Xponential Fitness, Inc.

Greetings, and welcome to the Exponential Fitness, Inc. Fourth Quarter and Full Year 2024 Earnings Call. At this time, all participants are in listen-only mode. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. You may be placed into question queue at any time by pressing star one on your telephone keypad, and we ask you to please ask one question and one follow-up, then return to the queue. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Avery Wanamaker, Investor Relations. Avery, please go ahead.

Thank you, Operator. Good afternoon, and thank you all for joining our conference call to discuss exponential fitness fourth quarter and full year 2024 financial results. I am joined by Mark King, Chief Executive Officer, 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 obligation 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 gap measures that we provide. A reconciliation of these non-gap measures to comparable gap 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. As a reminder, in order to ensure period-over-period comparability and consistent with our reporting method since IPO, we present all KPIs on a fully pro forma basis, meaning for the full KPI history presented, we only include brands that are under our ownership as of the current reporting period. For the period ended December 31, 2024, this includes AKT, BFT, Club Pilates, Cycle Bar, Lindora, Pure Bar, Rumble, Stretch Lab, and Yoga 6. I will now turn the call over to Mark King, CEO of Exponential Fitness.

Thanks, Avery, and good afternoon to everyone. Let me start by talking about what's going well. As I expected when I joined last June, many of the fundamentals of the business are strong. North America system-wide sales of 465 million were up 21% year over year. North America quarterly run rate average unit volumes of 668,000 were up 9% year over year. Total members stood at 813,000 at quarter end, up 15% year over year, We sold 400 franchise licenses and opened 464 gross new studios during 2024. So there are parts of the business that are performing well. However, as is also clear from the press release you may have seen earlier this afternoon, there are also parts of the business, both brands and corporate operations, that simply aren't where we need them to be. Let me first delve into what we're doing since we last spoke, and then I'll talk about some of the things we've discovered operationally that will require some pretty big changes. Let me start with some thoughts on where my team has been focused and the progress we've been making. I should note that all the things we have been executing on are prerequisites to achieving the five strategic pillars I spoke about last quarter. Perhaps most importantly, We're continuing to build out a senior management team comprised of leaders who know how to profitably scale companies and who know what great looks like. Our new hires, including our president of North America, our chief operating officer, our chief development officer, and our chief technology officer are best in class. And I am confident in their abilities to transform all the parts of the business necessary to become the franchisor of choice in health and wellness. With a great team in place, we've also completed a comprehensive organizational assessment that showed gaps in structure, capabilities, and process. Let me give you some of the detail of what we found and how we're addressing things. First, we're in the process of forming field operations teams that will be physically present in studios across North America working alongside our franchise partners to drive industry-leading studio operations. Having this level of field support is critical for any successful franchise operation to achieve not only successful, profitable studio operations, but also to create a culture of continuous innovation and relentless focus on delivering world-class member experience. Second, Until recently, franchise sales teams operated autonomously from real estate and construction. By bringing in an experienced chief development officer and uniting real estate, franchise sales, and construction all under one leadership vertical, franchise development, I believe we will be able to be more strategic and more efficient in the development of our brand footprint. In addition, we have departed from our historical broker network franchise license sales strategy and instead brought the full process in-house, further ensuring we have maximum control over strategic development. Third, we are rethinking the layout of our studios, both to maximize productivity per square foot and to ensure our box formats become more market customized, both in terms of size and placement. We believe this will drive studio profitability and customer traffic flow, ultimately benefiting both our franchisees and members. Fourth, and continuing on the customer experience front, our COO will be overseeing learning and education at Exponential, which is an important new role. His primary goal is to create a thoughtful member journey from the ground up. which in my experience is one of the most important drivers when it comes to long-term customer retention. Fifth, our CTO is focused on two key areas, enhancing enterprise applications and platforms, as well as a relentless focus on data and analytics. We plan to introduce technology solutions for our studios that will benefit both franchisees and members, focusing on areas such as enterprise resource planning, operational platforms, and our point of sale system. From a data perspective, Exponential is fully driving towards becoming a data-centric company. We will do all of this against a backdrop of strengthening our IT systems and overall cyber resiliency. Though John will speak more specifically about what we expect financially in 2025, Against a broader overall focus on franchisee performance, overall excellence, and culture, I'd like to highlight a few key tactical areas that will be focused on moving forward. As I said last quarter, I see no reason why Exponential shouldn't have as many studios operating outside the U.S. as it does domestically. Though we'll share a long-term vision for this during our investor day later this year, we are most focused on expanding our solid international footprint for Club Pilates, followed by strategically adding more Exponential brands in key international markets with the mature Club Pilates presence. Exponential will have on-the-ground leadership in Europe and Asia starting in the coming months and quarters as part of our commitment to support our international studio operations. Leadership will be based out of London initially, with presence in Asia expected later this year. Second, we will drive innovation in all aspects of our business. We've all become accustomed to rapid innovation in various aspects of our daily routines. In 2025, we're not only going to focus on what's working, but we're also going to help our franchisees more regularly exceed their customers' expectations. At Taco Bell, innovation was a huge part of our success. We constantly monitored consumer sentiment. I'm excited to build an innovation department here at Exponential. Number three, data. Data is becoming more central to every industry and health and wellness is no exception. At Exponential, we have access to a vast amount of data, but the real opportunity lies in building the right foundation to harness it effectively. In 2025, we're focused on taking the necessary steps to turn this potential into a strategic advantage, laying the groundwork for real-time insights, operational efficiency, and enhanced member experience. Before I turn the call over to John, I'd like to speak frankly about the EBITDA miss and the overall health of the portfolio. Though John's going to speak in detail about our financial results, I would like to be clear about what they mean from my perspective. Every successful transformation is rooted in transparency. Here, as I've done everywhere else, I've impressed upon my team the need to examine everything we do from ground up, and I've instituted this culture of transparency. Inevitably, as part of this exercise, we have found and may continue to find legacy operational issues that need to be addressed. Some of these are and might continue to be reflected in our financial results. Our hope is that they won't be material, but to the extent we do uncover issues that need to be addressed, we will address them. You may have seen from the press release that the company restated 2023 financial statements and that the company also corrected what it believes are immaterial errors in 2022 and 2024 financials. This was done in order to correct accounting errors primarily related to accrued inventory, 401 compliance, purchase accounting, and vendor rebates. John will provide more detailed thoughts. On the one hand, it's not surprising to me that we are encountering some of these issues. They represent a combination of rapid scaling and lack of organizational maturity. they have been brought about by the very gaps in structure, capabilities, and process I described above. Most companies that grow quickly go through some version of this given that the very same things that make companies grow quickly initially can often be impediments to long-term sustainable scale. On the other hand, we need to be clear that the goal here is to, from ground up, build a culture and infrastructure with corresponding structure and processes that will ensure exponential scales in a long-term, sustainable manner. Practically, this means that 2025 largely is going to be a year of foundation building, allowing for growth to reaccelerate in the out years. We will discuss all of this in more detail during our Investor Day in May in New York. I understand that this will be a disappointment to some of our stakeholders. But the last thing I want to do is to over-promise and under-deliver. John is also going to share with you some brand level economics as we typically do during our Q4 calls. On brand strategy broadly, I'll say that we're in the process of thoroughly reviewing whether and to what extent our portfolio needs to change so that shareholder capital is best allocated. Those of you who know me know that I've led through situations like this before, and I've learned a lot from those experiences. I've learned that perspective and context are important. I've also learned that an experienced team can build enormous value when they focus relentlessly on constructing a scalable foundation under their most valuable assets. That's what we're here to do. John, over to you.

