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.

Thank you, Anthony. We drove strong in-studio performance in the second quarter and further built out our ecosystem of B2B partnerships, strengthened our omnichannel fitness offering, and continued refining our XPath and XPlus services. During the second quarter, North America visitation rates grew 32% year-over-year, and our North America actively paying membership base grew to over 628,000 members. With our product continuing to be very sticky and playing an integral role in our members' lifestyle, Exponential continues to retain its membership base. Exponential aims to ensure that members have access to a boutique fitness experience that matches their individual needs and interests. Let's now discuss how our omnichannel offerings help drive customer engagement resulting in higher same-store sales and AUVs. Our XPAS offering is one way we enhance customer engagement by having frictionless access to all 10 of our brands on a single recurring monthly membership platform. Inception to date, there have been over 60,000 bookings made on XPAS. XPAS is beneficial for both consumers and franchisees. It provides consumers with flexibility to snack across fitness modalities, while driving new lead generation for in-studio memberships. This quarter, we will be introducing an advertising channel into the XPAS app to give Exponential Studio customers access to third-party exclusive offers, launching in categories such as mental health, apparel, and healthy foods. This initiative will drive further benefit to our members while serving as another means for driving incremental lead flow to the studios. XPUS is the second critical element of our omnichannel approach. Xplus allows our customers to access digital classes at all 10 of our brands, from the comfort of their own home and as a supplement to in-person classes at our studios. Many of our subscribers also hold in-studio memberships, including those who have subscriptions through their brick and mortar memberships. We're constantly developing new content for our Xplus platform, and we're excited to see this digital channel continue to translate into increased consumer stickiness and brand affinity. Also, during the quarter, we solidified an X-plus licensing deal with our master franchisor for BFT, which enabled us to offer on-demand classes to members across 250 international BFT locations. We are excited to introduce our omnichannel experience to global consumers and expect to pursue similar licensing deals with other MFAs. B2B partnerships, like our relationship with Princess Cruises, are the third key element of Exponential's omnichannel strategy. These partnerships provide a means of reaching new audiences, generating revenue, and creating lead flow with little, or sometimes negative, acquisition costs. As of the end of Q2, Pure Bar, Yoga 6, and Stretch Lab have been launched across the entire fleet of Princess Crew ships. In addition, in September, we will have our first one-of-a-kind sea-going retreat for Club Pilates, which is to set sail in Alaska. Club Pilates classes will be offered by top-notch instructors amidst Alaskan glaciers and mountains and in conjunction with Royal Princess' culinary entertainment and activity options. This experience is already selling itineraries, and we intend to launch future retreats across our other brands. The renewal we announced with Lululemon in June is another great example of a B2B partnership that is helping to grow exponential. Members of Lululemon Studio can stream a diverse range of workouts featuring PeerBar, Rumble, AKT, and Yoga6 classes, as well as take advantage of discounted classes at the brick-and-mortar locations of these brands across North America. The cross-promotional offering is an efficient and effective way of introducing new customers to our brands and building an enduring interest in Exponential Fitness' modalities. In the second half of 2023, we will continue to explore additional B2B partnerships to enhance our X-Plus and X-Pass offerings to further build out our omnichannel fitness capabilities. Through these offerings, we look forward to expanding the breadth and depth of tools available to our franchisees to bring people into the exponential ecosystem, drive higher customer retention, and create a world-class fitness experience. As a portfolio company, We have the ability to leverage our scale, our vendor relationships, our omnichannel offerings, and partnerships across all our brands to ultimately achieve the goal of driving more members into the franchisee studios. Importantly, our performance data validates this as studio-level KPIs continue to grow each quarter. Thank you again for your time. I'll now turn the call over to John to discuss our second quarter results and 2023 outlook. Thanks, Sarah.

