Xponential Fitness, Inc.

Greetings. Welcome to the Exponential Fitness, Inc. fourth quarter and fiscal year 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, Kim Esterkin, Investor Relations. You may begin.

Thank you, Operator. Good afternoon, and thank you all for joining our conference call to discuss Exponential Fitness' fourth quarter and full year 2021 financial results. I am joined by Anthony Geisler, Chief Executive Officer, 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 be making 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 the information provided on today's call. Please note that the fourth quarter and full year 2021 financial results discussed today do not include contributions from BFT prior to the acquisition in October 2021 unless commented on as being stated on a pro forma basis. 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 press 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 fourth quarter and full year earnings conference call. Exponential Fitness is the largest global franchisor of boutique fitness workout brands. Through our franchisees and master franchise agreements, we operate over 2,100 studios in 12 countries around the world. We own 10 leading brands across all major workout modalities with our newest additions including boxing and functional training. Our business model is straightforward. We license our boutique studio operations, share our business processes and branding with franchisees, and in exchange charge royalties and other fees for our services. As our studio AUVs grow and as we increase the number of studios, we become more profitable given that the royalties generated from our system-wide sales are virtually 100% margin flow-through and given our SG&A platform scales. We are extremely proud of the operational accomplishments that drove our record financial performance in 2021, which further provides us great momentum into 2022. On a pro forma basis, including our two new brands, Rumble and BFT, Exponential sold 955 franchise licenses and opened 334 new studios across nine countries. Our 2021 new studio cohort of 238 North American studios added almost $50 million to the over $700 million in system-wide sales generated in 2021. We deployed our XPAS membership offering across the system, signed a strategic partnership with LA Fitness, and reported record financial results. For the full year, Exponential posted net revenues of $155 million, increasing 45% year-over-year, an adjusted EBITDA of $27 million, or 18% of full-year revenue, compared to $10 million, or 9% of revenue in the prior year period. We attribute our success to the system we have created, to our dedicated franchisees, as well as our employees, our international master franchise partners, our members and vendors that together support our studios. In December, this same community of over 2,000 individuals traveled to Las Vegas from all over the world to attend our annual franchise convention. At our annual convention, we recognize franchisees for their hard work, share best practices, provide training, showcase vendors' exhibits, and align on our goal to carry forward the momentum for the coming year. I'd like to thank all those who contributed last year for your hard work and commitment to achieving our mission of making boutique fitness accessible to everyone. We finished 2021 with strong fourth quarter performance as our business remained resilient to the Omicron surge that began in late November. This resilience is evident in our fourth quarter actively paying members and visitation rates, which increased by approximately 70% and 50%, respectively, year over year. We also experienced strong demand for our franchise licenses, selling 301 licenses in Q4 pro forma for BFT. This brought our 2021 quarterly average to almost 250 licenses sold per quarter or a run rate of almost 1,000 licenses sold creating a solid new studio growth opportunity as we head into 2022, driven primarily by our younger brands. While Omicron continued to dominate the headlines early this year, we have experienced minimal impacts to our business and our growth momentum continues. In fact, average unit volumes, or AUVs, quartered to date have continued to increase, driven by higher active members and increased member visits. We are confident our business remains on track to fully recover run rate AUVs to their pre-pandemic levels in the first half of 2022. Our recovery to pre-pandemic levels and beyond continues to be driven by four key strategic areas of growth. I'd like to discuss our progress in each of these areas, beginning with growing same-store sales in AUVs. I am pleased to note that our Q4 North American system-wide sales grew for the sixth consecutive quarter increasing 76% year over year. We ended the year with North American Q4 run rate AUVs of $446,000, up 56% compared to 2020. The key to our ongoing success is our ability to proactively manage the health of our franchise system. You've heard me discuss before that we track our core KPIs continuously by leveraging our technology capabilities and data analytics tools to better understand real-time business performance and ensure our franchisees drive continued engagement, whether through in-person classes or through our new digital platform, X+. X+, which provides live and on-demand access to sought-after workouts in thousands of studio locations around the world, will launch this quarter. Advertisements announcing the launch began in December to develop consumer awareness. Our brands have started to pre-sale subscriptions to the new platform and are seeing early success. Xplus is the evolution of our previous platform, Go. Our new standalone app combines all of Exponential Fitness' digital offerings in a single platform, providing subscribers greater access to our robust fitness portfolio. The new platform also enables Exponential to offer business-to-business subscription options, as well as direct marketing partnerships. To further promote engagement, the app allows users access to book classes at nearby Exponential Studio locations. Another key sales driver is our XPAS offering, which provides access to all of our brands under a single monthly reoccurring subscription. As I noted during the fourth quarter, we met our milestone goal of fully deploying XPAS across the United States. 