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?

Thanks, Anthony, and good afternoon, everyone. It's great to speak with you today. As Anthony mentioned, we had a strong third quarter, with 248 licenses sold and 68 studios opened compared to 50 licenses sold and 80 studios opened during the prior year period. The significant improvement in licenses sold during the quarter provides visibility into new studio growth. We are seeing consumers excited to return to brick-and-mortar gyms, and as Anthony mentioned, actively paying members and visits are up approximately 60% and 70% respectively. Third quarter North American system-wide sales of 192.4 million were up 93% from 99.6 million in the third quarter of 2020. Importantly, this was our fifth consecutive quarter of sequential system-wide sales improvement and exponential's highest system-wide sales quarter ever. As Anthony highlighted, this continued momentum is a reaffirmation of the effectiveness of the exponential playbook. Third quarter North American same-store sales increased 65% from the prior year period, reflecting improved membership as pandemic restrictions lessened. Our month of September run rate average unit volume for North America, which is calculated by annualizing the monthly sales for all studios that are six months and older, was 421,000 and equated to a nearly 90% recovery when compared to pre-COVID-19 levels at the end of January 2020. Our franchise business model provides us with highly predictable and reoccurring revenue streams. On a consolidated basis, revenue for the third quarter was $40.9 million, up 60% from $25.6 million in the prior year period. Breaking this figure down further into the five individual components, franchise revenue was $20 million for the quarter, up 68% from $11.9 million in the third quarter of 2020. The significant year-over-year increase was largely driven by higher royalties as system-wide sales have continued to grow and surpass pre-COVID levels. Equipment revenue was $6.8 million in the quarter, up 39% from $4.8 million in the prior year period. This increase in revenue was largely driven by a higher concentration of installs within equipment-intensive brands, with most equipment revenue being recognized in the period that new studio opens. Merchandise revenue was 4.9 million in the third quarter of 2021, up 35% from 3.6 million in the prior year period. The improvement during the quarter was primarily driven by increased foot traffic in the studios. Franchise marketing fund revenue of 3.7 million was up 107% from 1.8 million in the third quarter of 2020, primarily due to system-wide sales growing above pre-COVID-19 levels through additional new studio openings and average unit volume recovery. In addition, we had reduced the marketing fund fee in 2020 to lower operational break-even levels for the franchisees during the pandemic. Lastly, other service revenue was $5.5 million in the quarter, up 63% from $3.4 million in the prior year period. The increase in other service revenue in the quarter was primarily driven by revenue generated from studios we took over because of the pandemic. As communicated on our last earnings call, our primary strategy is to be a pure franchise model and the company remains committed to re-franchising or shutting down all non-strategic corporate owned studios by year end. We are on track to achieving this goal and expect that by year end, we will only hold a small number of strategic transition studios in line with our historical pre-COVID-19 levels. Turning to our operating expenses, Cost of product revenue were $7.6 million during this quarter, up 41% from $5.4 million in the prior year period. The increase during the quarter was driven by higher levels of merchandise revenues and by a higher concentration of installs within the equipment-intensive brands in the current period. Cost of franchise and service revenue were $3.2 million in the third quarter, up 34% from $2.4 million in the prior year period. The increase during the third quarter was primarily driven by costs related to technology fee revenues because of the higher number of studios operating. Selling general and administrative expenses of $24.3 million were up 46% from $16.6 million in the prior year period. This increase was largely due to expenses of being a public company, temporarily operating company-owned studios, and higher non-cash equity-based compensation expenses. As previously shared, our core strategy is for all our studios to be owned and operated by franchisees. In addition, $3.1 million of the $7.6 million increase in SG&A was driven by an increase in equity-based compensation due to transitioning from a private to a publicly traded company. This, however, is a non-cash expense. As a percentage of revenue, SG&A expenses were lower at 59% in the third quarter compared to 65% in the prior year period. Depreciation and amortization expenses was $2.4 million in the third quarter, an increase of 21% from $2 million in the third quarter of 2020. Marketing fund expenses, which include expenses related to corporate marketing, were $3.8 million in the quarter, up 136% from $1.6 