Xponential Fitness, Inc.

Greetings and welcome to the Exponential Fitness fourth 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 zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Avery Wanamaker from Investor Relations. Thank you. 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 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 thank you all for joining us this afternoon. During 2023, we experienced substantial growth in revenue and adjusted EBITDA, while further streamlining our business and better positioning Exponential for an even stronger year in 2024. As the largest health and wellness franchisor, as of year-end, we have 3,062 studios operating globally, with 6,255 licenses sold across our portfolio. In 2023, we opened an average of one and a half new studios each day, and we have the pipeline to continue at that rate in 2024. North America run rate average unit volume, or AUVs, continue to rise, and exponential members have time and time again demonstrated their consistent commitment to their health and wellness routines. During the year, total members across North America grew 21% year-over-year to 717,000, while our visitation rates increased 31% to a total of 51.5 million in studio visits for 2023. This drove North American system-wide sales to over $1.4 billion in 2023, an increase of 36% over 2022. North America run rate average unit volumes of 590,000 increased 13% from 522,000 in 2022, while same-store sales increased 16% for 2023. Same-store sales growth was strong across our studio vintages and not limited to just new studios. In fact, studios older than three years increased 17% in 2023, demonstrating the value of adhering to our operating model and the durability of our modalities. We are pleased to see this continued growth at the studio level, and while we do not yet know the maximum potential of our AUVs, over 350 North American studios across our portfolio achieved 1 million or higher AUV in Q4, with another 160 exceeding 900,000. While these high AUVs are predominantly concentrated in Club Pilates, there are studios in Stretch Lab, Rumble, Pure Bar, Yoga 6, and Cycle Bar, and of course, Lindora, that have crossed the 1 million AUV threshold. We remain focused on driving AUVs higher as we execute on our in-studio growth strategies. Beginning with revenue, in 2023, net revenue totaled $318.7 million, an increase of 30% year-over-year. Adjusted EBITDA totaled $105.3 million, or 33% of revenue, up 42% from $74.3 million, or 30% of revenue, in 2022. As we continue to open more studios, our model continues to scale, enabling us to leverage our centralized back office and improve margin. Though the 2023 margins were shy of the 35% we sought as we worked through our restructuring efforts, we remain on track to reach our 40% target in 2024. Let's now turn to our first strategic growth driver, the increase of our franchise studio base. We ended 2023 with 3,062 global open studios, opening 557 new studios during the year, with 438 in North America and 119 international. We currently have over 400 leases and LOIs signed for studios not yet open. We sold 805 licenses globally in 2023, and our pipeline includes almost 2,000 licenses sold and contractually obligated to open in North America, plus an additional over 1,000 master franchise agreement obligations. We were particularly encouraged to see that almost half of our 2023 North American studio openings came from existing franchisees with existing open studios, highlighting our franchisees' continued reinvestment in and commitment to our brand portfolio. While this phenomenon was the most prevalent in Club Pilates, it was also true across all of our other scaled brands, including Cycle Bar, Pure Bar, Yoga 6, and Stretch Lab, as well as Rumble 2. Despite the brand's relative young age, we already had existing franchisees open additional locations in 2023. We take pride in the support we provide to our franchise operators, and we kicked off this year by holding franchisee forums with franchisee-selected representatives from each brand to discuss what they believe is and isn't working. The franchisee reps were selected by a popular vote by each brand's franchisees and have started spending time in person at our headquarters to formulate a targeted action strategy that we plan to execute on by the end of Q2. We are encouraged by the conversations and the opportunity to further streamline our support and offerings across the system, and we plan to continue holding regular strategy sessions with these franchisee representatives. We have already started franchising our recently acquired brand, Lindora, a leading metabolic health provider. The health and wellness market is large and growing and supported by strong secular trends. Lindora has ideally positioned us to continue tapping into the broader consumer demand for holistic and comprehensive approaches to health. We believe consumers increasingly understand the connection between regular fitness routines, metabolic health, nutrition, and overall well-being, and pursue lifestyles that align to those values. Through Lindora, we are able to offer consumers a more comprehensive wellness solution. We see the Lindora acquisition as the foundation for our long-term, broader strategic