It's great to speak with everyone today. Before diving into our results for the quarter, I'd like to discuss our calculations for average unit volumes and same-store sales, both of which have been consistently defined and calculated throughout our history. I will also provide clarity on historical and go-forward treatment of studio closures under KPI reporting and how they would be categorized, as well as provide an overview on how to think about brand-level economics. starting with North American quarterly run rate average unit volumes. We define this as the average quarterly sales activity for all studios that are at least six months old at the beginning of the respective quarter, multiplied by four to get an annualized number. Studios with zero sales in the period, as well as our 19 LA Fitness locations, are and have always been excluded from this calculation. With that said, inclusion of zero-sale studios and non-traditional locations would not result in a material difference to AUVs. For Q2 2023, our calculation for run rate AUV of 561,000 included 99% of our entire North American studio base older than six months. When including 100% of studios, run rate AUV would have been just 1% lower. Similarly, when calculating our North American same-store sales, we have followed the industry standard practice of including only studios that have 13 months of continuous sales activity as disclosed in our SEC filings. Our Q2 2023 same-store sales of 15% included 97% of our North American studio base older than 13 months. For Q2 2022, Same store sales of 25% included 98% of these studios. Turning to the go-forward treatment of studio closures under KPI reporting. Any studio that does not have sales for nine consecutive months will now be deemed closed for KPI reporting purposes. We have provided a full reconciliation of studio counts under this new method in the 10-Q. It's important to note that applying this new method to historical figures results in minimal differences. Turning to brand-level data, Exponential has always taken a portfolio approach to its brands where there is a diversification of modality and varying levels of revenue performance depending on the maturity of the brand. We will be providing more detail on the unit-level economics that underpin our portfolio of brands, which we will discuss at our upcoming Analyst and Investor Day. It is important to point out that our well-established brands in North America at scale, meaning brands that have over 150 open studios in North America, which include Club Pilates, Stretch Lab, Pure Bar, Cycle Bar, and Yoga 6, represent more than 90% of our total studio base at quarter end and generate weighted average AUVs of approximately 578,000. These brands have existed for several years, and have had time to develop a strong following among members, typically driving higher AUVs. Our five growth brands, which include Row House, Rumble, BFT, Stride, and AKT, account for less than 10% of our studio base in North America at quarter end. These brands have had the benefit of exponential support system for shorter time periods, yet continue to mature in the brand awareness and membership base. Our established brands generated 16% Q2 2023 same-store sales and make up 94% of North American system-wide sales. As the brands mature, the studio AUVs and corresponding franchisee profitability will improve as the largely uniform operating expenses are leveraged, noting some slight variations driven by labor and other expense items. Our brands have roughly the same monthly operating expenses. and these expenses can vary across designated market areas. For example, rent and labor costs in New York City would typically be higher compared to Louisville, Kentucky. The exception to the operating expenses occurs more frequently in our Stretch Lab and Pure Bar brands. Stretch Lab has a higher labor cost, given the mostly one-on-one model, but also generates higher AUVs. Purabar has more of an owner-operator model that allows the owner to internalize some of the expenditures they would otherwise have for labor. In some instances, franchisees of lower AUD concepts have transitioned from semi-absentee to owner-operator in order to reduce labor costs and internalize more of their overall spend. Now turning to our results for the second quarter. North America system-wide sales of $341.3 million were up 37% year over year. The growth in North American system-wide sales was driven primarily by the 15% same-store sales in the existing base of open studios that continued to acquire new members, coupled with 115 new North American studios that opened in the second quarter. On a consolidated basis, revenue for the quarter was $77.3 million, up 30% year over year. Reoccurring revenue for the quarter was 74%, which we have consistently defined to include all revenue streams except for franchise license sales and equipment revenues, given these materially occur up front before a studio opens. That being said, all five of the components that make up our revenue grew during the quarter. Franchise revenue was $35.1 million, up 27% year over year. This growth was primarily driven by an increase in royalty revenue as member visits and system-wide sales reached all-time highs. In addition, we saw increased instructor training revenues and higher monthly tech fees that will continue to increase as we open more studios domestically. Equipment revenue was $14.4 million, up 17% year-over-year. This increase in equipment revenue is the result of continued higher volumes of global equipment installations, in addition to a higher mix of equipment-intensive brands like BFT and Rumble. Merchandise revenue was $8.4 million, up 24% year over year. The increase during the quarter was primarily driven by a higher number of operating studios and increased foot traffic compared to the prior year. Franchise marketing fund revenue of $6.6 million was up 34% year over year, primarily due to strong system-wide sales from a higher number of open studios in North America. Lastly, other service revenue, which includes rebates from processing studio system-wide sales, B2B partnerships, XPath, and XPlus, amongst other items, was $12.8 million, up 62% from the prior year period. The increase in the period was primarily due to increased revenue from sales generated in our company-owned transition studios, increased rebates from the processing of studio-level system-wide sales, and our higher revenues from our B2B partnerships. Turning to our operating expenses, cost of product revenue were $14.2 million, up 5% year over year. The increase was primarily driven by a higher volume of equipment installations for new studio openings and a higher mix of equipment-intensive brands in the period. Cost of franchise and service revenue were $3.7 million, down 18% year over year. The decrease was driven by fewer license terminations in Q2 of 2023. Selling, general, and administrative expenses of $44.4 million were up 52% year over year. As a percentage of revenue, SG&A expenses were 57% of revenue in the second quarter, up from 49% in the prior year period. As Anthony spoke to earlier, we expect our shift in strategy regarding company-owned transition studios will begin to have a positive impact in the second half on this line item and drive leverage in SG&A. We are already executing on the plan to ramp down these studios and will share additional details on the positive impact this will have at the Analyst and Investor Day. Depreciation and amortization expense was $4.3 million, an increase of 20% from the prior year period. Marketing fund expenses were $5.5 million, up 34% year-over-year, driven by the increased spend afforded by higher franchise marketing fund revenue. Acquisition and transaction expenses were a credit of 31.3 million versus a credit of 31.6 million in the second quarter of 2022. As I noted on prior earnings calls, the contingent consideration is related to the Rumble acquisition earn out and is driven by the share price at quarter end. We mark to market the earn out each quarter and accrue for the earn out. We recorded net income of 27.5 million in the second quarter, compared to a net income of $31.5 million in the prior year period. The slightly lower net income was the result of $5.3 million of higher overall profitability offset by a $0.4 million increase in non-cash contingent consideration primarily related to the Rumble acquisition, a $1.6 million increase in non-cash equity-based compensation expense, and a $7.2 million increase in write-down of brand assets associated with taking on a number of Rumble founder company-owned transition studios in the period. We continue to believe that adjusted net income is a more useful way to measure the performance of our business. A reconciliation of net income to adjusted net income is provided in our earnings press release. Adjusted net income for the second quarter was $4.2 million which excludes the $31.3 million gain in fair value of non-cash contingent consideration, a $0.7 million liability increase related to the second quarter remeasurement of the company's tax receivable agreement, and the $7.2 million non-cash write-down of brand assets. This results in adjusted net earnings of $0.05 per basic share on a share count of 33 million shares of Class A common stock, after accounting for income attributable to non-controlling interest and dividends on preferred shares. Adjusted EBITDA was $25.3 million in the second quarter, up 43% compared to $17.6 million in the prior year period. Adjusted EBITDA margin grew to 33% in the second quarter compared to 30% in the prior year period. As a reminder, our 2023 outlook anticipates adjusted EBITDA margins reaching the 35% to 39% range, and we expect this number to grow to 40% in 2024. Turning to the balance sheet, as of June 30, 2023, cash, cash equivalents, and restricted cash were $40.2 million, up from $29.3 million as of June 30, 2022. Total long-term debt was $265.6 million as of June 30, 2023, compared to $131.7 million as of June 30, 2022. The increase in total long-term debt is primarily due to the repurchase of 85,340 shares of convertible preferred stock at a price of $22.07 per share announced in January. These shares prior to the repurchase would have been convertible into 5.9 million shares of Class A common stock. As mentioned on previous earnings calls, the company remains focused on optimizing our capital structure. If market conditions prove favorable, the company intends to pursue a whole business securitization of our repeating revenue streams, which would provide cheaper access to fixed rate financing in place of our existing floating term loan debt. Now turning to our outlook, based on current business conditions and higher levels of performance in the second quarter, We are increasing our full year 2023 guidance for system-wide sales, revenue, and adjusted EBITDA, and we are reaffirming guidance for new studio openings as follows. We expect 2023 global new studio openings to remain unchanged in the range of 540 to 560. This range represents the highest number of studio openings in our company's history and an 8% increase at the midpoint over 2022. We now expect North America systemwide sales to range from $1.385 billion to $1.395 billion, up from the previous $1.37 billion to $1.38 billion, or a 35% increase at the midpoint from the prior year. Total 2023 revenue is now expected to be between $295 million to $305 million, up from the previous $290 million to $300 million. a 22% year-over-year increase at the midpoint from the prior year. Adjusted EBITDA is now expected to range from 102.5 million to 106.5 million, up from 102 million to 106 million, a 41% year-over-year increase at the midpoint from the prior year. This range translates into a roughly 34.8% adjusted EBITDA margin at the midpoint. In terms of capital expenditures, we anticipate approximately $10 million to $12 million for the year, or approximately 4% of revenue at the midpoint. Going forward, capital expenditures will be primarily focused on the BFT integration, XPath and XPlus new features, and maintenance on other technology investments to support our digital offerings. For the full year, our tax rate is expected to be mid to high single digits, Share count for purposes of earnings per share calculation to be 32.7 million and 1.9 million in quarterly dividends to be paid related to our convertible preferred stock. A full explanation of our share count calculation and associated pro forma EPS and adjusted EPS calculations can be found in the tables at the back of our earnings press release, as well as our corporate structure and capitalization FAQ on our investor website. Finally, Before turning the call over for questions, I want to communicate that our Board of Directors on August 1st has authorized a new up to $50 million share repurchase. Our lender, MSD Capital, has already amended our term loan financing agreement and is funding the capital to complete the repurchase. Pro forma adjusting for this incremental $50 million in term loan debt The company will have less than three times net debt to adjusted EBITDA for the full year 2023 based on the midpoint of our guided range. Thank you for your time today and for your support of Exponential. We will now open the call for questions. Operator?