million in the prior year period. The increase was driven by costs associated with higher marketing fund revenue and because we limited marketing fund spend in 2020 when studios were required to be closed due to the pandemic. Acquisition and transaction expenses totaled $2.9 million during the quarter compared to an income of $5.1 million in the third quarter of 2020. This increase in acquisition expenses is related to the already completed acquisition of the Rumble brand and bringing the contingent earn-out liability up to fair market value. The contingent consideration requires exponential to accrue an expense over time as our stock price hits certain thresholds. The terms of the agreement include the vesting of approximately 2 million shares of Class A common stock if our stock price ranges from approximately $51 to $76. We value this contingent consideration on a mark-to-market basis each quarter and accrue for the earn-out. Net income is reduced as the consideration increases over time. However, the share count does not increase until the shares actually vest. We view this non-cash transaction expense as an adjustment to EBITDA, as it will on a quarterly basis be adjusted to fair value. We recorded a net loss of $8.9 million in the third quarter compared to a loss of $1.9 million in the prior year period. The change in net loss is primarily the result of 4.1 million of higher overall profitability offset by the previously mentioned 3.1 million of increased non-cash equity-based compensation expense and 8 million of non-cash contingent consideration as compared to the prior year period. On an adjusted net loss basis for the third quarter, excluding the 2.9 million of non-cash contingent consideration, along with $0.2 million related to the TRA remeasurement, adjusted net loss totaled $5.8 million, or $0.31 per share on a share count of 22 million shares. Compared to an adjusted net loss of $7 million in the prior year period, adjusted EBITDA was $6.8 million in the third quarter, compared to $1.5 million in the prior year period. Adjusted EBITDA margin grew to 17% in the third quarter of this year compared to 6% in the prior year period. We expect to realize improved margins over time as we expand our franchise studio base and leverage our shared services platform across each of our boutique fitness brands. We believe adjusted net income or loss and adjusted EBITDA better reflect our underlying operating results and so we have provided a reconciliation of adjusted EBITDA to GAAP net income or loss in our earnings release issued earlier today. Turning to the balance sheet, as of September 30th, 2021, cash and equivalents were $25.5 million, up from $11.3 million as of December 31st, 2020. Total long-term debt was $94 million as of September 30th, 2021, compared with $181.8 million as of December 31, 2020. Moving to our outlook for the remainder of the year, based on current business conditions, the BFT acquisition, and our expectation as of today, we are raising our full year 2021 guidance as follows. We are updating our total 2021 global new studio openings to be in the range of 230 to 250, We continue to expect North America system-wide sales to range from 690 million to 700 million, which at the midpoint would represent a 57% increase from the prior year. Total 2021 revenue is now expected to be between 147 million to 148.5 million, an increase of 39% from 2020 at the midpoint. Adjusted EBITDA is now expected to range from $25 million to $26 million, a 160% year-over-year increase at the midpoint of our guidance range. We continue to anticipate that our capital expenditure budget for the second half will remain in the range of $1.5 million and $2 million for the remainder of 2021, primarily focused on our Go Digital platform and other technology investments to support our digital platforms and building out a Rumble Studio. We do anticipate elevated SG&A expenses in the fourth quarter as compared to Q3 and compared to the fourth quarter of 2020 due to our upcoming franchisee convention, which will return to Las Vegas in December, and as we complete the process of re-franchising the company-owned studios to franchise studios. For the full year, we expect our tax rate to be approximately 5%, share count for purposes of earnings per share calculation to be $22.1 million, and $3.25 million in quarterly dividends to be paid related to our $200 million convertible preferred stock. A full explanation of our share count calculation and associated pro forma EPS and adjusted EPS calculations for the third quarter and first nine months of 2021 can be found in the tables at the back of our earnings press release. In summary, we are pleased with our third quarter results and the overall return momentum to the fitness industry. Based on our outlook today, we are confident in the growth trajectory of Exponential. Thank you again for your time today and for your support of Exponential in fulfilling our mission to make boutique fitness accessible to everyone. We look forward to updating you on our progress on the next quarterly earnings call, and we'll now open up the call for questions. Operator?