Thanks, Mark, and thank you to everyone for joining the call. I'd like to start by noting that today in our earnings press release, we announced that the company restated 2023 financial statements, and the company also issued what it believes are immaterial corrections to 2022 and 2024 financials. This was done in order to correct accounting errors primarily related to accrued inventory, 401k compliance, purchase accounting, and vendor rebates. There are additional other corrections that will be detailed in our Form 10-K financial statement footnotes. Collectively, these corrections would be too large to take as an out-of-period adjustment in the current period, so we are making revisions in the prior periods. These corrections, which are known as a big R restatement, represent our belief that the errors were material to the company's previously reported 2023 financial results. However, we do not believe that these corrections affect the company's overall financial health. Furthermore, the company has also come in below the range of where it had guided to on the Q3 2024 earnings call for gross new studio openings and adjusted EBITDA. Gross new studio openings missed by 36 studios, coming in at 464 versus the expected 500 gross new openings at the midpoint of the range, a miss of 7%. This was driven by an operating decision to let STDIOs open on a more organic timeline. Adjusted EBITDA missed by 5.8 million, or 5%, coming in at 116.2 million for the year, instead of the expected 122 million at the midpoint of the range. The lower EBITDA was primarily driven by 2.3 million in lower equipment margins, which included the effects for the higher freight costs in the period, 0.6 million in overall lower merchandise margins, which include a 1.2 million write-off of slow-moving inventory, 1.2 million in combined expenses for bad debt and loan liabilities, and 0.5 million for severance. Let's now turn to an overview of our fourth quarter results. We ended the quarter with 3,233 global open studios, opening 120 gross new studios during Q4, with 83 in North America and 37 internationally. There were 65 global studio closures in the fourth quarter and 225 total in 2024, representing approximately 7% of our global open studios versus the 3 to 5% previously communicated. The elevated closures in the period were attributed to Stress Lab, Cycle Bar, and Yoga 6. We sold 56 licenses globally during Q4 and 400 licenses in 2024. The volume of licenses sold was lower in the period compared to prior quarters due to a pause in sales while we closely reviewed and updated each brand's franchise disclosure documents. We anticipate franchise disclosure documents for the year 2025 to be filed in the coming weeks as part of the normal renewal process. Our base of licenses sold and contractually obligated to open is over 1,600 studios in North America, and over 1,000 master franchise obligations internationally. These licenses will provide a foundation for the future new studio openings, albeit note that as of December 31st, 2024, we estimate that approximately 30% of our licenses contractually obligated to open are over 12 months behind the applicable development schedule and are currently inactive. Fourth quarter North America system-wide sales of $465 million were up approximately 21% year over year, with growth driven primarily by the 5% same-store sales increase within our existing base of open studios, coupled with the growth from new studio openings. In 2024, system-wide sales increased approximately 23% to $1.7 billion from $1.4 billion in 2023, and full-year same-store sales were 7%. North America run rate average unit volumes of 668,000 in the fourth quarter increased 9% from 612,000 in the prior year period. The increase in AUVs were largely driven by a higher number of actively paying members, higher pricing for new members, and the continued favorable trend of proportionate studio openings coming from our scale brands, which make up 95% of the system-wide sales and 94% of our open studios in North America. On a consolidated basis, revenue for the quarter was $83.2 million, down 7% from $89.3 million in the prior year period, which included $5.1 million in revenue from the company-owned studios. In 2024, exponential generated $320.3 million in revenue, a 1% increase from the prior year. 78% of the revenue for the quarter was recurring, which we define as including all revenue streams except for franchise territory revenues and equipment revenues given these materially occur upfront before a studio opens. Turning to the components that make up revenue, franchise revenue for the quarter was $45.3 million, up 17% year-over-year. This growth was primarily driven by an increase in royalty revenue as system-wide sales were supported by year-over-year memberships and visits increasing 15% and 19% respectively. Equipment revenue was $12.7 million, declining by 22% year over year. This decrease was primarily the result of a lower volume of installations in the period compared to the same period prior year. Merchandise revenue of $6.1 million was down 34% year over year. The decrease year over year was due to lower sales volumes and price discounts as the company focused on reducing inventory levels. Going forward, the company will continue to explore alternatives for our retail operation that will result in greater profitability for exponential, improved service levels for our franchisees, and merchandise that more closely aligns with our members' interests. Franchise marketing fund revenue of $9.2 million was up 23% year-over-year, primarily due to continued growth in system-wide sales from a higher number of operating studios in North America. Lastly, other service revenue, which includes sales generated from company-owned studios, rebates from processing studio system-wide sales, B2B partnerships, XPath, and XPlus, amongst other items, was $9.9 million, down 43% from the prior year period. The decline in the period was primarily due to our strategic move away from