale have resulted in higher franchisee lead flow, lower franchisee acquisition costs, as well as allowed our brands and franchisees greater access to real estate and favorable vendor relationships. As an integrated platform, we can also utilize technology and benefit from sharing knowledge and best practices across a portfolio. This is particularly important as we track our studio performance to respond to real time regarding any changes that may result from the COVID-19 pandemic. As we grow, our long-term operating margin potential will also be supported by our ability to leverage our SG&A across the entire platform. Our corporate shared services are fully built out and ready to support our 1,500-plus planned new studio openings. If we were to add another brand to our portfolio, we wouldn't need to hire any additional team members to support expansion beyond the brand's management team. Our ongoing capital requirements will therefore be limited and enable us to drive strong free cash flow conversions. As we execute against each of the four growth initiatives I just discussed, we will carefully allocate our capital, balancing our activities between investments in our business, acquisitions, and of course, shareholder returns. When it comes to M&A, it's clear to see that we have a proven history of seamlessly acquiring and integrating brands. Today we are in the early stages of looking into expanding our portfolio of offerings to include HIIT, functional training, and a high-volume, low-cost fitness modality. We believe a functional fitness modality would fit well within our portfolio and complement our existing brand offerings. With that said, I'd like to thank you again for your time today. I could not be prouder of Exponential's journey, including our successful navigation through 2020. the pandemic, and now our recent IPO. Looking ahead to Q3, we are keeping a watchful eye on the Delta variant and continue to abide by all state requirements and CDC mandates at our locations. That said, I'll emphasize again that we have seen minimal impact on our business to date and remain very confident in our positive growth trajectory. I'll now turn the call over to John Malone, our CFO, to discuss our second quarter results and 2021 guidance in more detail. John?