Xponential Fitness Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 4, 2023

There are 12 speakers on the call.

Operator

Greetings and welcome to the Exponential Fitness Incorporated First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Kimberly Esterkin.

Operator

Thank you. You may begin.

Speaker 1

Thank you, operator. Good afternoon, and thank you all for joining our conference To discuss Exponential Fitness' Q1 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 Investors section of our website at investor. Exponential.com. We remind you that during this call, we will make certain forward looking statements, including discussions of our business outlook and financial projections.

Speaker 1

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.

Speaker 2

For a

Speaker 1

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 we issued earlier today prior to this call.

Speaker 1

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.

Speaker 3

Thanks, Kimberly, and good afternoon, everyone. We appreciate you joining our Q1 earnings conference call. I'll begin today's discussion with an overview of our quarterly performance and operational highlights. Sarah will then speak further about our progress against our core growth strategies with an emphasis on our growing B2B offerings. John will conclude with a review of our Q1 financials and an update on our 2023 outlook.

Speaker 3

It was another strong quarter for as our business has continued to perform across our key performance metrics. Exponential franchisees now operate over 1,750 studios globally, an increase of 24% year over year with more than 5,600 licenses sold across Also encouraging, our mature studio cohorts are again exhibiting strong same store sales growth with profiles similar to our younger studios. For the quarter, North American studios over 3 years old comped at 21% same store sales. Turning to our membership levels. Total members across North America increased by approximately 31% year over year to a total of 665,000 at the end of the Q1.

Speaker 3

Over 90% of these customers are actively paying members. Along with growth in our membership base, North American studio visits For the 3 months ending in March increased by 38% year over year, reaching a total of 12,600,000. The increasing foot traffic and utilization at the studios drove record North American system wide sales, which increased 42% year over year in the Q1. Freezes on memberships are also at their lowest level since prior to the pandemic. Q1 North American AUVs of 542,000 We're up 21% from $450,000 in Q1 of 2022, our 11th straight quarter of AUV growth.

Speaker 3

We believe that AUV growth is the most direct measure of the health of our franchise system, and I am pleased to report the momentum in the Q1, up from 17% in the previous two quarters. This improvement is particularly impressive when considering the difficult comp in the Q1 of 2021 when our studios were back running at full capacity and performing solidly post pandemic. These numbers also bode well for our studios growth prospects for the remainder of the year and into the future as more members are visiting our studios. Furthermore, the acceleration in growth in our North American AUVs and same store sales in combination with the growing membership base Demonstrate that consumers continue to view their health and wellness as a vital part of their budgets and not discretionary spend. Turning to revenue.

Speaker 3

For the quarter, net revenue totaled $70,700,000 an increase of 40% year over year. Adjusted EBITDA totaled $22,900,000 in Q1 or 32% of revenue, up 58% From $14,500,000 or 29 percent of revenue in the prior year period. The resiliency of Exponential's business is best demonstrated by our franchisees opening New studios while driving additional business to their existing locations. Exponential franchisees continue to have ample access to the capital required to open studios by leveraging our relationships with several lenders. Despite higher interest rates, we have a healthy pipeline of franchisees with pre sold licenses Seeking and receiving funding.

Speaker 3

In addition to franchisees continuing to open studios, studio members are continuing to show that they are spending on experiences. As Sarah will speak about shortly, many view their fitness memberships as part of their overall entertainment budgets. Let's now turn to our 4 strategic growth areas. I'll discuss the first three and then turn the call over to Sarah to discuss the 4th. Beginning with the increase of our franchise studio base, we ended Q1 with 2,756 global open studios, Opening 115 net new studios in the Q1.

Speaker 3

We sold 188 licenses globally in Q1, bringing the total to 5,638. Our pipeline of over 2,000 licenses sold and contractually obligated to open on a global basis offers us multiyear visibility into our growth. Note, this number does not include our master franchise agreement obligations, which I will speak to shortly. I am also happy that we are now conducting classes on all 15 of the cruise ships that make up the Princess fleet. Sarah will speak to this achievement in greater detail later in today's call.