Thank you, sir. Ladies and gentlemen, we will now be conducting the question and answer session. If you would like to ask a question, please press star and then one on your telephone keypad. A confirmation tone will indicate that your line is in the questioning queue. You may press star and then two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Randy Koenig of Jefferies. Please go ahead.

Hey, guys. Thanks a lot. Very thorough presentation. Lots of good data for us to analyze. So I guess one thing that really struck me on the AUV side was, A, it's very strong. And then, B, you talked about strength in visitation growth during the quarter. So maybe could you give us some perspective if you think about that AUV strength, you know, quarter in the quarter, year over year? Can you give us some, balance it out with how much is like visitation growth, some pricing, maybe mixed shift with the higher AUV concepts. Just want to get your perspective on what's driving that overall number.

Yeah, I'll take that. So the system-wide sales growth that you saw from Q1 to Q2, again, as consistent with prior quarters, you're getting 95% of system-wide sales growth two different ways. One from obviously opening up new studios. But two, it's volume. It's not price. So it's typically the 95, 5% did that calculation. Reaffirming Q2 is very similar, that it's 95% volume. And visitation, when you think about visitation, in the summer months, you typically see more families take vacation. So visitation was flat roughly to Q1, but you still had the benefit of growing system-wide sales and members. So You'll see that kind of in the early part of Q3 as well. July is more of a summer travel month. While kids are out of school, parents tend to take more vacation. So visitation in the summer months is relatively fast. But when you look at historical patterns and seasonality, August and September, you see when kids come back to school, parents usually have more time and they kind of return back to their workout regimens. But visitation is still greater than Q1. but it is flat when you look at it from like June to July.

Understood. And then, you know, on the additional country, I guess France, up to 19 countries now, maybe give us some flavor on what's been developed so far, how that's been going, what maybe differences you're seeing from your MFAs in the different regions or countries, and then kind of how you're thinking about the pace of new country openings let's say, over the next three to five years. That would be very helpful. Thank you.