company-owned transition studios in 2023, resulting in lower package and membership revenues. Turning to our operating expenses for the quarter, cost of product revenues were $13.7 million, down 23% year over year. The decrease was primarily driven by the lower volume of equipment installations and merchandise sales during the period, as well as year-to-date reclass of expenses from our cost of product revenue to cost of franchise and service revenue. Merchandise inventory levels at year-end are now roughly 50% lower than the prior year-end, creating a more manageable position to turn inventory over more frequently, requiring less discounting going forward. Costs of franchise and service revenue were $6.1 million, up 29% year-over-year. The increase in franchise sales commissions was driven primarily by the previously mentioned year-to-date reclass of expenses from cost of product revenue to cost of franchise and service revenue in the period. Selling, general, and administrative expenses of $57.1 million were up 8% year over year. The increase in SG&A was primarily driven by $18.1 million in legal fees during the quarter to address regulatory inquiries and accruals for various potential franchise legal settlements, with partial offsetting cost savings related to no longer operating company-owned studios. We do anticipate that a portion of our legal costs in 2025 will be offset by coverage from our insurance policy. Impairments of Goodwill and other assets of $46 million were up 849% year-over-year. The increase was primarily associated with a one-time impairment of Goodwill and intangible assets of $41 million related to BFT, Cyclebar, and Rumble. In addition, there was $2.7 million in write-down in the right-of-use assets for permanently closed studio leases in connection with our restructuring plan, and $2.2 million for impairment of our XPath software assets. At present, we have entered into lease settlement agreements of approximately $30.3 million and have paid approximately $28.1 million through the fourth quarter. As of December 31, 2024, we have approximately $15 million of lease liabilities yet to be settled. We expect the majority of the remaining liabilities will be settled in the first half of this year. Moving on to depreciation and amortization, expense was $4.5 million, up 8% compared to the prior year period. Marketing fund expenses were $5.9 million, down 8% year over year, driven by lower spend in the quarter, primarily for Club Pilates. To avoid competing with presidential election media coverage and holiday advertisements in Q4, this lower spend has been committed to the first quarter of 2025. As the number of studios and system-wide sales grows, it is expected that our marketing fund increases. Since we are obligated to spend marketing funds, an increase in marketing fund revenue will always translate into an increase in marketing fund expenses over time. Acquisition and transaction expenses were $1.9 million compared to a credit of $1 million in the prior year period. As I have noted on prior earnings calls, This includes the contingent consideration activity, which 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 a net loss of $62.5 million in the fourth quarter or a loss of $1.36 per basic share compared to a net loss of $12.3 million or earnings of $0.03 per basic share in the prior year period. The change in net loss was the result of 4.7 million of higher overall profitability, a 7.1 million decrease for financial transaction fees, a 2.2 million decrease in restructuring related charges, offset by 41.1 million increase in impairment of goodwill and other assets, a 17.1 million increase in litigation expenses, a 3 million increase in acquisition and transaction expense, which includes a non-cash contingent consideration primarily related to the Rumble acquisition, a $1.3 million increase in transformation initiative costs, a $1.2 million increase in contract settlement costs, and a $0.5 million increase on the loss of brand investiture. 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 and loss to adjusted net income and loss is provided in our earnings press release. Adjusted net loss for the quarter was 7.1 million, which excludes 1.9 million in acquisition and transaction expenses, 0.1 million expense related to the remeasurement of the company's tax receivable agreement, 46 million related to the impairment of goodwill and other assets, 0.5 million loss on brand divestitures, and 6.9 million related to restructuring and related charges. This results in adjusted net loss of 19 cents per basic share on a share count of 32.9 million shares of Class A common stock. Adjusted EBITDA was $30.8 million in the fourth quarter, up 13% compared to $27.2 million in the prior year period. The adjusted EBITDA margin was 37% in the fourth quarter, down from 38% from the previous quarter and increasing from 30% in the prior year. For 2024, our adjusted EBITDA was $116.2 million, up 16%, compared to $100.3 million in the prior year period. I'd now like to provide a comprehensive summary of our annual results that include more granular brand-level metrics and data. It's important to note that this additional data will only be provided during our Q4 calls. At times, I will discuss our scale brands in our portfolio. were those brands with greater than 150 studios operating in North America, which currently includes Club Pilates, Cycle Bar, Pure Bar, Stretch Lab, and Yoga 6. In 2024, the strongest license sales occurred at Club Pilates with 215, Lindora with 84, and BFT with 46. These three brands represented 86% of the 400 licenses sold this year. Most licensed sales occurred in North America with 63% and the balance of 37% internationally. For gross openings, Club Pilates led with 236, followed by Stress Lab with 84 and BFT with 59, representing 82% of the 464 new studio openings this year. New studio openings largely occurred in North America with 76% and the balance of 24% internationally. Over time, international