At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation symbol will indicate your line is in the question queue. You may press star 2 to remove your question from the queue. For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star keys. One moment while we poll for questions. Our first question comes from the line of Randy Connick with Jeffries. You may proceed with your question.

Hey, Doug. How are you? Thanks for taking my questions. Anthony, I wanted to start off with you and get your perspective now that your quarter has come out. You've shown us these very strong numbers. You've talked about AUVs getting towards pre-COVID levels. We've seen a couple of at-home fitness businesses report less than stellar results in their quarters. So, I guess what would be very helpful for us and everyone on the call is to get your perspective on how you think this all plays out, you know, the push and pull of in-person boutique fitness and gym fitness compared to at home over the next, not just next quarter, but let's just think about over the next one, two, and three years. Just want to get your perspective of how you think this all kind of shakes out. Thanks.

Thanks, Randy. You know, I've said it before, and I said it pre-COVID, right, that the in-home kitchen wasn't going to kill the restaurant industry. And I think that is true. We're communal animals. We love to work out with other people. We love to be around other people. And so that will always be the way that we are. And you're seeing, you know, the world has returned to that. With that said, at-home fitness has been around a very long time. And so at-home fitness is not anything new. I think what it does, given our Go network and what we have digitally across 10 brands, what it does do is give people the ability to take a yoga class at 8.05 a.m. on Saturday when they wake up if they want to do that for 30 minutes or whatever it might be. So I think what we'll see going forward is this omni-channel approach that But Exponential, you know, had that pre-COVID, right? We, you know, we acquired our video on demand and streaming production, you know, facility in June of 2019. And so we were already, you know, very prepared to launch into that digital business pre-COVID. So that was our view pre-COVID. And of course, you know, during COVID, us being set up that way allowed us to shift our members from physical to digital and now back into the physical kind of omni-channel approach.

Super helpful. And then, you know, very interesting moves during the quarter, the agreement with LA Fitness. You know, give us some perspective on, you know, should we expect to see more additional gym companies want to proceed with these types of offerings for their members? Could you expand this kind of strategy to other types of fitness gyms out there, both domestically and internationally. And while I'm on the international front, just update us on where we stand with international development. Thanks a lot.

Yeah, it's two-parter. I'll take the first one first, Randy. So we have an exclusive with LA Fitness, so we will be opening our locations inside of LA Fitness. And we specifically chose them because you know, they are the largest, you know, business of that type. So, you know, with that said, they're a corporate owned business. And so it makes it a lot easier for us to put our franchise business inside of something that is corporate owned, as opposed to trying to put something that is franchised owned inside of something franchised owned. And if you look at, you know, other brands that could be out there like 24 Hour Fitness or Lifetime or Equinox or anything like that, they don't have you know, the amount of open doors and units that LA Fitness has. So, you know, I'm sure others may try to, you know, duplicate this type approach potentially. But, you know, we'll continue on this path here domestically. And then we will, you know, see how we do internationally. And so speaking to your international, we have 1,000 plus international stores that are open or obligated to open. in 12 countries, including the US and Canada. And so, you know, BFT, you know, also that deal that we did expanded our, our international footprint, you know, with 130 open about, you know, 15 times what it was prior to that acquisition. So, you know, we, we are pushing on the, you know, the international piece of the business as well.

And can I just sneak in one last little question? I don't want to hog the call, but, When you gave us during the IPO process, you talked about, I think, 6,900 door count or unit count kind of potential in the United States. You've had some brands since. It seems like the consumer is coming back in a big way to in-person fitness, if you will. And then we have all this international development you just talked about. How do you think about the conservatism or realism of that number you shared with the start of the IPO? Thanks, guys.

Yeah, I still think the TAM we shared at the IPO is valid, plus the acquisitions we've done BFT after that TAM. And so we will continue to go at it from a scientific approach, You know, we don't look at it on, you know, units in a population basis or something like that. We use Buxton and scientifically approach what our TAM is, which by nature makes it conservative. And the way we do that is by looking at our current membership and how they act and behave and, you know, what metrics they have that are more than did they go to college and do they make money. So we actually create very specific profiles for the brands And then once we have that very specific profile, we go back out to the U S map and we say, okay, where do all these profiles live within two mile radiuses that can hit our AUV targets. And then from there, it gives us how many stores we could open in what areas with longitude and latitude, um, pinpoints that would give us that member profile within that radius at that AUV. So obviously as you, you sell more and you expand, you know, that brand and you expand that modality, the TAM expands. And if you are willing to take a lower AUV by, let's say, $25,000 a year, $50,000 a year, you can still have a very profitable store in a secondary market with a bit less AUV and increase TAM that way as the brand starts to head toward maturity in something like a Club Pilates, for instance.

