Xponential Fitness, Inc.

This is a conference operator. Thank you for your patience. The call will begin shortly. Please continue to hold. Thank you. Good day and welcome to the Exponential Fitness, Inc. Third Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Avery Wanamaker, Senior Associate, Addo Investor Relations. Please go ahead.

Thank you, Operator. Good afternoon, and thank you all for joining our conference call to discuss exponential fitness third 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 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 Fitment.

Thank you, Avery, and thanks to everyone for joining our third quarter earnings conference call. As the leading global boutique fitness franchisor, Exponential again produced strong results this quarter as we continue to operate our business efficiently while providing our end customers with the workouts they find vital to their routine. We are encouraged by the strength of our consumer, and our KPIs are continuing to show consistent and healthy growth. At the end of the third quarter, Exponential franchisees operated nearly 3,000 studios globally with over 6,000 licenses sold across our 10 brands. Momentum has continued into the fourth quarter. Exponential has made international growth a priority, and our efforts have continued to bear fruit in the form of new master franchise agreements. Our existing Kuwait master franchise partner has recently signed a new master franchise agreement to develop Club Pilates, Rumble, Stretch Lab, and AKT in Qatar. We now have franchise, master franchise, and international expansion agreements in 23 countries around the globe. We will discuss our international strategy in more detail shortly. Our membership and visitation trends continue to demonstrate the strength and resiliency of our membership base. During the third quarter, total members across North America grew 26% year-over-year to a total of 726,000, with 92% of these customers continuing to be actively paying members. Consumers also continue to flock to the overall boutique fitness industry. According to IHRSA's 2023 report, Boutique Fitness now accounts for 42% of all gym memberships today, with estimated growth of 17% by 2025. As the largest player in the boutique fitness market, we are confident our brands are well-positioned to capture a large share of this growth. Additionally, current adoption of weight loss drugs such as Ozempic have shown early tailwinds for our business model, with Morgan Stanley analysts recently citing a survey that showed people's greater propensity to get active after beginning injections. Our visitation rates remain strong, with North American studio visits for the third quarter up 30% year-over-year to a total of 13.1 million. This drove North American system-wide sales to 357 million during the period, an increase of 35% over the third quarter of 2022. Q3 North American run rate average unit volumes of 564,000 increased 15% from 489,000 in Q3 of 2022. While the third quarter typically sees a slight sequential slowing of growth impact due to seasonality related to summer vacations and travel, we still delivered our 13th straight quarter of AUV growth. In addition, September and October AUVs of 570,000 and 576,000, respectively, provided momentum heading into Q4, which tends to be our best-performing quarter from an AUV perspective. We are seeing encouraging early trends thus far in the fourth quarter, with same-store sales up again 15% in October and visitation rates up 29% year-over-year and approximately 5% compared to September. Third quarter North American same-store sales growth of 15% were consistently strong with the previous quarter and remained well above our long-term targeted level. Studios over three years old also saw remarkable growth with same-store sales increasing by 15% during the quarter, further demonstrating the resilience of boutique fitness consumers and the healthy growth profile of our more mature studios. Turning to revenue. For the quarter, net revenue totaled $80.4 million, an increase of 26% year-over-year. As John will discuss in a moment, these better-than-expected results and our visibility to Q4 drove us to increase our revenue guidance for 2023. Adjusted EBITDA totaled $26.5 million in Q3, or 33% of revenue, up 33% from $20 million, or 31% of revenue, in the prior year period. I will now turn to our strategic growth drivers. 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 Q3 with 2,980 global open studios, opening 127 new studios in the third quarter, comprised of 100 in North America and 27 international. As presented in our Analyst and Investor Day in September, our pipeline of future openings is predictable based on visibility into lease signings. As of September, we have 442 leases and LOIs signed for studios not yet open. In Q3 alone, franchisees signed 123 leases in North America, which adds to our evergreen backlog of studio openings. As a reminder, in the fourth quarter, we consistently produce a high volume of new studio openings as franchisees want to take advantage of growing their membership bases as consumers set New Year's health resolutions, and this year will be no different. We sold 216 licenses globally during the quarter. Our increasing pipeline includes over 2000 licenses sold and contractually obligated to open on a global basis, plus an additional over 1000 master franchise agreement obligations, giving us clear visibility on openings over the next several years. Turning to our second growth driver, international expansion. Considering the continued importance of international as a key growth driver, we created the new position of President of International. We're excited to announce the addition of Bob Kaufman, who will be our first President of International. Bob has over 25 years of experience leading global franchising for franchisors across 50 countries. He has held various roles, including Senior Vice President of Business Development and International Franchising at Tower Records, Vice President of Global Franchise Development and Operations for the Coffee Bean and Tea Leaf, and most recently Senior Vice President of Franchise Operations at Mathanasium, a brick-and-mortar education franchise system with over 1,100 locations across 10 countries, which was acquired by Roark Capital Group in 2021. Bob is a true industry veteran with a longstanding history of international franchising success, and we're thrilled to have him lead our already impressive international team of individuals who have joined us from Orange Theory, Anytime Fitness, and the International Health Racket and Sports Club Association, or IHRSA, among other companies. As of quarter end, we have over 1,000 studios obligated to open under master franchise agreements, and we continue expanding into new markets. In addition to the new master franchise agreement recently signed in Qatar for our AKT Club Pilates, Rumble, and Stretch Lab brands, We have also expanded further into Asia and Europe with new multi-unit franchise agreements for BFT in Hong Kong, Malaysia, Scotland, and Spain. We look forward to signing more deals around the globe and expanding our presence. Growth in our international business comes with nearly 100% EBITDA margins as we deploy an asset-light model and receive a percentage of revenue share with minimal corresponding SG&A. Importantly, there remains ample white space to continue growing our presence around the globe. Our third key growth driver is to expand margins and drive free cash flow conversion. Adjusted EBITDA margins increased to 33% during the third quarter and will improve further as we continue to grow our higher margin revenue stream and ultimately decrease our selling general and administrative expenses. As discussed during our Analyst and Investor Day presentation, in the third quarter, the company has continued the process of re-franchising our portfolio of company-owned transition studios with the goal of getting to zero studios operating in a net loss position by year-end. We have made solid progress, and as of the end of the third quarter, we have reduced the number of company-owned transition studios to 22 transitional studios as well as nine LA Fitness locations, that we intend to operate as we prove out that business model. Executing this strategy of either re-franchising or closing our existing company-owned transition studios, and if not taking on any new company-owned transition studios, will lead to higher operating leverage in EBITDA margins. During Q3, we've had 39 overall studio closures, including 24 units in North America, of which 11 were franchised, and 15 units internationally. Taking this into account, the closure rate of the last six years to date would represent a nominal annual percentage per year. I'd now like to briefly provide an update around our M&A strategy. As discussed at Analyst Day, we're continuously evaluating targets. We've been pleased with what we have been seeing. Any transactions we'd pursue would be funded from cash available on our balance sheet. We continue to be focused on smaller targets with significant growth potential and white space. In summary, we are pleased with another strong quarter and the continued momentum we are seeing in Q4. And with that, I'll pass the call on to Sarah.