operations are anticipated to become a greater percentage of the total new studio opening. System-wide sales are driven directionally by the number of studios operating and the maturity of those studios. It is expected that the brands with the growing number of studios will continue to generate higher proportions of our system-wide sales as AUDs increase. Our scaled brands represented 94% of North American studios operating at year-end, and contributed 95% of the system-wide sales in 2024. Club Pilates, with 1,075 studios operating at year-end in North America, contributed 56% of our total system-wide sales for the year. Pure Bar, with 625, and Stretch Lab, with 502 studios operating, contributed approximately 13% and 15%, respectively. Run rate average unit volumes increased 9% and reached $668,000 at year end. Amongst the scaled brands, four of the five brands had AUV increases year over year. StretchLabs AUV decreased 8% year over year to $550,000. We continue to view run rate AUV as one of the key measurements of franchisee health and will remain an area of focus to enhance performance through the initiatives Mark spoke to earlier. Same-store sales across the portfolio have normalized to the mid-to-high single digits for the year as expected, with Club Pilates at 12%, continuing to over-influence performance due to its scale. Within the other scale brands, Yoga 6 and Pure Bar had same-store sales of 6% and 3% respectively for the full year, while Cycle Bar and Stress Life had negative 3% and negative 5% respectively. Turning to the balance sheet, as of December 31, 2024, cash, cash equivalents, and restricted cash were $32.7 million, down from $37.1 million as of December 31, 2023. In 2024, the company's cash position decreased by $4.4 million. For the year, net cash provided by operating activities was $11.7 million, which includes $24.5 million in lease settlements. Net cash used in investing activities was 14.1 million, with material cash usage of 8.5 million for the acquisition of Lindora and 6.5 million for the purchase of property and equipment and intangible assets. The cash used in financing activities was 1.9 million, which included a 25 million borrowing on long-term debt, 11.2 million on tax receivable agreement and tax distributions to pre-IPO LLC members, $5.8 million on preferred stock dividends and a $3.5 million payment on a promissory note liability. Total long-term debt was $352.4 million as of December 31, 2024, compared to $328.5 million as of December 31, 2023. The increase in total long-term debt is primarily due to the company drawing $25 million in additional debt in the third quarter of 2024 to address the lease termination payments on previously owned studios and for general working capital purposes. We are in the process of finalizing an amendment to our credit agreement with our existing lenders. Our interest rate and repayment terms will be similar to our existing agreement. We will continue to seek more inexpensive capital with more favorable terms and ultimately seek to complete a whole business securitization. Let's now discuss our outlook for 2025. Based on current business conditions and our expectations as of date of this call, we are issuing the following guidance for system-wide sales, global new studio openings, total revenue, and adjusted EBITDA for the current year as follows. We project North America system-wide sales to range from $1.935 billion to $1.955 billion, representing a 13% increase at the midpoint from the prior year. We expect 2025 global net new studio openings, which is net of closures to be in the range of 200 to 220, representing a 12% decrease at the midpoint from the prior year. We expect the number of closures to be five to 7% of the global system this year as a percentage of total open studios with a longer focus to reduce global closures to a low to mid single digits as a percentage of the total global system. Total 2025 revenue is expected to be between $315 million to $325 million, representing no change year over year at the midpoint of our guided range. Adjusted EBITDA is expected to range from $120 million to $125 million, representing a 5% year over year increase at the midpoint of our guided range. This range translates into roughly 38% adjusted EBITDA margin at the midpoint. We expect total SG&A to range from $130 to $140 million. When further excluding the one-time lease restructuring charges and regulatory legal defense expenses, we are expecting SG&A of $115 to $120 million and a range of $99 to $104 million when further excluding stock-based costs. In terms of capital expenditure, we anticipate approximately $10 million to $12 million for the year, or approximately 3% of revenue at the midpoint. Going forward, capital expenditure will primarily focus on our data transformation initiative, brand application and platform enhancements, and general technology investments that 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 $34 million, and $1.9 million in quarterly cash dividends related to our convertible preferred stock. A full explanation of our share count calculation and associated pro forma EBS and adjusted EBS calculations can be found in the tables at the end of our earnings press release, as well as our corporate structure and capitalization FAQ on our investor website. We anticipate our unlevered free cashflow conversion to be approximately 90% of adjusted EBITDA as we require minimal capital expenditure to grow this business. We continue to expect that our anticipated interest expense in 2025 will be approximately $45 million, tax expenses to be approximately $10 million, including the cash usage for tax receivable agreement and tax distributions to pre-IPO LLC members, and approximately $8 million in cash dividends related to our convertible preferred stock, resulting in levered adjusted EBITDA cash flow conversion of over 40%. This concludes today's prepared remarks. Thank you all for your time today. We'll now open the call for questions. Operator?