Yeah, I can take that one. We've got a lot of development out there in terms of potential. We mentioned that there's 50 countries that we've identified times 10 brands, so 500 total MFAs that we can go out and develop and pursue. In terms of the recent MFAs, we've got Switzerland, Ireland, as well as France. Those are existing franchise partners of our domestic studios that have decided to open abroad, which is really exciting to see. And they're in the early stages of going out and looking for leases and developing out those studios. So we should know soon how they perform, but we feel very confident in the performance of our franchise partners, given that they're strong performers domestically.

And to follow that up, Randy, like looking into the future in regards to your question around you know, what is the openings internationally look like compared to domestic. It's going to follow suit. We've been, right now, the total mix is around 90-10 with 90% domestic, 10% international, but we've been selling at opening closer to 75-25. So, you know, assuming, you know, long-term metrics, you know, north of 500 units a year, you could probably assume about 25% of those will come internationally over the coming years.

Super helpful. Again, thanks for all the data, guys. Appreciate it.

Thank you. The next question is from Joe Altabella of Raymond James. Please go ahead.

Thanks. Hey, guys. Good afternoon. First question, I want to dig a little deeper into studio economics. What percentage of your studios that are open more than a year or longer than a year are profitable on a four-wall basis?

Yeah, so when we talk about studio economics, you'll typically see in the first 12 months studios ramp to about 380,000 ish, which is above the breakeven level. And we've, we've provided that information before. So the, the majority of our students and our students, majority of our, our studios arrive at that, you know, in the first year. And then they typically come in the mid to high single digits after that, you know, we saw 8% on average pre COVID the model largely reflects that, that studios get to, Studios get to, like I said, 380,000 in their first year, and then they typically comp around 8% after that per year.

Okay. Helpful. And then maybe a second question. You mentioned that you do expect to get transition studios down to zero at some point. What timeframe are you thinking about?

Yeah, well, Joe, as we said, the studios or the actual unit count of the studios are down about half from what they were in Q1 and recently in Q2. So the remaining balance in the portfolio doesn't lose any material money. So we've never looked at the unit count of studios as an indication of franchisee health. You know, the unit number itself, it's always, you know, what are the NOLs and what is the headwind to SG&A that we're concerned with? We're not concerned with the actual number. And so these stores that we have now, the 30-plus stores that are kind of our four-wall brick-and-mortar stores that you know, don't lose a lot of money for us. And so there's not a lot of pressure to offload those right away. But we will be doing that in balance and making sure that the winners and the losers that are left in that portfolio are giving us the least amount of headwind. And that's what we're focused on, right, is SG&A and NOLs. So, in other words, we don't want to sell all the winners and be left with all the losers, and that's been the strategy from the beginning. And so, you know, if I had to throw a guess out there, you know, we're targeting by the end of the year or, you know, kind of Q1 of next year. But we want to do good deals that are accretive to the company. You know, some of these stores we've bought for, you know, a lot less than what they're actually worth. And so, you know, we'll be going out and making sure that we do the best deals possible for the company. But given that there's not a lot of leakage, we're not trying to, you know, necessarily offload them, you know, real quickly. And then the nine LE Fitnesses we're operating, eight of which are Club Pilates and one of which is a Stretch Lab, we'll continue to probably operate those a little bit longer as we're just proving out that concept because franchisees want to see that the concept is works. We do have several franchisees that are operating LA Fitnesses and doing very well with them, but we want to be operating them here locally in Southern California.

Okay. Thanks, guys.

Thank you. The next question is from Alex Perry of Bank of America. Please go ahead.

Hi. Thanks for taking my questions here. I guess just first to follow up on some of the earlier questions can you talk about sort of franchisee profitability and cash on cash returns sort of by concept versus pre-covid um is it fair to say sort of like you know the the clubs that have the concepts with the most tenure like a club pilates or you know have better cash on cash returns and maybe like a row house or some of the more nascent concepts just any more color you can give us on sort of the economics by concept would be really helpful. Thanks.

Yeah, Alex. So we will double click on that in the investor day. We debated whether or not this was the right form to dive into that. And it's just, it's too much data to try and do in a five minutes kind of a Q and a session. But, To think about it, you know, we've talked about 40% cash-on-cash returns at certain levels of AUVs. We are seeing a lot of our brands produce more than that from an AUV perspective, and we continue to keep climbing. The scale brands, for sure, you know, as we talked on the call, you know, north of 575,000 roughly on a weighted average AUV. So their cash-on-cash returns are much higher. than the ad design model, which we've largely spoke about. You have brands in the, we'll call it not at scale, BFT, Rumble, you know, those are already coming out, opening at 500,000 plus AUVs, so, you know, in year one. So you could actually expect to see the cash returns better there. You know, we do have brands, you know, in the unscaled, like, stride. you know, Row House AKT, the different model, you know, and I talked to in the call in relation to, you know, how those studios can operate at lower AUVs, but yet generate similar margins if they go to more of an owner-operator model versus, you know, a semi-absentee model. So definitely we'll provide a lot more detail on that in the investor day and give more clarity to you guys so you can see it more at brand level, how we think about the business and how they're performing in So I would say stay tuned on that, but we're excited to kind of delve into that in about a month.