expansion into health and wellness, and we're excited at the growth prospects in this market. There are 42.5 million addressable households for Lindora. Based on using existing exponential trade areas nationwide, we are finding that 69% of the 42.5 million of Lindora's national core member households are captured by an existing exponential fitness studios trade area. Lindora has a lot of runway where Expo has already proven to be successful. We're actively working with Buxton, a data-driven real estate analysis company, to identify the clinic potential across the U.S., Buxton from Preliminary Works sees the greatest similarities between the Lindora member profile and our current Club Pilates and Stretch Lab member profiles. Buxton expects that the TAM for Lindora will be similar to the TAM of our other brands. As a company, we continuously evaluate our portfolio to ensure profitable growth, optimize global customer experiences, and drive long-term value creation for our stakeholders. We think about successful portfolio construction not just from the perspective of acquiring new brands and opening new studios, but also from the perspective of ensuring alignment with our three-year financial growth targets. As part of our optimization efforts, we recently announced a divestiture of Stride Fitness to Stride Fitness Franchising, Inc., which is owned by Sean Grove, the current president of Rumble Boxing. Stride accounted for less than 1% of our studio base and system-wide sales in 2023, and after considering potential alternatives for Stride, we found this transaction was the best option for both Exponential and the Stride brand. We are particularly pleased to transition Stride to an experienced franchise owner and operator. Another optimization effort that will result in immediate margin expansion is the re-franchising of company-owned transition studios and the elimination of related operating losses. We had previously committed to fully exiting our portfolio of company-owned transition studios, and as of today, we have only a small number of corporate studios remaining. It's also worth noting that as part of no longer operating studios and wanting to concentrate our resources around the growth of our traditional studios, we have exited our corporate-owned LA Fitness locations in the first quarter of 2024. Note that existing franchised LA Fitness locations will continue operating. Finally, I wanted to provide an update on our litigation with ClubReady. Exponential has resolved this litigation at the end of 2023 and is in the process of launching an RFP to ensure that our studios have access to best-in-class point-of-sale technology. Let's now discuss our second growth driver, international expansion. During 2023, we expanded into seven new countries, bringing our total country count to 23. At year end, we have over 1,000 studios obligated to open under master franchise agreements, and we'll continue expanding our brands into new and existing countries under the leadership of our recently hired international president and team. Earlier this year, we announced that Pure Bar and Yoga 6 are entering the Japanese market through a master franchise agreement with Sung Park Co., who is the current master franchisee for Stretch Lab in Japan. This brings our brand count in the country to seven, the largest count of exponential brands outside of North America. Japan has demonstrated strong demand for our concepts, where Club Pilates alone has opened 45 locations with the potential of an additional more than 100 studios obligated to open for Club Pilates alone. We are encouraged to see that even though our average Club Pilates studios in Japan is less than a year old, with most of them having opened in 2022 and 2023, run rate AUVs are already well exceeding 500,000. From a brand evolution perspective, these AUVs are already well exceeding the performance that we saw for Club Pilates domestically in year three of operations. As a reminder, our international business provides exponential with nearly 100% margin flow through. The model is asset light with exponential receiving a revenue share from the master, but carrying minimal corresponding SG&A, given that the studio SG&A and CapEx is fully funded by the master franchisee. In summary, we are proud of our 2023 performance and the strategic realignment we have achieved, and we are entering 2024 from a position of strength. We remain on track to achieve the projections laid out in our Analyst and Investor Day in September of last year, and we expect our refocus on core operating activities to result in strong cash flow and significant margin expansion in 2024 and beyond. Before turning the call over to Sarah, I'd like to take a moment to highlight our annual Franchisee Convention, which took place in Las Vegas in early December. During the event, over 2,000 attendees came together to celebrate achievements in 2023, share best practices, and set the strategy for 2024. It is always great to experience the excitement of the event and speak with franchisees from all over the world. Thank you to our franchisees and employees for all your hard work and dedication, which have helped make exponential fitness what it is today. And with that, I'll pass the call on to Sarah.