Thank you. We'll now be conducting a question and answer session. If you'd like to be placed in the question queue, please press star one on your telephone keypad. And as a reminder, please ask one question, one follow-up, then return to the queue. Our first question today is coming from Chris LeCoultre from Stifel. Your line is now live.

Thanks. Good afternoon, guys. First, John, can you help us understand the comp performance that is embedded in the 2025 system sales guidance? I think it's calling for 13% growth.

Yeah, the assumption that we have is what I stated in the guide is, you know, we're looking for about mid-single digits as an expectation around comp. The split obviously changes amongst brands with Club Pilates, you know, has been over-indexing to a higher percentage. historically, but when you take it into context of the entire portfolio, you should expect to see about a mid-single-digit comp for 2025.

And then, Mark, I know you've been focusing on revamping the franchise recruiting process. Can you provide an update on what you believe needs to change and how quickly you believe you can rebuild that pipeline with franchisees that are more in line with the type of operators you hope to target?

Well, first of all, hi, Chris. How are you? Good. I would say this. We've hired a new chief development officer who has a lot of experience in the franchise world. Very excited about having him on board. The first thing that we've done is we've put all of the functions of franchise sales, real estate, and construction under his purview. So where we were very fragmented before, We have now one unit that works as one, and they're up and running today, so that's number one. Secondly, we've definitely taken a different approach, or we will when we start selling again after the FDDs are filed, that you can buy one, two, three, you can buy whatever you want, so we're not going to be overly aggressive in selling the number of franchise or the number of licenses. And then the third is we really want to make sure that The people that we're selecting, one, are committed to being an entrepreneur and a franchisee that have the capability to run a small business and are well capitalized. So those are new requirements that have higher standards, I would say, that I think gives us a better chance to have really successful franchisees going forward.

Okay, thanks. One last one, John. Did you say how many gross openings you're expecting for 2025?

Yeah, just to note, we did change from gross to net this year in our guide. The 375 is kind of the midpoint for the gross openings, and we expect about 165 closures in that number. So it should get you to 210, which is the midpoint.

Great. Thanks, guys.

Thank you. Next question is coming from John Heimbacher from Mugenheim Partners. Your line is now live.

Hey, Mark, what's your assessment of Stretch Lab? in terms of the negative comps. And then if you look at four-wall economics for the franchisees, particularly with some of the brands that are comping negatively, how would you look at that? And I know you talked about being holistic with brands. Sort of the idea here that some of the brands, I don't know if they don't work, but should either be smaller or should be owned by somebody else Let me tackle all of that.

All right, John. Well, thank you for the multi-question question. The first thing I'd say is since I've gotten here, Stretch Lab has been slowing, so it's not something that's brand new for us. So we're all hands on deck looking at everything at Stretch Lab, starting with how do we qualify more flexologists in an easier way? It's very expensive. It's time-consuming, which is one of the challenges is to have enough labor to be able to take in more people to be stretched. So that's number one. The second thing is we're looking at how we're deploying our marketing resources, looking at moving more of those to local marketing to drive more efficiency and be more involved in the community. We're looking at different programs like corporate programs, recruiting corporations in to offer it to their membership. So honestly, John, we're looking at the whole model to see if There's things that we can add there. We're also looking at, and we've experimented with this in the past, but we're looking at it again. Is there a way we can do group stretch and not just one at a time? So I would say right now everything is on the table. We've got some of our best resources in-house looking at it. and have quite a few workshops going on to drive that. And then the last thing is that we have much better, we need much better communication with our franchisees, the ones that are out there and are experiencing this. So we're trying to build a platform for them to be able to contribute all the things they know. As it relates to the other brands, we are looking at everything, and I said that at the last earnings call, that we're going to take 2025 to look at uh the non-scaled brands to see is is there the opportunity and what's the capital requirement to drive those brands that's ongoing we're only in early march uh but all of those decisions will be made sometime during the year okay thank you and then maybe my follow-up i know you want to grow internationally i assume that you talked about boots on the ground right so you're going to have uh i guess some people in london some people in asia