Perfect. And then I guess just my follow-up question is a two-parted. How much visibility is there into unit growth outlook for this year? Is that sort of based on leases that have already been signed, so you have a high degree of confidence there? And then you know, maybe one more for you, John, just the $7.2 million ad back of write down a brand assets. Can you just give us a little more color? Um, you know, what, what that is? Um, that'd be really helpful. Thanks.

Yeah, I'll start with a 7.2, uh, in Q2, the original route, a rumble founder studios, those were as part of our agreement when we purchased that business, they would be exiting at a certain point. That happened in Q2. We did assume those studios. So the ones in a lot of the major markets, we have those. So we will be looking to get those refranchised over time. So that was one of the, that was what the 7.2 reflects. In essence, when we bought the brand, the intangibles were assigned to the franchise agreements because that's what was outstanding. Now that we own the The studios, the franchise agreements are no longer outstanding. Therefore, you would not hold them onto your balance sheet from an accounting perspective. And apologies, what was the first question?

Just the visibility into the growth outlook for this year.

Yeah, so really strong. I mean, we've always talked about the fact that lease signings is the greatest early indicator of how many studios you're going to have open. we consistently sign and have been consistently signing lease agreements from the beginning of this year. We knew how many we signed kind of going into Q3 and Q4. So how many were coming into this year. So for our perspective, the visibility into the openings is very strong. We usually have about a good six to nine month view, you know, forward looking view. So we can almost tell you, you know, not only what's going to happen in Q3 and Q4, but we pretty much have a good idea in Q1 of next year already. So, The guidance around studio openings, we said at the beginning of the year, it's been unchanged. We've moved guidance around in regards to revenue and adjusted EBITDA and system-wide sales. We've raised those as we've continued to perform in Q1 and Q2, but we haven't moved the studios because the visibility we have is pretty strong. I mean, it's pretty structured in the sense that when somebody signs a franchise agreement, they go out, they acquire a lease contract, and there is that sixth to eighth month where they're now building out the studio and getting open. So you're always kind of looking at things a couple quarters ahead of time. So once we sign the lease, we already know in about two quarters when that studio is going to open. So it's pretty static from that perspective. So short answer to your question, feel really strong and really good about the guidance that we put out there for new studio openings this year.

Perfect. That's really helpful. Best of luck going forward.

Thank you. Thank you. The next question is from Brian Harbour of Morgan Stanley.

Yeah, thanks. Good afternoon. John, could you just comment on SG&A expense given, you know, where you're running year-to-date and then any impact of the kind of the transition studio strategy?

Yeah, great question. So SG&A in, you know, Q2 was higher than it was in Q1. That has to do with, you know, the number of – you know, transition studios that we had on the books, looking forward into Q3 and Q4, you know, as we've made this shift in strategy, as we start lowering SG&A costs because we don't have the operating costs of rent and labor in our SG&A, you'll expect SG&A to start coming down over time. So in the second half, you'll see that apparent pretty quickly. So the way you can kind of think about it is, you know, we were, you know, I think it was close to a high 50% range in Q2 and I would expect to see, you know, as we ramp down these studios that the SG&A as a percent of total revenue will hit below 30%. So it is a function of how quickly we, um, you know, kind of ramp down these studios, you know, as Anthony mentioned, um, you know, the goal, you know, loose goal that we kind of talked about is it'd be great to have them all done by, um, you know, the end of the year, but, uh, you will see it get into the low 30% range as we, uh, as we kind of re-franchise these studios back out.

Okay, yeah, makes sense. And just with that, are you, how will it change going forward in the sense that are you just going to take a more active role in kind of brokering, you know, franchisee to franchisee deals? Do you think that there might be occasional closures if, you know, you can't kind of find a suitable buyer? Like how might we see the impact of that?

Yeah, as we said in the earnings script, you know, we will be, you know, triaging, I guess, studios differently in the sense that if we feel that we can, in a reasonable amount of time, get the studio either refranchised or turned around, you know, we will invest resources and the time to do that. If the studio, you know, there are situations where studios just no longer make sense. If they were in a large grocery anchor that the anchory moved or the center just kind of for whatever reason doesn't really have a lot of foot traffic, it would be in the best interest of the franchisee to relocate that to a better location. But in situations where it's just not a viable studio anymore, I think you will start seeing the company look to closures as a path. But in the short term, we're going to go ahead and focus on getting the studios ramped down on our side, and then we'll work with franchisees to assess what's the best option for them in operating their studio going forward. But, yeah, we will be assisting, obviously, with tools and resources from a sales perspective, make sure they're following the model, look at relocations if it's more of a center issue to kind of address studios, you know, on a case-by-case basis. Okay, thank you.

Thank you. The next question is from Jonathan Comfort. Please go ahead.

Yeah. Hi. Thank you. Good afternoon, everyone. I want to just ask about the same-store sales trend that you're seeing. And your first quarter, you were at 20%. Second quarter at 15%. Strong numbers, but obviously different ways you can interpret the trend and trajectory. So can you give any more insights? in terms of the trend that you're seeing for same-store sales, and then any color, you know, what we should expect going into the back half?