Very helpful and very thoughtful. Thank you so much.

Of course. Thank you.

Our next question comes from the line of Alex Perry with Bank of Securities. You may proceed with your question.

Hi. Thanks for taking my questions and congrats on a great quarter. Just first, could you talk a bit more about the rationale for the acquisition of body fit training and maybe give us a little more color on the domestic white space opportunity you see for body fit training in terms of door count? It seems like the functional training space is, you know, pretty competitive in the U.S. with another player with, you know, some pretty significant scale. Maybe talk a little bit more about sort of what differentiates, you know, body fit training versus the other players that's out there. And, you know, one more on that is maybe just remind us in terms of the near-term P&L impact of the acquisition. Thank you.

Yeah, I'll handle the operation part and I'll let John handle the P&L impact. But there are other players, both in Asia Pacific and in the U.S. in the functional training space. We had said on the last earnings call that this was a modality that we would be looking at in terms of M&A. So we're continuing on with that. What we really loved about BFT is that in the face of those headwinds in Australia, they returned better AUVs than the market. They sold more stores and opened more stores than some of their competitors in the space. So we really like that. We like the workout itself, the modality itself, and what they do inside of BFT. really liked, uh, cam and rich and Hamish, the guys that were running it. Um, and so they'll, you know, continue to stay on as, as master franchisees of Asia Pacific, uh, while we develop, um, you know, the domestic footprint, um, you know, we don't have a specific number on TAM and we don't really report specific TAM numbers. Um, but we do believe it is in line with the TAM that we see on a brand basis in the other exponential brands in the portfolio. We'll continue to use that same sort of scientific data-driven analysis to get the TAM that I just talked about in the previous question as we start to develop that.

And John, do you want to speak to the financial piece of it? Yeah, so in regards to the financials, from a balance sheet perspective, we disclosed that we paid $44 million for the IP And that was a mix of some cash off the balance sheet and some term loan that we had drawn. And then from a P&L perspective, the margin impact is very similar to all our other master franchise agreements where we receive a percent of the revenue or the margin generated by the master franchisor. From our P&L perspective, that revenue is recognized in the period. And it usually comes from things like your license sales, your royalties, any equipment or merchandise sales. and they have an immediate recognition in the period in which they're generated. So high margin, 100% flow through. And in Q4, as we disclosed on the release, that the BFT acquisition has already had an accretive benefit to our P&L since acquiring it in late October.

That's really helpful. And then just to follow up, it seems like run rate AUVs and license and sold came in well ahead of expectations. maybe just talk through the key drivers there. And when would you expect, you know, RunRay AUVs, you know, visitations and actively paying members to sort of reach pre-COVID levels? Is that, you know, something you're targeting by like 1Q22? Or when should we, you know, expect those numbers to reach pre-COVID levels?

Yeah, great question. We disclosed on earlier calls that the recovery back to pre-COVID levels we expect to happen in the first half of 2022. You know, we continue to make progress, as you see through our Q3 results on, you know, grinding our way back up to those levels. So we're remaining with our first half expectation that that's when we're going to get there. You know, if there's any factors outside of our control, you know, we'll be sure to update you guys. But at this point in time, we're sticking with the first half of next year to get back to pre-COVID levels. And on a membership basis and visit basis, we've already well surpassed pre-COVID levels. And we've done that based off of studios recovering, but also the introduction of a lot more new open studios into our system.

Perfect. That's really helpful. Best of luck going forward. Thank you so much.

Our next question comes from the line of Joe Altabella with Raymond James. You may proceed with your question.