What's sort of the extent of that? And is the idea here, you talked about building around Club Pilates, so there will be more of a focus on specific countries, right, where Club Pilates is strong?

Yeah, I think so, John. Plus, BFT is also very strong internationally. So it's both. The main reason for boots on the ground is as... We start to sign up these MFAs with different master franchisors in different countries. We need to be sure that we're there to help them get started, to train their staff, to make sure they're doing the right things. And today we do that all remotely, and all the franchisees from around the world come here, but we've got to be closer to them in their markets to understand how to help them with marketing, site selection, and those types of things. So if we're going to really grow to, you know, we have – thousands of studios outside the U.S., we're going to certainly need people around the world. But that'll be a slow build over the next few years. It's not something that will, you know, happen this year. But we are starting with a couple individuals in London to help with the expansion in the U.K. and Spain and then some of the other European countries.

Thank you.

Thank you. Next question is coming from Randy Connick from Jeffrey's. Your line is now live.

Thanks. I guess Mark and John, can you just clarify the thoughts around the closures? I just want to repeat those comments and just kind of where are we with kind of that? Are we getting towards the end of the line of cleansing, the cleansing process around the real estate? I just want to get some thoughts, just how you guys think about that as we go over the next couple of years. Thanks.

Thanks, Randy. Hey, one of the things we're doing is we're taking a really close look at all the underperforming studios and we're really being more, I would say, conservative how we're dealing with those because we really need to get to where the struggling, underperforming studios probably need to close. And we need to end up with a healthier system. And that would help not only the brands, but the franchisees that survive. So we're taking a much different look at existing franchisees and really trying to err on the side of facilitating a healthier system.

And hey, Randy, for following up on the LEAP settlement around the real estate, We're getting there. We've settled or gotten into settlements in around $30.3 million worth of the leases. We've paid cash on around $28 million of it. So there's some of the leases that we've got into payment plans on and kind of getting to the end of those in the first half of this year. There's about, I would say, just under $15 million. We said $15 million in the talk, but it's about $15 million of leases that are outstanding that we need to settle up with landlords. I think these are the more tougher ones where the landlords are holding out. So our expectation is we're actively trying to get through those as much as possible and get them settled, but the expectation is that the first half of the year is where we'll address I would say the majority of that 15 million that's outstanding. We've actually done quite a bit already in the first quarter and expect to continue in Q2 to try and get it wrapped up. Hopefully in the second half, it'll be sort of an immaterial number that will be less outstanding.

Got it. And then Mark, you know, I think the theme that you've kind of come up with is this idea of less is more, you know, we don't need hyper growth. We need profitable, solid, stable growth. And when you kind of get that, when you talk about club Pilates, or you look at club Pilates, you know, obviously it's a very stable, very good business. And, it seems there's these other businesses that are less so. So, you know, are there kind of specific hurdle rates you're thinking about when assessing these other brands as it pertains to looking out over the course of 2025 to think through, you know, what do we really keep here? What do we not keep? Like, how are you thinking about that decision-making process? Because, you know, I think the market really believes in Club Pilates, less so on the other stuff. So just kind of just want to try and get your thoughts on this idea of less is more and how you're going about thinking about these other concepts. Thanks.

Yeah. I, Randy, I think it all starts with franchisee profitability. Um, Any of these brands, if we can figure out, and we're looking at that now, different size boxes and does Yoga 6 need to be hot yoga? Can it be different? So we're looking at all those. For me, it starts with franchisee profitability. So what does that need to be? It needs to be 20, 25% EBITDA margin. at a studio level. And if we can do that, franchisees are going to want to grow. They're going to want to open up new ones. So for me, it's all around, can we get these brands profitable at the franchisee level? And the challenge when you run a portfolio is you can't invest in all of them. And that's why for me, less is more because it'll give us an opportunity to take whatever capital we do have and invest it in fewer brands to be able to help those grow. And that investment would be marketing, sales training, new innovation at the modality level. So it's all those things. It's just really challenging to do. So we're going to have to make some decisions on what brands have the biggest opportunity and we have the right capital allocation. That's how we're looking at it. But to me, it all starts with profitability at the four-wall economics. Thank you.

Thank you. Next question is coming from Jonathan Komp from Baird. Your line is now live.

