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.