Thanks. Hey, guys. Good afternoon. Congratulations. Thank you. So looking at the guide for this year, you raised openings, you raised revenue, you raised EBITDA, you left your system-wide sales range intact. I'm just curious what the thought process was there.

Yeah. So when we initially set guidance, it was mid-August, right? So only about four months left in the year. And from the perspective of the fact that we have pretty highly predictable reoccurring revenues and our ability to forecast those accurately is is pretty high. We set that range with only four months left of the year, so there's not a lot of time risk associated with what potentially could happen around system-wide sales. So I thought we delivered both on a studio opening and a system-wide sales a fairly accurate depiction of where we thought we would land. Openings has been a little bit better than we had expected, so we did move the guidance up there, but system-wide sales is falling within the range that we expected. And again, it's pretty predictable when you're only out one quarter. In regards to the revenue and adjusted EBITDA, you know, we talked on the call that, you know, we wanted to be conservative, freshly minted public company. Even in a downside scenario, we wanted to make sure that we were delivering on our guidance from a performance perspective. So we took a more conservative approach on overall revenue and overall adjusted EBITDA. But for, you know, the system-wide sales, you know, only being four months out, you know, we felt that, you know, we had a pretty good forecast. We were hitting it. We continued to to perform to those levels. So, you know, no reason to change the guidance at this point.

Understood. And maybe in terms of new studio openings for next year, I think the expectation was you could potentially achieve, you know, your long-term cadence of around 250 to 350 new studios. Is that still the case? And how should we layer in, you know, potential openings for BFT, for example, as well as the the LA Fitness and City Sports Club openings as well. Are those wholly incremental to those numbers?

Yeah, I mean, from the guidance we provided right now, the 230, 250 for this year, that would exclude, you know, any material benefit of the BFT or any of the LA Fitness announcement that we made. So as we move into 2022, there will be incremental openings associated with those two additional relationships that we formed.

Okay, but are you ready to quantify how many potential openings from the acquisition and the license agreement or the development agreement?

As far as BFT, we haven't put anything out there yet. In regards to the LA Fitness relationship, there is a minimum development schedule. We committed to a minimum 350 over five years. That has a more back-end weighted opening schedule, but that should give you some kind of indication related to that. As far as BFT, we're in the process of getting the financial disclosure document filed. with the states where it's required. And then from that point, we'll begin the process of selling licenses. And then, you know, as we discussed, there's about a six- to 12-month timeline from once you sell the license to getting it open. So if there is any impact related to BFT in the U.S. market, you know, that'll come, you know, in the later half of the year. But it should be noted that BFT already has a portfolio of already sold licenses in the Asia-Pacific region, that they'll be continuing to open. So those will be accretive. So, you know, in 2019, we opened, you know, 400 studios. You know, we got to do about 250 this year. I think it's fair to say that we'll be well north of 250, but, you know, working our way closer into the 300s next year.

Okay, great. Thank you, guys. Thanks, Joe.

Our next question comes from the line of Brian Harbor with Morgan Stanley. You may proceed with your question.

Yeah. Hi, guys. Hope you're doing well. Maybe just one more quickly on the guidance. So is the kind of increase in revenue and EBITDA guidance entirely due to BFT, or is that kind of representative of what they usually do in a given quarter, or is there anything else that's changed within that that we should be thinking about?

Yeah. The majority of the guidance that, or the increase in the guidance was driven by the existing portfolio that we already had. BFT, yes, will be incremental and accretive to our P&L in 2021, but the majority of the increase is driven by the nine core brands we had prior to BFT.

Got it. Maybe one bigger picture question. You know, I think that it seems like the first quarter of 22 will shape up to be quite a strong season for signups for a lot of in-person fitness concepts and all the indicators are kind of in the right direction. It Is there anything you plan to do kind of outside of the norm in terms of marketing or in terms of supporting franchisees to help them really kind of capitalize on that and make it a great quarter for them?

Hi, Brian. This is Sarah Luna. We have our annual convention coming up in just four weeks, and it's a great opportunity for us to bring our franchise partners together and talk about those best practices and share ideas and make sure that we have a solid plan in place for next year. So you're right in that there are the traditional methods that will help us launch the studios and get them in a great place for January. But in addition to that, it's just sticking to the tactics that we know are strong and bringing the franchise partners together in December to really celebrate all of the great achievements and get everyone fully aligned for having a stellar 2022. So we've got that just in a couple of weeks. We look forward to seeing all of our franchise partners at that time.