Yeah. Hi. Good afternoon. Mark, I want to follow up. You talked a bit about the development process changes, but when you look at the other strategic initiatives, could you give a little better sense of either the roadmap or the timeline to get some of the key pieces in place? And then just to follow up on the legacy issues that you mentioned, could you just give a little more context around your comments, what may still be out there or, you know, areas that you're thinking are not fully certain at this stage.

Jonathan, those were two very different questions. Can you repeat the first one, the first part of that question?

Sorry to jam a couple in here. The first question is really just the... Oh, yeah, you guys are all clever trying to do that. Go ahead, Jonathan. Yeah, I just want to understand the... Yeah, the major initiatives that you have, just more on the roadmap and the timeline.

Okay. Yeah, okay. So the last time we were together, I talked about our five strategic pillars, and one is franchisor of choice. And that really, I think, Jonathan, starts with mindset, that what we do around here really needs to – first, we need to think about our franchisees and how do we help them. The second thing is our field ops team. So we actually have people out in the field that can help them. We're going to deploy a handful of people mid-year, and we'll be running a pilot on where we put these people, what do they do, how do they most help. So that will be in place. We feel over the coming years we can scale that pretty significantly, but we're going to start slow. And then the third thing on that one is the LMS system, the learning management system, which is really this playbook for how franchisees can be successful. So that's a big one for us. The second one is member experience, and that's really all about innovation and curating these member experiences. That's not very expensive. That's just looking at how we deploy our current marketing dollars. Data is a big one for us, and we've hired a new CTO. We've got a big data warehouse project going on to look at BI and consumer insights. So that is really moving ahead right now. And then the international, and we're starting to deploy a few resources there. So they're all in motion, I would say, Jonathan. I think where they really start to pick up momentum is probably in 2026. And then you had a follow-up question.

Yes, a second unrelated question. The operational issues that you mentioned that there could be some more and you're hopeful that they're not material, but can you just give a little more context to those comments and what areas may still be out there where there's some uncertainty?

Well, here's what I would say. We've done a lot of work over the past 90 days to look at the organization as we look to transform it in building a really solid foundation. We believe that we've done a lot of really good work. That being said, you can never know what you don't know. But we do believe we've identified all of the issues that we know presently. And what I really believe is that we've had a cultural shift around here around transparency and franchisee mindset first. And we have a leadership team that I think is really committed to working together as a team, to collaborate, to communicate. So some of these issues that we've run into, which are really, in my opinion, a result of a lack of the right structure, capabilities, and process. So I think we're on the way to really managing this in a much more effective way.

Okay, great. And my last follow-up, I know you mentioned the portion of the licenses that were inactive for the last 12 months. Is there any way, as we think about the base of studios open, what percentage in total today is maybe below the threshold, if it's 20% to 25% EBITDA margin or some other threshold that would be potential closure risks as we look over the next few years?

Hey, Jonathan, I'll take that one. Yeah, I mean, when we look at, you know, we look on a monthly basis. We evaluate the portfolio. You know, we focus mainly on AUVs because to me it's the easiest kind of KPI that, you know, assesses franchisee health. You know, all portfolios have a bottom 10%, right? But we understand kind of if you go all the way back to our prior investor analyst day that we did a while back, there's about a $30,000 a month break-even point. And so we typically look at AUVs below $360,000 as kind of a general rule. And that's where we kind of assess the line in the sand of anybody below that $360,000 mark is where the focus needs to be on profitability and figuring out why they're performing below that. It's still, I would say, you know, in that as we guided to the number of closures, It's that 10% rule. Some of the franchisees run the model a little bit differently, which allows them to operate below that $360,000 a year kind of AUV level. But as we mentioned, you can't stay down there very long because at the end of the day, you have to generate, as Mark mentioned just previously, in that 20% operating margin to kind of have long-term success there. Otherwise, if you're operating in that 0% to 10%, there's just too much volatility to break even point You're operating too close to the break-even point. So I would say there is the bottom 10%, as we guided, about 5% to 7% closures in 2025 kind of addresses that. So I don't know if that answers your question, but it is about 10% of the portfolio that we're focused on, but there's probably about 5% to 7% that are in more of that critical range that if they don't grow their AUVs, they'll likely end up closing.

Okay, yeah, that's helpful, and thanks for all the color on this call. Thank you.

Thank you. Next question is coming from Joe Altobello from Raymond James. Your line is now live.

Thanks. Hey, guys. Good afternoon. I wanted to ask about the studio all things. I think, John, you mentioned you're expecting about 375 or so gross openings at the midpoint here in 2025, obviously a little bit below what you've been doing in recent years. Is that a number we should consider a good steady state number or is that a temporary number?

I would say it's the number right now. One of the issues that we had in kind of the back end of 2024 and early part of 2025 is not having our FDDs active, which we are in the process of getting those those filed. So that'll help us with getting new license sales. But without the FDDs, you know, being active, we haven't been able to sell licenses, which kind of impacted the back end of 2025. You know, typically you see studios that are licenses that you sell, you know, at the end of a year or the beginning of a year, those typically get opened by Q4 of what would be this year. So it did take a little bit of momentum out of the back end of this year. So I would call it the number for this year. I think as we kind of get FDDs active and we start selling licenses again, we'll be able to provide a better number beyond 2025. Okay.