Speaker 3

Turning to our 2nd growth driver, expanding internationally. On the international front, we have over 1,000 studios obligated to be open under master franchise And we continue to gain traction. Just last week, we announced a master franchise agreement in Japan to franchise up to 40 StretchLab Studios over the next 10 years. Xponential has 5 brands operating in Japan, including Club Pilates, Rumble, Cycle Bar, AKT and StretchLab. In addition, we recently signed master franchise agreements with Club Pilates in Ireland and Switzerland.

Speaker 3

And in Q1, we opened our 1st Club Pilates in Frankfurt, Germany. As a reminder, our MFAs are structured to provide exponential with high margin flow through given that we structure them as a revenue share model and require minimal incremental SG and A to support MFA growth. Our 3rd key Growth driver is to expand margins and drive free cash flow conversion. As our business continues to grow, we see further benefits of our asset light Scalable operating model, which shows up in our margin performance. Adjusted EBITDA margins again improved to 32 point 4% during the Q1 as we continue to increase our operating leverage.

Speaker 3

We remain confident that our adjusted EBITDA margins will expand into the 35% 39% range in 2023 and are on track to achieve our adjusted EBITDA margin target of 40% in 2024. With that, I'll pass the call on to Sarah to discuss our 4th and final growth driver, increasing our same store sales in AUVs.

Speaker 1

Thank you, Anthony. At Xponential, we understand the importance of empowering customers to exercise where and when they want. We also acknowledge that Customers are looking to work out and to have a full experience while doing so. In other words, they are looking for a place where they can work out and socialize. And it's not just Exponential customers spending on experiences.

Speaker 1

In a recent spending report by Mastercard, The credit card company found that consumer spending on experiences rose by double digits in February. Compared to the year ago period, Consumers spent 42.7 percent more on lodging, 15.6% more on airlines and 14.2% more on restaurants. Consumers are shifting their spending and Exponential is benefiting from the spend on experiences, as is evident from the increase in our visitation rates and membership count. During the Q1, North America visitation rates grew 38% year over year and our North America membership base has grown to over 165,000 members. While we often see some seasonality in membership following the New Year, Q1 is typically our strongest quarter for membership growth.

Speaker 1

These results are further proof points that more individuals are visiting our boutique fitness studios. Importantly, These trends have continued into the Q2. To keep this momentum going, Exponential is consistently innovating, finding new ways to connect with our members, Increased retention and reduced churn, all of which are vital to growing our same store sales is one such example of a novel way in which we are providing our members frictionless access to all 10 of our brands on a single recurring monthly membership platform. In addition to providing our customers with greater flexibility, XPass serves as a lead generator for our franchisees to drive in studio memberships. Not only have we been able to sell traditional XPass memberships to those frequenting our studios on land, but we now are actively offering our XPass to individuals who work out with 1 of our boutique brands on Princess cruise ships.

Speaker 1

We are excited that Purebar, Yoga 6 and StretchLab Have already launched across the entire fleet of Princess cruise ships. We are happy to already see social media posts from franchisees Discussing signing up new members post cruises. Beyond taking our live classes onboard, cruise guests also have the opportunity to stream our digital offering X Plus across Princess' more than 23,000 staterooms. X Plus helps enable our members to work out whenever and wherever is convenient for them, even if onboard a cruise ship. At the end of the Q1, we had over 140,000 subscribers on X Plus, many of whom also hold in studio memberships, including those who have subscriptions through their Club Pilates or StretchLab membership.

Speaker 1

X Plus is also a key driver of our B2B partnerships. Recently, we announced the launch of X Plus on LG Electronics Smart TVs, which will provide on demand access to Exponential's family of brands to millions of LG Smart TV owners in over 250 countries. Our previously announced partnership with Active Solutions is progressing well. Active is leveraging our world class digital content through our X Plus platform In one of a kind immersive exercise experiences tailored specifically for amenities located within leading hotels and resorts, Corporate campuses, universities and high end multifamily housing properties. We've installed about 90 active base so far and expect that these will all be activated at the end of June.