Thank you.

Our next question comes from the line of Jonathan Komp with Baird. You may proceed with your question.

Yeah. Hi. Thank you. Maybe just to follow up again, a couple of questions on the guidance. I'm just curious, first, as you look at the SG&A, how that's sort of coming in versus what you thought, if there's anything incremental that you're accelerating there, and when you step back and look at the guidance raised for 2021, is there anything we should think about that sort of non-recurring that's benefiting that we shouldn't flow through in our models looking forward, or how should we think about the profit raise?

Yeah, so in regards to the fourth quarter, there's one event that, you know, Sarah just mentioned, the annual convention. That has, from an SG&A perspective, a higher expense in the fourth quarter. So, but the benefit of that is we also provide or have sponsorship revenue that comes in related to offset the expense. So, the, you know, the investment in our annual convention is nominal, but there will be, you will see SG&A increase for that, but you also see a revenue increase that virtually offsets that expense in the fourth quarter. So, something to be aware of there. You know, as we mentioned on previous calls, we do have or we did have a portfolio of company-owned studios from the impacts of COVID. You know, we discussed that we would be refranchising those out, and we've made really good progress and continue to make good progress on delivering on that commitment by the end of the year. So you'll see SG&A ramped out associated with the company-owned studios throughout the end of this year. But outside of that, those are kind of, I would say, maybe the more one-time things you should just take into account. As far as anything of flowing out of you know, 2021 into 2022, you know, we believe our normal run rate business is very similar to, or SG&A run rate is similar to 2019, excluding the impacts of stock-based comp. So, you know, we see, you know, excluding stock-based comp around that 60 to mid-$60 million range around SG&A, and that's what we'll continue to operate now once the corporate studios have been fully refranchised.

Okay, great. That's very helpful. Maybe then one, Anthony or Sarah, bigger picture question about the industry. It sounds like the AUVs are recovering roughly as you expected, but maybe the bigger picture question, if others don't see AUVs fully recover well until mid-2022, what's your general sense on sort of the the state of others that you're competing against? Do you think we'll see another wave of closures and financial pressure for others? Is there any risk of a more competitive pricing industry environment? Just any broader thoughts on your ability to continue to operate against others in the industry?

No, I mean, I don't. I mean, other than our core advantages we have, like our digital network Go and the XPAS, you know, which I think you guys are all aware with. But, you know, simply put, you sign up at one of our brands and get to access all of our brands. So we think that is a, you know, a key differentiator in what we do. So, you know, we wish our competitors all the best. We don't want to see anyone do poorly. So we hope that, you know, everyone is able to, you know, to work hard and obtain customers in this industry. But, you know, we will continue to compete with the things that we have and, you know, continue to return to our pre-COVID numbers. And so, you know, we have 10 brands, multiple revenue streams, the XPath, Digitals. There's a lot of differentiators that we have that allow us to compete against our closest competitors.

Great. And if I could just slide in at the end. to end here. Any comments on what you optimize in terms of the XPath structure, pricing, and features? Any comments there? And that's it for me. Thanks.

Sure, I can take that one. As you know, we've been very conservative with the rollout with the XPath, taking about 25% of our system and putting them on the XPath each quarter. We're at 1,400 locations currently on, and we'll get the remaining of our studios on the XPath by the end of the year. And really our first priority was to test the technology and watch consumer behavior, then to test our marketing campaigns and pricing and point system. We have made tweaks along the way, but we're in a very good place where we're starting to see that the XPAS is servicing a new customer base that we weren't currently servicing before. So 15% of account holders for XPAS are brand new to the exponential ecosystem, and about 23% of those that are account holders that did interact with our studios prior to joining the XPath were deemed as either cooled off or not interested in the franchise base. So we're seeing that this is becoming a new service and product that is exciting a new audience, and it will be great benefit to the franchise partners in 2022. Okay, thanks again.

