Xponential Fitness, Inc.

Greetings and welcome to Exponential Fitness Incorporated First Quarter 2023 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. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Kimberly Estrigan. Thank you. You may begin.

Thank you, Operator. Good afternoon, and thank you all for joining our conference call to discuss Exponential Fitness' first quarter 2023 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 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 first 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 with an emphasis on our growing B2B offerings. John will conclude with a review of our first quarter financials and an update on our 2023 outlook. It was another strong quarter for Exponential as our business has continued to perform across our key performance metrics. Exponential franchisees now operate over 2,750 studios globally, an increase of 24% year over year, with more than 5,600 licenses sold across our 10 leading fitness brands. We now have franchise, master franchise, and international expansion agreements in 18 countries. Also encouraging, our mature studio cohorts are again exhibiting strong same-store sales growth with profiles similar to our younger studios. For the quarter, North American studios over three years old comped at 21% same-store sales. Turning to our membership levels. Total members across North America increased by approximately 31% year-over-year to a total of 665,000 at the end of the first quarter. Over 90% of these customers are actively paying members. Along with growth in our membership base, North American Studio visits for the three months ending in March increased by 38% year-over-year, reaching a total of 12.6 million. The increasing foot traffic and utilization of the studios drove record North American system-wide sales, which increased 42% year-over-year in the first quarter. Freezes on memberships are also at their lowest level since prior to the pandemic. Q1 North American AUVs of 542,000 were up 21% from 450,000 in Q1 of 2022, our 11th straight quarter of AUV growth. We believe that AUV growth is the most direct measure of the health of our franchise system, and I am pleased to report the momentum in AUV growth has continued to build in the second quarter. We also saw same-store sales growth of 20% in the first quarter, up from 17% in the previous two quarters. This improvement is particularly impressive when considering the difficult comp in the first quarter of 2021 when our studios were back running at full capacity and performing solidly post-pandemic. These numbers also bode well for our studio's growth prospects for the remainder of the year and into the future as more members are visiting our studios. Furthermore, the acceleration and growth in our North American AUVs and same-store sales, in combination with a growing membership base, demonstrate that consumers continue to view their health and wellness as a vital part of their budgets and not discretionary spend. Turning to revenue. For the quarter, net revenue totaled $70.7 million, an increase of 40% year over year. Adjusted EBITDA totaled $22.9 million in Q1, or 32% of revenue, up 58% from $14.5 million, or 29% of revenue, in the prior year period. The resiliency of Exponential's business is best demonstrated by our franchisees opening new studios while driving additional business to their existing locations. Exponential franchisees continue to have ample access to the capital required to open studios by leveraging our relationships with several lenders. Despite higher interest rates, we have a healthy pipeline of franchisees with pre-sold licenses seeking and receiving funding. In addition to franchisees continuing to open studios, studio members are continuing to show that they are spending on experiences. As Sarah will speak about shortly, many view their fitness memberships as part of their overall entertainment budgets. Let's now turn to our four strategic growth areas. I'll discuss the first three and then turn the call over to Sarah to discuss the fourth. Beginning with the increase of our franchise studio base, we ended Q1 with 2,756 global open studios, opening 115 net new studios in the first quarter. We sold 188 licenses globally in Q1, bringing the total sold licenses to 5,638. Our pipeline of over 2,000 licenses sold and contractually obligated to open on a global basis offers us multi-year visibility into our growth. Note this number does not include our master franchise agreement obligations, which I will speak to shortly. I am also happy that we are now conducting classes on all 15 of the cruise ships that make up the Princess Fleet. Sarah will speak to this achievement in greater detail later in today's call. Turning to our second growth driver, expanding internationally. On the international front, we have over 1,000 studios obligated to be open under master franchise agreements, and we continue to gain traction. Just last week, we announced a master franchise agreement in Japan to franchise up to 40 Stretch Lab studios over the next 10 years. Exponential has five brands operating in Japan, including Club Pilates, Rumble, Cycle Bar, AKT, and Stretch Lab. In addition, we recently signed master franchise agreements with Club Pilates in Ireland and Switzerland, and in Q1, we opened our first Club Pilates in Frankfurt, Germany. As a reminder, our MFAs are structured to provide Exponential with high margin flow-through, given that we structure them as a revenue share model and 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 see further benefits of our asset-light scalable operating model, which shows up in our margin performance. Adjusted EBITDA margins again improved to 32.4% during the first quarter as we continue to increase our operating leverage. We remain confident that our adjusted EBITDA margins will expand into the 35% to 39% range in 2023, and are on track to achieve our adjusted EBITDA margin target of 40% in 2024. With that, I'll pass the call on to Sarah to discuss our fourth and final growth driver, increasing our same-store sales in AUVs.