Speaker 1

Our strategic B2B partnerships with industry leading companies Franchisees even more with these tools and partnerships in the future, helping drive individuals into the Exponential ecosystem, whether virtually or through our brick and mortar locations. Thank you again for your time. I'll now turn the call over to John to discuss our Q1 results and 20

Speaker 2

Thanks, Sarah. It's great to speak with everyone and discuss Exponential's Q1 2020 results. 1st quarter North America system wide sales of $317,800,000 were up 42% year over year. The growth in North American system wide sales was largely driven by the 20% same store sales in the existing base of open studios that continue to acquire new members, coupled with 82 net new North American studios that opened in the Q1. On a consolidated basis, Revenue for the quarter was $70,700,000 up 40% year over year.

Speaker 2

Each of the 5 components that make up our revenue grew during the quarter. Franchise revenue was $33,000,000 up 29% year over year. This growth was primarily driven by an increase in royalty revenue as member visits and associated system wide sales reach 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 $13,100,000 up 68% year over year.

Speaker 2

This increase in equipment revenue is the result of Continued higher volumes of global equipment installations. Merchandise revenue was $7,200,000 up 18% year over year. The increase during the quarter was primarily driven by a higher number of operating studios and increased foot traffic when compared to the prior year. Franchise marketing fund revenue of $6,200,000 was up 40% 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 XPath, amongst other items, was $11,300,000 up 71% from the prior year period. The increase in the period was primarily due to increased rebates from the processing of city level system wide sales and our increased revenues from our B2B partnerships.

Speaker 2

Turning to our operating expenses. Cost of product revenue were $14,000,000 up 46% year over year. The increase was driven by a higher volume of equipment installations for new studio openings and merchandise revenue in the period. Cost of franchise and service revenue were $4,000,000 down 5% year over year. The decrease Was driven by fewer license terminations and Sidio transfers in Q1 of 2023.

Speaker 2

Selling, general and administrative expenses Of $34,900,000 were up 3% year over year, which in the period included the cost of the secondary offering that was completed in February. As a percentage of revenue, SG and A expenses were 49% of revenue in the 1st quarter, down from 67% in the prior year period, demonstrating the continued leveraging of SG and A as we continue to grow revenues. As I have noted on prior calls, costs related to company owned transition studios Are included in our SG and A. We are focused on growing the sales in these studios, optimizing operating costs to achieve 4 wall profitability And then finding new franchisee owners to which to sell them. We also expect to see legal costs decline in the second half of the year as a result of increased efficiencies.

Speaker 2

Further, in the Q1, we announced the hiring of Andrew Hagopian, who will serve as our Chief Legal Officer. We are thrilled to see that Andrew has hit the ground running and has already started working towards optimizing legal expenses. Depreciation and amortization expense was $4,200,000 an increase of 20% from the prior year period. Marketing fund expenses were $5,000,000 up 15% year over year driven by increased spend afforded by higher franchise marketing fund revenue. Acquisition and transaction expenses were $15,700,000 primarily related to the non cash contingent consideration as part of our acquisition of Rumble.

Speaker 2

As I have noted on prior earnings calls, the Rumble contingent consideration is driven by movements in our share price. We mark to market at each quarter and accrue for the earn out. We recorded a net loss of approximately $15,000,000 in the 1st quarter compared to a net loss of $15,200,000 in the prior year period. The decrease in net loss was the result of $2,800,000 of lower overall A $6,200,000 increase in non cash contingent consideration primarily related to the Rumble acquisition And a $9,200,000 decrease in non cash equity based compensation expense. We continue to believe that adjusted net income is a more useful way to measure the performance of our business.

Speaker 2

A reconciliation of net income to adjusted net income is provided in our earnings press release. Adjusted net income for the Q1 was $1,300,000 which excludes the $15,700,000 change And fair value of non cash contingent consideration and a $600,000 liability increase related to the Q1 remeasurement of the company's tax receivable agreement. This results in adjusted net loss of $0.02 per basic share On a share count of 30,800,000 shares of Class A common stock after accounting for income attributable to non controlling interest And dividends on preferred shares. Adjusted EBITDA was $22,900,000 in the Q1, up 58% compared to $14,500,000 in the prior year period. Adjusted EBITDA margin grew to 32% in the 1st quarter compared to 29% in the prior year period.

