Xponential Fitness, Inc.

Greetings. Welcome to Exponential Fitness Incorporated third quarter 2022 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 Kimberly Estrikin, 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' third 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 obligation to update the information provided on today's call. In addition, we will be discussing certain non-GAAP financial measurements 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. I'll begin today's discussion with an overview of our quarterly performance and operational highlights. Sarah will then speak about our progress against our core growth strategies, including our new partnership with Princess Cruises and our recent brand launches on Lululemon Studios. John will conclude with a review of our third quarter financials and an update on our full year outlook. We are very pleased with our operational execution and resulting financial performance for the third quarter. Beginning with studio count, Exponential remains the largest boutique fitness franchisor globally, with franchisees operating over 2,400 studios and more than 5,100 licenses sold across 10 leading fitness brands. We have franchise, master franchise, and international expansion agreements in place in 16 countries around the world. As our total studio count continued to grow, so too did our membership base, another key indicator of the strength and stability of our business model. Looking specifically at North America, total members for the third quarter increased by approximately 33% year-over-year to 577,000, Our Q3 North American system-wide sales also continued to grow up 37% year-over-year to $265 million. Finally, we ended the third quarter with run rate North American AUVs of $489,000 up from $417,000 year-over-year. AUVs for the month of September reached $496,000, underscoring the continued momentum in the business. The consistent growth in our run rate AUVs is a strong reminder that despite inflationary pressures and other macroeconomic challenges, the workouts our franchisees provide across our diverse portfolio of brands remain an integral part of our members' lives. As we continue to open more studios and grow our system-wide sales, our profitability also increases, driven by the high margins our royalties generate. Turning to revenue, for the third quarter, we posted net revenue of $63.8 million, an increase of 56% year over year. Q3 adjusted EBITDA of $20 million, or 31% of revenue, was up 193% from $6.8 million, or 17% of revenue, in the prior year period. As is evident from our third quarter results, while we continue to operate in a time of inflationary and overall macroeconomic pressures, our business has remained resilient. This resiliency can be attributed to three factors, our members, our franchisees, and our business model. Let's start with our membership base. As we noted last quarter, Exponential's customers continue to prioritize their health as a necessary investment rather than discretionary spend. Our average member has a typical household income of approximately $130,000, and the majority subscribe to reoccurring membership packages with fees that represent a relatively small piece of their overall budget. With membership counts growing and churn remaining low, we are confident in the ongoing health of our membership base and demand for our boutique offerings. The second factor contributing to Exponential's resiliency is our franchisees. As you've heard me speak to previously, we take our franchisee selection process very seriously with only 2% of our leads becoming franchisees. Our franchisees are typically corporate veterans looking for an entrepreneurial opportunity. These individuals have the tenacity, courage, and capital to successfully run their businesses. Our franchisees have also borrowed over 200 million from the SBA without any non-repayment under our ownership. To ensure a studio's success, once we bring an individual into our franchisee system, Exponential offers ongoing monitoring of the business and key operational assistance that leverages our extensive data analytics capability. Should there be any indication in the data that studio operations are awry, we are able to respond quickly and make the necessary shifts to maintain that studio's performance. We take regular engagement with our franchisee base seriously, and we are looking forward to our annual convention in Las Vegas coming up again this December. Last year, over 2,000 individuals traveled to Las Vegas to join us. At the event, we recognize franchisees for their hard work, share best practices, provide training, showcase vendors, and most importantly, align on our goals to carry forward the momentum into the coming year. Last but not least, the third factor contributing to our resiliency is our franchise business model. As a franchise business, exponential benefits from highly predictable reoccurring revenue streams and limited ongoing capital requirements. In the third quarter, approximately 71% of our revenue was reoccurring, largely driven by royalties. Beyond our reoccurring revenue streams, our capital-like franchise business model and access to labor and equipment help drive our continued success and margin expansion. Based on these factors, despite the uncertain macroeconomic environment, we remain confident in our go-forward trajectory and are raising our revenue and adjusted EBITDA outlook for the full year. With that as a background, let's turn to our four strategic areas of growth. I'll discuss the first three levers and then turn the call over to Sarah to discuss the fourth. Starting with increasing our franchise studio base, we ended Q3 with 2,485 global open studios, opening 128 net new studios in the third quarter. Year to date, we have opened 355 new studios, putting us on track to reach our goal of 500 plus new studios for the year. Of note, with each progressive quarter, studio opening cohorts have gotten stronger, opening at higher sales and membership levels in month one and then ramping faster than studios in prior cohorts. We were also pleased to see our highest number of new studio openings in the final week of September. Our franchisees opened 36 studios in the last week of September, a strong indicator that our franchisees remain bullish on opening new studio locations as we approach 2023. We also experienced strong demand for our franchise licenses, selling 258 licenses globally in Q3 and 769 thus far this year. Keep in mind that over time, as we continue to sell through prime geographic territories in each of our existing brands, in order to maintain this elevated run rate, we would eventually need to acquire another brand. In North America, we have over 1,900 licenses sold and contractually obligated to open, along with a replenishing pipeline of organic new studio expansion that offers us four to five years of visibility into our growth. We were also excited to recently announce that our newest brand, BodyFit Training, or BFT, which has over 200 studios open internationally, has started expanding into additional locations in North America, beginning with Toronto, Canada. Much like its predecessor, Rumble, which sold over 150 North American franchise licenses in its first eight months of franchising, since we began franchising BFT in February of this year, we have sold over 150 BFT licenses in North America, positioning the brand for expansion across the United States and Canada. Turning to our second growth driver, expanding internationally. On the international front, we have almost 1,000 studios obligated to be open, and we continue to gain traction. In August, we signed a new master franchise agreement, or MFA, in Kuwait for Rumble, Club Pilates, Stretch Lab, and Cycle Bar. Then in September, we signed an MFA for Club Pilates in Portugal. The addition of Kuwait and Portugal, both large fitness markets, brings our global presence to 16 countries. As a reminder, our MFAs are structured to provide exponential with high margin flow-through, given that we require minimal ongoing SG&A to support MFA growth. Speaking of margins, our third key growth driver is to expand margins and drive free cash flow conversion. 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 macro environment, we're especially pleased with where our operating margins performed this past quarter. 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 achieve our long-term adjusted EBITDA margin target. 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.