Xponential Fitness, Inc.

Greetings and welcome to Exponential Fitness Inc. Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during today's conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Ms. Kimberly Estricant, Investor Relations. Thank you, ma'am. You may begin your presentation.

Thank you, Operator. Good afternoon, and thank you all for joining our conference call to discuss Exponential Fitness' third 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 obligation to update this information provided on today's call. Please note that the third quarter 2021 financial results discussed today do not include contributions from acquisitions and our partnerships made subsequent to the third quarter, including the company's newest brand, BFT, which was acquired in October 2021, and its partnership with LA Fitness and City Sports Clubs, in which studio build-out will not begin until Q1 2022. 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. Please also note that all numbers reported in today's prepared remarks refer to global figures, unless otherwise noted. 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 third quarter earnings conference call. Exponential Fitness is a curator of 10 leading boutique fitness brands across multiple fitness modalities. Our mission is to make boutique fitness accessible to everyone, and we are accomplishing this through our global network of franchise studios. For the third quarter, Exponential posted strong results with net revenues of $40.9 million, increasing 60% year over year. Adjusted EBITDA totaled $6.8 million, or 17% of third quarter revenue, as compared to $1.5 million, or 6% of revenue, in the prior year period. Brick-and-mortar gyms are back, and our boutique fitness customers, dedicated fitness enthusiasts who enjoy the community aspect of a smaller-sized gym, are excited to return to in-person fitness. In the third quarter, our business saw actively paying members and visitation increase by approximately 60% and 70%, respectively, year over year. In some ways, you can say that this past quarter was the grand reopening of the global fitness industry, and we're excited to continue building on this momentum. Our strong financial performance, combined with our operational excellence, has paved the way for continued momentum in the fourth quarter, including our acquisition of our 10th brand, BFT, and a new strategic partnership with LA Fitness, both of which I will discuss in more detail shortly. During the third quarter, we sold 248 franchise licenses, bringing us back to pre-COVID franchise license sales levels. In addition, we opened 68 new studios and increased our North American system-wide sales 93% year-over-year for a total of $192.4 million, our fifth consecutive quarter of increased system-wide sales. Proactively managing the health of our franchise system is key to our ongoing success and a characteristic which differentiates exponential from any other franchisor today. We track our core KPIs continuously by leveraging our unique technology capabilities and data analytics tools to better understand real-time business performance. Should we begin to see any shift in membership trends, for example, We have mechanisms in place, such as targeted marketing programs, to respond immediately and ensure that our franchisees drive continued engagement, whether through in-person classes or through our digital platform, Go. Speaking of the Go platform, during the third quarter, we officially launched our upgraded production studio out of our headquarters in Irvine. The studio features a 70 by 14 foot LED wall, creating a fully immersive experience for our customers. We transformed this studio four to five times per day to accommodate the filming of multiple brands and now have an online fitness library of more than 2,700 workouts. With hesitancies around in-person workouts due to COVID-19 subsiding, we have started implementing a bundled at home in-studio offering. Our XPath offering, which provides access to all our brands under a single monthly reoccurring subscription, also continues to gain traction. Next month will officially be the one-year anniversary of the launch of XPAS. We have conservatively been testing XPAS over the past 12 months, and more recently, we have optimized marketing tactics, pricing, and product features that benefit both our franchise partners and end subscribers. With COVID-19 restrictions lifting and class inventory becoming more available, we have gradually onboarded franchisees, testing and implementing feedback from our early adopters to build an even stronger platform. XPAS continues to be a great funnel for new customers, with more than 15% of account holders having never interacted with one of our brands prior to joining XPAS. 23% of the leads that joined XPAS were previously deemed inactive by studio sales staff. Today, XPAS reaches over 1,400 studios across 48 states. As we've rolled out XPaaS, we have seen strong adoption by franchisees with participation at over 80%. We have doubled subscriber accounts since last quarter and we are tracking toward continued growth between now and the end of the year when we anticipate that XPaaS will be fully deployed across our entire North American studio base. XPaaS is a differentiator for Exponential as XPaaS unites all of our brands on one platform. We are optimistic about the revenue potential XPAS could represent over time and are currently searching for an executive to lead this effort full time. Turning now to studio growth. Today, we have over 1,600 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 license obligations alone. Our in-house real estate department is in regular contact with our franchisees across the U.S., helping them identify optimal studio locations and lease terms so that we can convert these obligated licenses into open studios as efficiently and quickly as possible. With strong franchisee