Our next question comes from the line of Peter Keith with Piper Sandler. You may proceed with your question.

Hey, thanks. It's Bobby from Neuron for Peter. I appreciate you taking my questions. I just want to look at sales member trends the past few months and the cadence of the ongoing rebound. Would you describe the progress you're seeing as steady buildback, or has there been any inflection point in the past few months in acceleration here? And related to that, I was wondering if you're seeing any notable differences between brands or geographies as momentum is continuing to build.

We've seen a steady buildback with members coming back into the studio visits and membership sales. So there hasn't been volatility. It really has just been kind of slow and steady. Some nice increases across the board. You asked about regional, you know, improvements and increases. Obviously, as we saw California and New York open, you know, those sales have started to come back online again. But there isn't really any sort of region across the country which is performing, you know, much better or much faster than others. But basically, it's very consistent. I think most importantly to call out, there's no delta issue. So we've seen a really great increase in studio foot traffic and great increase in other revenue streams across each of the studios.

Okay, that's helpful. Just a quick follow-up. Are all the studios back to 100% capacity now, or are there still distancing measures you're taking in any classes that are limiting the amount of people per class?

We don't have 100% of the studios back to 100% of the capacity. However, the majority are back to full capacity. Of course, there's some regions, and we don't track all the different states and local mandates, studio by studio. So there is a little bit of inventory that we still have access to, and that gives us excitement about putting more members in through XPAS and some of our other partners. But we're very close to getting back to 100% capacity and 100% of the studios.

Okay, great. Thank you.

Our last question comes from the line of John Hainbacher with Guggenheim. May I proceed with your question?

So, Anthony, let me start with how do you think about if there are any bottlenecks to the ability to grow in the U.S., right? Because you've got more brands than ever. You've got more mud partners than ever. And, you know, I think right in the past, your peak studio openings were 400. What are the bottlenecks, and do you think the business, in theory, should be well-equipped to do more than that? Is that just you want to be certain about execution? How do you think about that?

Yeah, so I think we don't really see – you know, kind of massive bottlenecks. But in the business in general, you know, franchisees need access to capital and access to leases. And so, you know, access to leases during COVID and still post-COVID are better than they were pre-COVID. So that's good. Lending has come back. You know, Exponential had a zero default rate on its SBA loans. which allowed our franchisees to still continue to access capital. So, you know, we're still continuing to see, you know, the same challenges in the business we saw pre-COVID to, you know, to getting stores open or getting access to capital. You know, franchise sales are, you know, as we reported, you know, really back to its, you know, 2019 run rates. So franchise sales are back. And then that will eventually flow through into, you know, signed leases, franchisees, you know, acquiring capital and getting open.

All right. And then maybe when you think about the LA Fitness Partnership, what modalities or what brands do you think will occupy, you know, the vast majority of the, you know, the 350 or 400 they're going to do? Will there be multiple brands? modalities in a single LA Fitness. And I assume the pricing will be consistent with the external studios around those locations. Is that fair?

Yeah, that is fair. I hit the nail on the head. So it'll be consistent with the pricing, you know, and around those geographies and those studios. You know, we will be starting to roll out, uh, the club Pilates brand and the stretch lab brand, uh, and then continuing with, um, other modalities as we go forward. But we do have the ability to have multiple, uh, brands inside, um, you know, of the same LA fitness location. And so, you know, we'll make sure that we access that where, you know, we're relevant and then, you know, make sure that the brands are complimentary to each other, um, and what LA Fitness is doing inside of their box as well.

Okay, thank you.

Ladies and gentlemen, we have reached the end of today's question and answer session. I would like to turn this call back over to Mr. Anthony Geisler for closing remarks.

Thank you, Operator, and thanks again for joining our call today and for your support of Exponential. I'd also like to thank the entire Exponential Fitness team and, of course, our franchisees for their hard work and dedication to our business. Well, we'll certainly speak on our fourth quarter call next year. Over the next few weeks, we'll be participating virtually at the Morgan Stanley Global Consumer and Retail Conference and the Citi Global Consumer Conference and in person at the Roth Consumer Conference. So we hope to speak with many of you during these events and hope you all make it a great day. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.