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, and nearly 60% of account holders being previously lapsed from an exponential brand or deemed inactive by studio sales staff. We are optimistic about our differentiated offering and expect XPath to contribute more meaningfully to our business in 2022. Finally, we are thrilled to announce the recent hiring of our XPath president, Dan Ali. Dan previously was vice president and head of global strategy and analytics at Gimpass, and before that, he was head of strategy and analytics at Groupon. Our next two growth levers are to increase our franchise studio base across all brands in North America and expand our brands and studio base internationally. We entered 2022 with the largest studio count in our company's history and expect to open over 500 new studios this year. Opening over 500 studios in a year would be a company record and is a testament to our strong pipeline and the resilience of our franchisees that we have primed to achieve such a milestone. Today, we have over 1,800 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. That said, the approach we took of adding brands to our portfolio over time has now provided us with a replenishing pipeline of organic new studio expansion, offering us four to five years of visibility into our long-term growth. And based on our latest white space study conducted by Buxton, a leading consumer intelligence technology and services company, we have the white space for approximately 7,900 studios in the U.S. alone, nearly quadruple our current total number of open studios. Our international growth also remains solid. As of the end of the fourth quarter, including BFT, we now have over 2,100 global studios with over 175 of them operating outside of North America. Additionally, we now have almost 1,000 studios obligated to be opened internationally, paving the way for future growth. Our master franchise agreements are structured to provide Exponential with virtually 100% margin flow-through. Another organic studio growth driver for Exponential is our nationwide partnership with LA Fitness, which we announced in October. Through this partnership, we have the exclusive right to open our Exponential Fitness brand studios within LA Fitness locations. with 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. We are still in the early stages of launching in these locations, but have already opened our first few initial studios and look forward to speaking more on their progress on future calls. On the M&A front, During the fourth quarter, we announced that we welcomed our 10th brand, BFT, a community-based, high-energy, functional training offering. BFT transforms our global growth trajectory at time of acquisition, 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 open in the next 12 months. As it relates to the BFT integration, we are on track and have already started selling franchise licenses in North America. I am also happy to announce we named Lou DeFrancisco as president of BFT. Lou previously served as president of our Stretch Lab brand, growing it to over 150 open studios to date domestically and selling more than 570 licenses since we acquired the brand. Lou also has extensive international experience in Australia and New Zealand where BFT has a very strong presence having sold 80 studios in these regions through our master franchise agreements. Leveraging the leadership bench strength in our brands, we have promoted Verdine Baker, who served as the vice president of sales and second in command for Stretch Lab, to backfill the Stretch Lab president role. Looking ahead, on the M&A front, we will continue to opportunistically evaluate potential brands and new modalities, taking a disciplined approach to capital allocation. Since our founding, we have strategically and thoughtfully curated a portfolio of the 10 best-in-class boutique fitness brands. We believe our diverse portfolio differentiates us from any other franchisor and provides stability to our business model. Investing in exponential is not just an investment in a single company. Instead, we liken ourselves to investing in a diversified portfolio of the best boutique fitness companies. The proven, rigorous diligence process used to assemble our portfolio has ensured that we welcome complementary brands and modalities with longevity and long-term sustainable growth trajectories, protecting our position as the industry leader in boutique fitness franchising. Contributions from our first three growth levers, coupled with continued operating excellence, will support our fourth growth lever, expanding our operating margins and driving free cash flow conversion. The asset-like nature of our franchise model, together with the many benefits we experience because of our scale and shared services platform, has supported our margins to date. This year, we expect our adjusted EBITDA margins will expand from approximately 17% at year-end 2021 to over 30% in 2022, strengthened by the continued growth and maturation of our business. In summary, we are very pleased with our fourth quarter results and the continued momentum of our business. We expect to achieve solid system-wide sales growth in 2022 driven by the continued recovery in AUVs we are experiencing in our current North American studio base and by our aggressive pipeline of planned new studio openings. As is clear from the 2022 outlook, John will discuss shortly, Exponential is well-positioned to continue executing our four growth levers as we open new studios, drive same-store sales, expand our operating margins, and create value for all stakeholders. Thank you again for your time. I'll now turn the call over to John Malone to discuss our fourth quarter results and fiscal 2022 guidance.