demand for new licenses and strong sales, our backlog of studios obligated to open is continuously replenished. and offers us solid visibility into our long-term growth. In addition to growing organically, we have a disciplined M&A strategy. We constantly evaluate brands that could complement our current roster of modalities that align with our company's mission and that have strong growth potential on a global basis. To this end, in October, we welcomed our 10th brand, BFT, a community-based high-energy functional training offering. BFT has transformed our global growth trajectory, adding over 130 franchise studios across Australia, New Zealand, Singapore, and the U.S., along with an additional 150 studios previously sold and contractually obligated to open in the next 12 months. With BFT's addition, we have officially achieved the X in exponential, and we are thrilled to bring this new highly complimentary offering to our customers. As of September 30th, our master franchisees were contractually obligated to sell licenses to open over 730 studios across nine countries internationally. With the addition of BFT, we now have over 1,000 studios open or obligated to open internationally, and we're excited to watch our growth continue to accelerate. As part of the transaction, Exponential has entered into a master franchise agreement with the existing BFT management team who will be running day-to-day operations in the Asia Pacific region with Exponential providing the team with full support. Similar to our other international franchise agreements, this MFA is structured to provide Exponential with 100% margin flow through over the term of the agreement. The transaction has already been accretive to our EBITDA in the fourth quarter. Following the acquisition, we have seen strong interest in BFT licenses both from existing and new potential franchisees. We anticipate to start selling BFT licenses before year end as soon as we have completed the franchise disclosure document filing requirements. The integration of BFT is underway, and we will make use of Exponential's playbook to seamlessly manage the process. We have a proven history of integrating new brands into our portfolio, And just like with our other acquisitions, we anticipate very little additional overhead costs from this acquisition. We will be able to leverage our shared services platform including key back office functions to BFT's benefit with minimal additional hires or expenses to grow the business both internationally and domestically. While we remain focused on integrating BFT and supporting our current portfolio, over time we will explore acquisitions strategically and thoughtfully ensuring that the brands we add to our portfolio fit with our long-term growth strategy. Another growth driver for Exponential is our nationwide partnership with LA Fitness, also announced in October. Through this partnership, we have the exclusive right to expand our Exponential fitness brand studios through a minimum development commitment of 350 franchise locations over five years. We are providing existing franchisees who have an LA Fitness location within their protective territory the opportunity to open another exponential studio within that specific gym location. Franchisees will be able to increase their sales generation and reach with another studio that is free of initial franchise fees and reduced marketing fund fees and whose build-out costs are significantly less than those of our traditional studios. While the average unit volumes or AUVs of these studios are expected to be lower than traditional studios, they will also carry lower operating costs. This is a win-win for all. Our franchisees instantly expand their potential customer base with limited effort and cost. LA Fitness brings new customers who are interested in boutique fitness while retaining current customers with an innovative membership offering And Exponential expands its new studio potential while bringing its brand of best-in-class boutique fitness to an even greater addressable market. We expect to begin building out in gym studios in the first quarter of 2022 and anticipate we will start seeing some P&L benefits from the partnership next year. As we continue to execute on our long-term growth strategy, we recognize the importance of also building our expertise with the expansion of our board of directors. I am therefore pleased to note that we recently welcomed a new independent director to our board, Chelsea Grayson, who is also serving on our audit committee effective in October. Chelsea is an experienced board member and public company CEO, having previously headed global retail companies including True Religion and American Apparel. We are excited to add Chelsea's perspective to Exponential and leverage her brand expertise as we continue to build out our own retail and merchandise sales across our current network of over 2,000 global studios. In summary, we are very pleased with our third quarter results and the continued momentum of our business. We are excited to continue seeing the benefits of applying franchising's easy-to-scale asset-light business model to a fast-growing industry. Our modality and brand diversification adds stability to our model while increasing the addressable market for our offerings. I am particularly looking forward to the energy and renewed spirits at our upcoming annual franchise convention in Las Vegas. We have taken all appropriate COVID precautions and are excited to return to a 1,500-plus in-person event with people attending from all over the world. Our annual convention provides the exponential community an opportunity to come together and share best practices, provide training, celebrate achievements, and lay out our growth strategy for the year to come. Thank you again for your time. I'll now turn the call over to John Malone to discuss our third quarter results in 2021 guidance. John?