Xponential Fitness, Inc.

Greetings and welcome to the Exponential Fitness second quarter 2023 earnings 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 and then zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Avery Wanamaker, Investor Relations. Please go ahead.

Thank you, Operator. Good afternoon, and thank you all for joining our conference call to discuss Exponential Fitness second 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 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 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, Avery, and good afternoon, everyone. We appreciate you joining our second quarter earnings conference call. I'm proud to share yet another consistent quarter of results that continue to highlight the strength of our business and the health of our franchisees. On the call today, we will address several key concepts aimed at providing additional clarity on the business. We will also be speaking about these items in more detail at our Analyst and Investor Day on September 6, when we will provide a full overview of the business in financial performance, layout company strategy, and discuss longer-term growth metrics. Let's turn to our second quarter results. Exponential franchisees now operate nearly 2,900 studios globally with over 5,800 licenses sold across our 10 leading fitness brands. We have franchise, master franchise, and international expansion agreements in 19 countries outside of North America. Total members across North America saw growth of 29% year over year to a total of 697,000 at the end of the second quarter. Over 90% of these customers are actively paying members. Along with growth in our membership base North American studio visits for the second quarter increased by 32% year over year reaching a total of 12.9 million. This drove record North American system wide sales of 341 million, which represents a 37% increase over the second quarter of 2022. Q2 North American run rate average unit volumes of 561,000 were up 17% from 480,000 in Q2 of 2022, our 12th straight quarter of AUV growth. We continue to believe that AUV growth is the most direct measure of our franchise system's health. North America's same-store sales growth remains strong at 15% in the second quarter, and we are particularly pleased with the performance of our more mature cohort, with studios over three years old increasing same-store sales by 16%. Now that we are further removed from COVID-impacted time periods, we believe this metric has begun to normalize. John will speak about these calculations in more detail shortly. Turning to revenue. For the quarter, net revenue totaled $77.3 million, an increase of 30% year-over-year. Adjusted EBITDA totaled $25.3 million in Q2, or 33% of revenue, up 43% from $17.6 million, or 30% of revenue, in the prior year period. 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 Q2 with 2,892 global open studios, opening 141 net new studios in the second quarter. We sold 234 licenses globally in Q2 2023, with about 30% of licenses bought by existing franchisees, bringing total sold licenses to 5,872. We also continue to have an increasing pipeline with almost 2,000 licenses sold and contractually obligated to open on a global basis, excluding our master franchise agreement obligations. We are always pleased when an existing franchisee purchases additional licenses as it reinforces their satisfaction with our model and the success of their businesses. In fact, over 56% of our studios have owners who have purchased multiple exponential licenses. Looking at this in a bit more detail, our average franchisee has bought 2.6 licenses with 1.3 studios currently open. Turning to our next growth driver, international expansion. We have over 1,000 studios obligated to open under master franchise agreements. Of note, just recently we announced the signing of a master franchise agreement in France for our Club Pilates brand, which represents our 19th country outside of North America. The agreement gives the master franchisee the opportunity to license a minimum of 75 Club Pilates studios in France over the next 10 years and is indicative of Exponential's approach to international expansion, wherein we partner with world-class, experienced operators who can rapidly scale our brands. As a reminder, our MFAs are structured to provide Exponential with high-margin flow-through. We typically receive a percentage of revenue share with very little corresponding SG&A. Exponential is currently targeting approximately 50 countries with our 10 existing brands or potentially 500 different MFA opportunities, which provides significant white space for future growth. Our third key growth driver is to expand margins and drive free cash flow conversion. Adjusted EBITDA margins again increased to 32.6% during the second quarter, demonstrating continued operating leverage. As we continue to scale, holding company-owned transition studios will create headwinds when optimizing margins. Therefore, going forward, we no longer will take on company-owned transition studios. As of the date of this call, we are operating 38 company-owned transition studios and have nine corporate LA Fitness studios under our Club Pilates and Stretch Lab brands. We plan to continue operating these nine studios in order to prove out the LA Fitness non-traditional studio concept. The company-owned transition studios currently generate an immaterial amount of net operating loss. We plan to re-franchise these studios down to zero and we will no longer take on any company-owned transition studios going forward. We are confident this shift in strategy will drive additional leverage to SG&A expenses while also benefiting AUVs in the long run. Importantly, as John will speak to shortly, we are raising guidance on several of the guided metrics for the year. We remain on track to achieve adjusted EBITDA margins in the 35% to 39% range by year-end and adjusted EBITDA margins of 40% in 2024. We look forward to providing an overview of the business and financial performance, layout company strategy, and discuss longer-term growth metrics at our Analyst and Investor Day on September 6 at the New York Stock Exchange. 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.