Xponential Fitness, Inc.

Greetings, and welcome to the Exponential Fitness Incorporated second quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. The 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. As a reminder, this conference is being recorded. I would now like to turn the call over to Kimberly Esterkin of Investor Relations. Thank you. You may begin.

Thank you, Operator. Good afternoon, and thank you all for joining our conference call to discuss Exponential Fitness' second quarter 2022 financial results. I am joined by Anthony Geisler, Chief Executive Officer, Sarah Luna, President, and John Malone, Chief Financial Officer. 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 on 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 we 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 second quarter earnings conference call. I'll begin with an overview of our performance. Sarah will then join me to speak about our progress against our growth strategies. John will conclude with a review of our second quarter financial results and an update to our full year outlook. Exponential Fitness is the largest global franchisor of boutique fitness workout brands. 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 AUVs grow and as we increase the number of studios, we become more profitable, given that the royalties generated from system-wide sales are very high margin and given our SG&A platform scales. As of the end of the second quarter, franchisees collectively operated over 2,350 studios in 14 countries around the world across 10 leading brands in major workout modalities. We are pleased with our operational execution and resulting financial performance in the second quarter. Total members in North America for the second quarter increased by approximately 32% year over year. Our Q2 North American system-wide sales grew for the eighth consecutive quarter, up 45% year over year. Finally, We ended the quarter with run rate North American AUVs of 480,000, up from 384,000 year over year. The dynamic growth in run rate AUVs is a strong reminder that despite inflationary pressures to date, the workouts our franchisees provide across our diverse portfolio of 10 brands are an integral part of our members' lives. Importantly, as we continue to open more studios and as our AUVs continue to grow, our profitability increases, driven by high-margin royalties from growing system-wide sales, with an active pipeline of approximately 2,800 studios contractually obligated to open globally, and only about a quarter of our conservative North American total addressable market currently penetrated. Studio openings are not expected to slow anytime soon, continuing to drive profitability. For the second quarter, we posted net revenues of $59.6 million, an increase of 66% year-over-year. Q2 adjusted EBITDA of $17.6 million, or 30% of revenue, was up 112% from $8.3 million, or 23% of revenue, in the prior year period. While we acknowledge we are operating in a time of inflation and macroeconomic pressures, including labor and supply chain constraints, our business has remained resilient. First, Exponential's customers continue to prioritize their health as a necessary investment. Our customers do not view fitness as discretionary spend. The majority of our members have a typical household income of approximately $130,000 and subscribe to reoccurring membership packages with fees that are a relatively small piece of their overall budgets. Second, as a franchise business model, we benefit from highly predictable reoccurring revenue streams and limited ongoing capital requirements. In the second quarter, approximately 68% of our revenue was reoccurring, largely driven by royalties. This percentage is lower than our 70% plus historical reoccurring revenues due to the high number of studio equipment installations in the quarter as we prepare to ramp openings in the second half of the year. We expect the percentage of reoccurring revenues will continue to fluctuate from time to time based on the number of equipment installations and subsequent studio openings in the period. Finally, paramount to Exponential Fitness's ongoing success is our ability to proactively support and grow our franchise system. Our business has remained resilient, and we have not experienced significant operational headwinds around talent acquisition or supply chain management. Given that approximately 25% of health clubs and 30% of studios closed permanently during the pandemic, there remains an adequate supply of fitness instructors in the space. In terms of supply chain, our equipment is primarily sourced in the United States, and as previously mentioned, we continue to take steps to proactively purchase equipment inventory for brands with a high volume of studio openings in the pipeline to mitigate against any potential disruptions in the coming quarters. In addition, these advanced purchases have been particularly beneficial given the current high inflationary environment. Based on these factors, despite the uncertain macroeconomic environment, we remain confident about the go-forward trajectory of our business, particularly as the positive momentum has continued into the third quarter. As one of the only scaled boutique fitness franchise operators during the 2008 financial downturn, I am keenly aware of the steps required to keep a business running successfully during economic volatility. At LA Boxing, I successfully scaled the business through the downturn before selling it in December of 2012. More recently, Exponential has proven resilient in the face of COVID-19, growing our business significantly against a backdrop of industry contraction. One of the most important things I have learned in my career in fitness and franchising is that partnering with the right operators who have the tenacity, courage, and capital to successfully run their business, no matter how challenging the operating environment they face, is critical for success. As you may have heard me speak to previously, we take our franchisee selection process very seriously, with only 2% of our leads becoming franchisees. Our franchisees generally are corporate veterans looking for an entrepreneurial opportunity. Their resilience and business acumen is evidenced by the fact that in the company's history, including most recently during the pandemic, we had zero studios closed permanently. Our franchisees have borrowed over $200 million from the SBA without any non-repayments under our ownership. Between our strong franchisee base, the support we provide our franchisees, and the continued strength of our underlying business, we feel confident that Exponential will not only be able to successfully weather a slowdown or recession, but maintain a solid growth trajectory going forward. As we continue to scale our global footprint, optimizing complex systems, data, and business intelligence is an increasingly important driver of our success. With that, I'm excited to announce the appointment of Jair Clark to serve on our board of directors as well as on our audit and human capital management committees. Given Jair's current role as global chief technology officer of commercial systems at Microsoft and his prior senior digital leadership roles at Disney and at IBM, It's hard to imagine anyone who could be a better fit for the board as we continue to scale our global business. With that as a background, let's move to our four key strategic areas of growth, beginning with our first two growth levers, increasing our franchise studio base across all of our brands in North America and expanding our brands and studio base internationally. We ended the quarter with 2,357 global studios. opening 128 net new studios in the second quarter. We also experienced strong demand for our franchise licenses, selling 251 licenses globally in Q2, maintaining our annualized run rate of 1,000 licenses per year. In North America, we have almost 1,900 licenses sold and contractually obligated to open and have a replenishing pipeline of organic new studio expansions. offering us four to five years of visibility into our growth. On the international front, we have almost 1,000 studios obligated to be open, and we continue to gain traction in terms of international expansion. We recently announced new master franchise agreements, or MFAs, for Club Pilates in the U.K. and Cycle Bar in Japan. As a reminder, our MFAs are structured to provide exponential with high margin flow through given we require minimal ongoing SG&A to support MFA growth. The Club Pilates MFA in the UK gives the master franchisee the opportunity to license at least 50 Club Pilates studios over the next 10 years. In Japan, our new MFA provides the master franchisee the opportunity to license at least 30 cycle bar studios over the next eight years. These new partnerships will bring Exponential's global reach to 14 countries. On the M&A front, the BFT integration remains on track. As of today, BFT has over 200 open studios globally. Regarding future M&A, the pipeline of opportunities remains robust, and we will continue to opportunistically evaluate potential brands in new modalities. Turning to our third key growth driver, expanding margins and driving free cash flow conversions. As our business continues to grow, we are increasingly reaping the benefits of our asset-light, scalable operating model, providing us with consistent and growing margin performance. Considering the current macro environment, we are very pleased to have held our operating margins steady. We continue to expect our adjusted EBITDA margin will be in the low 30% range for the full year 2022, and we remain on track to achieving our long-term adjusted EBITDA margins. John will discuss this further when he discusses our full-year outlook. With that, I'll pass the call on to Sarah to discuss our fourth and final growth driver, increasing our same-store sales and AUVs.