Xponential Fitness, Inc.

Greetings and welcome to the Exponential Fitness Inc. fourth quarter and fiscal year 2022 audience 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 the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce to your host, Kimberly Eftekin from Investor Relations. Thank you, and 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 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 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 gap 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 fourth quarter earnings conference call. I'll begin today's discussion with an overview of our quarterly performance and operational highlights. Sarah will then speak further about our progress against our core growth strategies. John will conclude with a review of our fourth quarter financials and provide our 2023 outlook. As will be evident from the results we discussed today, 2022 was another successful year for Exponential. For the year, we achieved double-digit growth across North America memberships, same-store sales, and AUVs. all of which are representative of the fact that boutique fitness is considered a must-have, not discretionary spend by studio members. The demand for our offerings is demonstrated by our North American studios generating over $1 billion in system-wide sales in 2022. We are especially encouraged by the fact that our mature studio cohorts still exhibit strong same-store sales growth and have a profile that's similar to our younger studios. For the full year, North American Studios over three years old comped at 25% same-store sales growth. And more recently, in the fourth quarter of 2022, North American Studios over three years old comped at 18% same-store sales growth. While we do expect this percentage to come down over time as growth profiles normalize, we are encouraged to see this level of performance. It is clear from these numbers that each year, Exponential continues to raise the bar on its operational performance and deliver on its financial results, and 2022 was no exception. Together, we have built a resilient business, and I want to thank every one of our franchisees and employees. All your hard work has enabled Exponential to reach record annual results and to continue to deliver on its mission to make boutique fitness accessible to everyone. I had the opportunity to meet with a large number of our franchisees this past December at our annual franchise convention in Las Vegas. Over 2,000 enthusiastic attendees gathered to share best practices and discuss innovative ways to promote the growth of our brands. We are seeing this excitement reinforced in the momentum we are already experiencing in early 2023. As the largest boutique fitness franchisor globally, with franchisees operating over 2,600 studios, We have grown our studio footprint by 24% year over year. We now have a combination of franchise, master franchise, and international license agreements in place in 16 countries and will continue to grow our footprint globally. Turning to our membership performance, total members across North America increased by approximately 32% year over year in 2022 to a total of 590,000. This momentum in membership growth has carried into 2023 And in the month of January, we officially surpassed 600,000 North American members. With nearly 90% of these customers on reoccurring membership packages, these figures are representative of the long-term growth of a passionate, loyal customer base. As our membership base has grown, so too have visits to our studios. North American studio visits for the 12 months ending in December 2022 increased by 32% year over year, reaching a total of 39.2 million. Increased utilization at studios resulted in record North American system-wide sales. North American system-wide sales increased 46% in 2022 and surpassed 1 billion annual sales for the first time in Exponential's history. We believe that our studio's quarterly run rate average unit volumes, or quarterly AUVs, ultimately offer the most direct measure of the health of our franchise system. We ended 2022 with fourth quarter run rate North American AUVs of 522,000, up from 446,000 in Q4 of 2021. This represents the 10th straight quarter of AUV growth. While we don't know maximum AUV potential, we know that our studios have plenty of capacity to add more members and classes. The strong same-store sales exhibited by even our more mature cohorts that I discussed earlier make us confident in our studio's growth prospects. Turning to revenue. For the year, we posted net revenue of approximately $245 million, an increase of 58% year-over-year. Adjusted EBITDA for 2022 totaled $74.3 million, or 30.3% of revenue, an increase of 172%. from $27.3 million or 17.6% of revenue in the prior year period. With that as a background, let's turn to our strategic growth areas. I'll discuss the first three levers of our growth plan and then turn the call over to Sarah to discuss the fourth. Let's begin with increasing our franchise studio base. We ended Q4 with 2,641 global open studios, opening 156 net new studios in the fourth quarter alone. For the full year, we opened 511 net new studios globally, or a new studio opening approximately every 17 hours. We also experienced strong demand for our franchise licenses, selling 257 licenses globally in Q4, bringing total sold licenses to 5,450. In North America, we have almost 2,000 licenses sold and contractually obligated to open, offering us multi-year visibility into our growth. Keep in mind that over time, as we continue to sell through prime geographic territories in each of our existing brands, we would eventually need to acquire another brand to maintain this elevated run rate of licensed sales. Turning to our second growth driver, expanding internationally. On the international front, we have over 1,000 studios obligated to be opened, and we continue to gain traction. In November, we announced a master franchise agreement in Portugal to license Club Pilates studios. Then in December, we announced a master franchise agreement in Japan for our Rumble and AKT brands to open a minimum of 100 new studios across both brands. As a reminder, our MFAs are structured to provide exponential with high margin flow through given that we require minimal incremental SG&A to support MFA growth. 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. We are especially pleased with where our adjusted EBITDA margins ended for the year. We continue to expect our adjusted EBITDA margins to expand into the 35% to 39% range in 2023, and we remain on track to achieve our adjusted EBITDA margin target of 40% in 2024. Our boutique in-studio offerings are exactly what consumers post-pandemic are gravitating toward. Consumers have shifted their interest towards smaller classes that offer community and entertainment in a safe, healthy environment. Our members come to our studios not only to work out, but also to socialize with one another and studio staff. It's this sense of community that makes our studio membership so sticky and why the thought of giving up one studio membership equates with also giving up a community and a lifestyle. People are just not willing to make that trade-off. Furthermore, as our brands and community continue to grow, we are increasingly capitalizing on opportunities to engage with consumers far beyond just the physical studio space. As Sarah will discuss shortly, our B2B, X-Plus, and X-Pass offerings are great examples of how we are increasingly engaging with our consumers in a more holistic, omnichannel way. 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.