Yeah, so first quarter, obviously, 20%, as you mentioned, 15% in the second quarter. You know, I do see, obviously, system-wide sales as they continue to grow. I do expect to see same-store sales normalize over time. I mentioned on previous calls that I do believe in 2023, you're still, you know, benefiting from a pretty strong growth perspective on studios getting into, you know, as they kind of grow into maturity, as we continue to have more studios, you're going to see elevated same-store sales, you know, over the coming quarters. Mid to high single digits is still my long-term, you know, kind of, you know, guidance or expectation on how studios will perform. But I do expect, you know, 2023 to be in the mid-teens, you know, the 15%, 16% range in same-store sales. You look in the second half of this year, As I mentioned, Q3 is typically a strong quarter when you look at it quarter on quarter and you see strong growth. So I do expect Q3 and Q4 to stay somewhat elevated as you benefit from people, as I mentioned, the seasonality going back to kids going back to school, parents start going back to their workouts from vacation. And then also in Q4, we always have our Black Friday holiday promotions and we typically see strong sales in that quarter. So I expect 16% range for the full year. I think Q3 and Q4, you'll see you know, around that level as well. You know, and then as you kind of roll into 2024, as we kind of continue to monitor, assess, measure, CL studios are opening up, we'll get a better idea. But long-term, mid to high single digits, you know, as you start looking beyond 2023. Got it.

That's helpful, Culler. And then I want to follow up to ask about the board's decision to initiate the buyback program and to do so with taking on incremental debt. Just Any thoughts to the process there and weighing the different options relative to using internally generated cash or further simplifying the capital structure? I know you bought back some of the preferred shares in the past, or the convertible, excuse me. So just any additional thoughts on the thought process and how the board may have settled on the path that it did?

Yeah, we finished the quarter with $40 million in cash. Obviously, we announced a $50 million repurchase. The long-term goal was always to kind of put in place a more efficient capital structure with the securitization. So we had always talked about the preferred shares and wanting to repurchase those. it's all, to me, it's all fungible, whether it's class A, class B preferred, you know, the ultimate goal is to have as few shares out there as possible, I guess, from an anti-dilutive perspective. So, you know, for us, the way we looked at it is, you know, the debt was available to us. We have a great partner, MSD, who, you know, offered to say, hey, listen, we'll be willing to give you guys the capital to do the shares because they also see this as shareholders from their perspective, but they also see it as the stock being undervalued at these levels. So it was easy access for us to get the cash. You know, would we ideally would have loved to just done all the repurchase of shares on the preferred, you know, under a securitized model. Yeah, that makes it easier. But given the timing and the share price, you know, we'll go ahead and take the debt in the short term. We were going to refinance that out anyway. So to me, it's just a timing issue of being able to do it now at a lower price. and taking advantage of that. Yeah. And not to mention, but our leverage is pretty low. You know, we're just over two times. So, you know, even borrowing the 50 million, we're still at roughly just under three times levered. So it makes it, you know, easy for us to do it.

Got it. I appreciate the color. Thanks again.

Thank you. The next question is from Ryan Myers of Lake Street Capital. Please go ahead.

Hey guys, thanks for taking my question. First one for me, just wondering if you can comment on if you've seen any changes in the willingness of potential franchisees to open up more studios.

Yeah, so I have some data on that related to, you know, the number of licenses we stole. I mean, the licenses we sold in Q2, about a third of them came from existing franchisees. When you look at the number of studios that opened in Q2, 50% of them came from existing franchisees. So you're continuing to see new franchisees opening studios and buying licenses, but the existing franchisee and install base we have, you know, they, most of them buy around three licenses. They're continuing to open those licenses. And again, like I said, half of them that opened in the quarter were existing franchisees and a third of the license sales that we sold this quarter came from existing franchisees. So they're continuing to come back to buy more.

Got it. That's helpful color. Um, and then can you maybe talk about how multi-unit franchisees perform relative to single franchisees? Is there any differences there, just kind of as a follow-up to my last question?

Yes, typically what you see is franchisees that own multiple locations, the benefit to them is they get to, they get the economies of scale, right? So there's the ability from like a marketing perspective to market across all three of theirs versus just one specifically. So there's actually benefits to the franchisee, you know, operating more, even from a general manager perspective. You can manage that across three. So you get the benefit of sharing labor, resources, coverage in case an instructor calls out sick. So there's actually a lot of benefits for operating multiple, not to mention if you open one, you typically will open the second one better and the third one better than that because you get the benefit of kind of experience and learnings from the first one to the second one to the third one. So you typically see franchisees who open their second one, they actually perform better out of the gate because they have all these lessons that they've learned in actually opening the first one.

Got it. That makes sense. Thanks for taking my questions.

Thank you very much. The next question is from John Heinbacher of Guggenheim. Please go ahead.

Hey, guys. This is Julio Marquez on for John Heinbacher. If you guys could touch on, you mentioned the improved costs in product and franchise revenue, but if you think about profitability of product equipment, how can that improve with scale? Any letters that we can pull there? And then to follow up, any thoughts on the weekly KPIs, any signs of changing member behavior would be great. Thank you.