And then in terms of the health of your member, I'm trying to kind of get to that. You mentioned membership was 15%, but I don't know if you gave us visits and maybe any other sort of anecdotal data you can provide on your member? Are they cutting back on visits or reducing the number of classes they're taking, et cetera?

No, we haven't seen a shift in the weakness of our members. Visitation, obviously visitation in the first quarter is usually higher just given the New Year's resolution kind of effect, but visitation and members are up year over year and haven't seen any kind of weakening shift in trends there.

Okay, great. Thank you.

Thank you. Next question is coming from Richard Magnuson from B. Reilly Securities. Your line is now live.

All right. Thank you for taking our call. You were talking about the field operations teams and then some of the international leadership. It's going to take a while to build that out, but can you give us an idea of the impact of operating expenses from that? Is it more of an incremental expense? Will you have an extra team there in the beginning and then sort of meet her off after a while? It's like a better picture of that.

Yeah, Richard, thanks for the question. We're looking right now, we're actually in the process of interviewing internal people that would move from internal support jobs to external support jobs. So during this year, for sure, it would be cost neutral. And then on the international side, we're moving one key person that was inside that we're moving them to the UK to be the first boots on the ground. So at this point, Richard, it's cost neutral on both of those fronts.

Okay, that sounds great. And then... I have just one more regarding the Lindor clinics. I don't think you talked about them much, but are there any changes that we should know there? And what is the AUV of that one right now, if you could tell us that? And then some of the changes in some of the weight loss drugs recently, and some of those are no longer in short supply. Has that had any effect on that business model, maybe some of that color?

Yeah, I'll take that one. I think I caught all of them. The main one was the AUV that you were looking for. So in the fourth quarter, the AUV for Lindora was just under $1 million. It was $9.84. When you think about the overall sales profile within Lindora, there hasn't been a big mix change as far as the services that are being offered. They continue to kind of be pretty stable even with the shift in a lot of people kind of entering the space. There hasn't been... an overall movement or a trend that varies in the prior part of the year.

Okay. And then the latest news in that part of the industry about the weight loss drugs no longer being in short supply, that hasn't played any significant role in the business?

It has not. It has not shown an impact on the business as of now. All right. Thank you.

Thank you. Next question is coming from Owen Rickert from Northland Capital Markets. Your line is now live.

Hey, guys. Thanks for taking my question. Can you talk a bit about the third pillar of becoming a data-driven company? I think I did hear you have a new CTO, and I believe I heard a data warehouse initiative, if I'm correct. Can you give us some more color there on this pillar as a whole and how this will help going forward?

Yeah, I'll take that one just simply because it hits home for me. I mean, the business has been very, I would say, spreadsheet driven given the lack of investment in technology. So about a year ago, the company put forth a, I believe it's called a data lake house now, but we'll call it a data warehouse in which all information is being dumped into a central repository for which we could use data visualizer or something like a Power BI to to create dashboards that are not only applicable by brand but by department as you as you for me it's extremely helpful for financial reporting it'll include things like your budget versus actuals so we'll be able to stay on track from that perspective but as you move it out to operations the intent here is for the data to be almost real time. In essence, anybody in the company who has access would be able to come in and see what the sales were the day before, how many studios we opened yesterday or last week or last month. They could look at information by studio location. The field ops people that Mark talked to, these are people that will need access to information being somewhat disconnected if they're sitting in Texas or Florida, being able to get onto their phone or their laptops, pull up a dashboard and pull anything they want almost real time. in regards to franchisee performance or the health of the system. So it's been – it'll be a game changer. We've got early user acceptance testing coming to an end here. You know, so for our perspective, you know, probably another – by probably the next earnings call, we'll start moving into live dashboards and actually being able to use it.

Great. Thank you. Thank you. Next question is coming from Corinne Wolfmeyer from Piper Sandler. Your line is now live.

Hi, this is Sarah for Corinne. Just one on how we should be thinking about brand and membership investments over the course of the year and then the cadence over the quarters and how much flexibility guidance builds in there.

What was the first part of the question?

Just how we should be thinking about brand and membership investments over the course of the year.

We have quite a bit of money in the marketing fund, for example, on Club Pilates that we're going to, and we've committed, John talked about it in his remarks, we're going to spend that in Q1 to make that stronger. We also are committing some of our own dollars against, let's say, Stretch Lab to match some of the funds that they are to help drive business short term. So I think as a consumer-driven company, which that's what the franchisees are, it's all about their consumer, we've got to constantly be looking at where do we put our resources, how do we best use them, and how do we drive members back into the studio. So that's something that we do every day.

Got it. Thank you.

Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over for any further closing comments.

Well, thanks, everyone, for joining today. We look forward to seeing many of you at some of the marketing events next month. I'm also excited to remind you that we plan to host an investor day in late May, and we intend to elaborate on all of our strategies and specifically our growth trajectory. We'll communicate more details as the event gets closer. So, again, thanks for tuning in today.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.