In regards to retail equipment margins, you know, we did kind of back in coming out of COVID, we spent some time with our equipment manufacturers and made sure that as there were supply chain issues, that we had the sufficient equipment packages available to meet the demand of the number of studios we're opening. So we, you know, in lieu of negotiating, you know, them kind of passing on supplies, price increases, what we did is we did more firm commitments on volume to manage price increases. So we've done a good job of stabilizing prices across our equipment, roughly again, 30% margin. When you look at retail, we use a mix of both branded and non-branded vendors. The branded vendors like Allo as an example, franchisees could order directly from the vendor. You know, in return, we get rebates for volume associated with the purchases and facilitating that relationship. We have an entire warehouse here in Tustin, California, where we actually inventory, you know, both branded and unbranded as well, that our franchisees have the ability to buy at a lower cost than they could if they went to certain vendors directly because we have, you know, pre-negotiated costs with them. And then they, in return, our franchisees could turn around and sell the wholesale inventory they purchase for us at a retail price and make margin. Typically, you know, we recommend somewhere closer to, you know, 40% to 50% retail margins if they follow the recommendations we provide. So our margins, you know, equipment retail combined is 30%. I largely believe that will remain unchanged, and that's really intended. The margins we make are really intended to manage the supply chain, which is everything from vendor negotiations to the cost of the warehouse to the cost of the staff doing the packing and shipping and a lot of the inbound freight from getting it from our suppliers. So largely margins will remain unchanged into the future.

Awesome. Thank you. And just very quickly on the weekly KPIs, any changes that you're seeing?

Oh, weekly KPIs, yeah. Following up on that, no. As I mentioned, visitation is, I would say, seasonally flat due to the summer months. We haven't seen any, like, increases in cancellations. You do typically see in the month of July more freezes on your memberships because people are out of town. So, you know, rather than getting charged, they're They're mostly membership. They could avoid paying it while they're on vacation. You typically see August and September. That ramps back up. Year on year, when you look at July of 2023 versus July of 2022, our freezes are actually less than they were prior year. So it does show that members are still staying somewhat engaged more so than they were last year in the same month of July. But it is more of a seasonal impact. But nothing indicates any sort of shift or change in our member behavior. It's just more seasonal. So August and September, we'll be able to have a better indication of how people have come back and returned back to the studios. But classes, system-wide sales, same-store sales continue to show really strong momentum into Q3. Awesome. Thank you.

Thank you. The next question is from Warren Chang of Evercore.

Hey, good evening, John and Anthony. I was wondering what kind of cost inflation your franchisees are seeing in their cost of new build. One of your publicly traded competitors talked about some pretty significant increases in cost of new build. Obviously, you reiterated your studio opening guys, but I'm just curious what level your franchisees are seeing as they build new stores compared to a year ago.

Yeah, in percentage, you know, we're all going to see the same kind of thing, but in real dollars for us, it's not massive. And the reason is, is when you think of our box, it's, you know, 1,500 square feet, not huge. 15,000 or 25,000 or 50,000, or if it's a lifetime, you know, it can be bigger than that. And so they build a lot of, you know, there's a lot of showers and bathrooms and things like that. So it's, it's a much bigger box. So there's a lot more walls, there's a lot more electricity, there's a lot more plumbing, which means a lot more engineering and planning and all that stuff. And so, you know, it's, the percentages will be the same, but the build-outs are really cheap, just given the size and the scale that they are. If you think of in our most complex builds, you really have two walls or three walls. You're really building a box inside a box. So in some cases, you're building a wall just straight across the back, or you're building a wall that comes out of the middle and goes to the left. And so there's just not There's not a lot of walls, a lot of dry walls. There's, you know, there's something like a stretch lab, you know, Club Pilates, Pure Bar, you know, Yoga 6. There's not a lot of electric work that has to get done. The stretch lab, for instance, which is a lot of our openings... This year, the only thing that really plugs in is the front computer. And then our little maps program is on an iPad that stands there. But those are only kind of the two pieces of electric. So in a lot of electric wiring, you have a single bathroom or a men's and women's bathroom, depending on the size of the box. So not a lot of work to do. So it has less dollar impact.

That makes sense. Thanks, Anthony. My follow-up question was just on Randy's question earlier on the hire visitation. How are these new members finding your studios? You know, you've developed a lot of new sources and regeneration recently. I'm just curious if there's certain ones that are most fruitful for driving visitation, driving new members.

Yeah, great question. We're leveraging all of our B2B partners. Of course, you know, constantly improving SEO and, you know, digital marketing efforts. but really looking at the overall blended CAC and making sure that we've got grassroots initiatives that are coupled with digital marketing initiatives that are coupled with our B2B partnerships. So all of that is now starting to really tick and push leads into the studios. Of course, our XPath and XPlus also are net new leads bringing into the system as well, and then recycling those leads through those channels to kind of bring them back to life so that they're excited to come back into our studios again.

Thank you. Good luck.

Thank you. The next question is from Jeff of B-Radio Securities. Please go ahead.

Hi, everyone. Just to clarify regarding the company-owned studio count decline from Q1 to Q2, all of those studios were sold, correct? Correct.

It was flat from Q1 to Q2, roughly around 85 studios we had at the end of Q1 and the same amount in Q2. The studios that we talked to in the earnings release earlier was the ones that we've already sold. So we've already, about half of those have already been sold off to a new operator. So we're on the way of already kind of executing on that strategy to unload and re-franchise the studios that we have.

But to be more detailed, no, they weren't closed. They were sold to existing franchisees. Yeah.

Okay. Okay. I just want to clarify that. Thank you. And then I know this is maybe something you want to say until the end of the day, but just we'll ask anyway, regarding your individual brands, can we say that all of your brands are comping positive with increasing AUVs? And then I guess any insight you could share around retention, member ad metrics around any of the individual brands that were maybe stand-ups favorably or not as favorably.

Yeah, so when you look at Q2, and let me explain something, BFT as a brand actually had a negative comp, but that's because there's really only like a handful of studios, and one of the original studios, When we bought the brand, which is in Santa Monica, it does like a million plus in AUVs. So you start opening more younger brands that are falling in, or more studios that are in the comp, and it naturally will just kind of average out. So when you look at Q, if you take that out of the mix, nine out of the, excuse me, eight of the nine remaining brands all had positive same-store sales in the quarter, with one with a negative. And it was like minus 2%. And it was a brand that has, I would say, It's an unscaled brand that doesn't have a lot of studios open. So it's really just noise.

Okay. So we would think that as that one scales, it should start to cop positive and so forth.

Yeah. As you get more and more, I guess you could say data points, you know, we've continually see, and it was just in that quarter that it was, I would say, flat at 2% on a nominal number of studios. But kind of reinforcing that, our scaled brands, you know, they generate, 90% of the studios that are open and 90% plus of the system-wide sales are generated out of more of a concentration of five brands.

Okay. Well, that's helpful. Sounds pretty healthy to me. Thanks for taking your questions.

Thank you very much. Thanks.

Thank you. The next question is from George Kelly of Ross Capital Partners. Please go ahead.

Hey, everyone. Thanks for taking my questions. So first one for you, John, in your prepared remarks, you talked about a lot of your studios being owner-operated. So I was just curious if you have sort of a ballpark estimate of your total studio base. What percent of them are operated that way? Or asked another way, if that's too much detail, which brands are most concentrated there?

Yeah, to give you a concept, that's really directed more at the Pure Bar brand, pre-acquisition. As I mentioned, most of the sales we do in Expos, we recommend franchisees buy three, right, because they get the economies of scale and the benefit of operating multiple locations. Pure Bar, originally when we acquired the brand, most of the franchisees that existed bought one. It's more of – it's not like a three – one franchisee for three studios as more one franchisee to one studio, the model at which they, um, you know, and I wasn't, I wasn't here back then, but it appears the model that they did is they would be owner operator kind of model. So it's largely the pure bar count that you could say fits that. Now, when you look at post expo acquisition, um, the AUVs, uh, for the pure bar franchisees that have opened up post our acquisition, is much higher. It largely reflects the overall expo average from that perspective. So it is just a difference in whether or not a franchisee is running their studio more as a personal business versus kind of something that generates a lot more sales when they run it to try and build, I would say, a mini enterprise of two to three units to generate more profit. So a different, different benefit for model, different strategy. Now, the one thing that's really interesting about our model, and we proved this out during COVID is the model does have flexibility where if a franchisee does want to be more involved in the day-to-day operations and work within the studio, they have the ability to do that and lower their OPEX costs. But largely we promote a semi-absentee kind of model from an operations perspective and encourage franchisees to, to operate more than just one studio.

Okay, excellent. And then second question for you is on XPAS. I think that you said there's been 60,000 cumulative bookings through XPAS. So curious if I heard that right. And the part two is what is your plan to accelerate that business? As you're looking at 2024 or beyond, are we getting to the point where you've seen enough where you feel comfortable maybe boosting marketing spending or something else behind it? And that's all I had. Thank you.

You did hear that correctly. So we've had 60,000 bookings to date, and we'll actually have more to talk about and dive into at the Analyst Day coming up in September. We've got some new initiatives there with XPath.

Okay. Understood. Thanks.

Thank you. Our next question is from Corrine Wolfmeyer of Sandler Piper. Sorry, Piper Sandler. Please go ahead.

Hey, good afternoon, team. Thanks for taking the question, and congrats on the quarter. So just quickly, just one for me. I wanted to touch a little bit on the CAC, and maybe this is more of an Investor Day question as well. But can you just talk about, like, is there a way to quantify the level of kind of like that negative CAC you are getting from your B2B partnerships? Obviously, that other category has been growing in nicely, and I assume some of it is baked into that. And then as you think about the longer-term trajectory of these B2B partnerships and that negative CAC you're generating, how are you thinking about the longer-term opportunity and how big that really can get over time? Thanks.

Yeah, it's really going to depend on each of the partnerships and the type of lead flow that they, you know, are bringing in. We've already got, you know, partnerships like ClassPass, which brings in students lead flow, and then some of our other B2Bs that will have new leads coming into the system are kicking off. To put it into perspective, we did see that year over year there was a decline in CAC and CPL. So from an annual standpoint, we're seeing things moving in the right direction, specifically given that our B2B partnership and our strategic business division really just launched about a year or so ago. So Now those deals are done, they're launching, and we're starting to see the benefit of that across the system.

Thank you.

Thank you very much. Ladies and gentlemen, we have reached the end of the question and answer session, and I would like to turn the floor back over to Anthony Gosler for closing comments.

Thanks again for joining today's earnings call and for your support. As we alluded to earlier, we'll be hosting an analyst and investor day on Wednesday, September 6th, the New York Stock Exchange. At the event, we plan to give the investment community an in-depth look at our business and drill down further on the company's long-term strategic initiatives and growth opportunities. We hope to see many of you there. And for those unable to attend in person, a live video webcast will be available on our investor relations website. In closing, we remain very bullish on the direction of Exponential Fitness' heading and look forward to continuing to support our franchisees, partners, and customers every step of the journey. Thank you.

Ladies and gentlemen, we have reached the end of this conference and you may not disconnect your lines at this time. Thank you for your participation.