Speaker 2

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 March 31, 2023, cash, cash equivalents and restricted cash were 28,100,000 up from $15,800,000 as of March 31, 2022. Total long term debt was 266 $7,000,000 as of March 31, 2023 compared to $132,500,000 as of March 31, 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.

Speaker 2

These shares prior to the repurchase would have been convertible Into 5,900,000 shares of Class A common stock. Now turning to our outlook. After a solid first quarter and a continued positive momentum in the Q2. We are confident in our growth trajectory. With that said, Based on current business conditions and our expectations as of the date of this call, we are increasing our full year 2023 guidance For system wide sales, revenue and adjusted EBITDA, and we are reaffirming guidance for net new studio openings as follows.

Speaker 2

We expect 2023 global net new studio openings to remain unchanged in the range of 540 to 560. This range represents the highest number of studios opening in our company's history and an 8% increase at the midpoint over 2022. We are increasing North America system wide sales to range from $1,370,000,000 to $1,380,000,000 up from the previous $1,340,000,000 to $1,350,000,000 or 33% increase at the midpoint from the prior year. Total 2023 revenue is now expected to be between $290,000,000 to $300,000,000 up from the previous $285,000,000 to 295,000,000 A 20% year over year increase at the midpoint of our guided range. Adjusted EBITDA is now expected to range from 102,000,000 To $106,000,000 up from $101,000,000 to $105,000,000 a 40% year over year increase at the midpoint of our guided range.

Speaker 2

This range translates into roughly 35.3 percent adjusted EBITDA margin at the midpoint. In terms of capital expenditures, we anticipate approximately $10,000,000 to $12,000,000 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 XPath 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 $32,600,000 $1,900,000 in quarterly dividends to be paid related to our convertible preferred stock. A full explanation of our share count calculation and associated pro form a EPS And adjusted EPS calculations can be found in the tables at the back of our earnings press release as well as on our corporate structure And capitalization FAQ on our investor website.

Speaker 2

Thank you again for your time today and for your support of Xponential. We look forward to speaking with you on our next earnings call. We will now open the call for questions. Operator?

Operator

Thank you. At this time, we will be conducting a question and answer We ask that you please limit to one question and one follow-up. Our first question is from Jeff Van Sinderen with B. Riley. Please proceed with your question.

Speaker 4

Hi, everyone. Thanks for taking my question. Just wanted to check on promotional activity pricing, any thoughts Well, I guess, are there any changes happening there at all in promotional activity or pricing? And then how might those elements evolve This year as you're thinking about the remainder.

Speaker 1

Hey, there. No substantial changes In terms of how we're approaching pricing and promotions, we're seeing the brands focus on various marketing promotions throughout the quarters and throughout each month, Make sure that we're attracting new customer base. Tons of focus on our B2B activity and driving negative CAC back to the studios with the leads that we're bringing in. And that's so far performing very well. A lot of those partnerships are starting to stand up this year.

Speaker 1

So we're starting to See the fruits of that labor, which we're excited about.

Speaker 4

Okay, great. And then as a follow-up, just I know you mentioned VST, but any update you can provide on the VST integration process, how that's going?

Speaker 3

It's going according to plan. So we're integrated with BFT. So we're continuing That process, but it's operating today just like our normal domestic business and our normal MFAs operate.

Operator

Okay, great. Thanks for taking my questions. I'll get the rest offline.

Speaker 2

Okay. Thank you so much.

Operator

Our next question is from Alex Parry with Bank of America. Please proceed with your question.

Speaker 5

Hi. Thanks for taking my questions and congrats on a I guess just first, you kept the NetSuite opening number the same even in this higher rate environment. Can you talk about the feedback you're getting From your franchisees, are they accelerating development, developing sort of in line with schedule? Are you seeing any pause? And then just on the 540 to 560 openings, how much visibility do you have on that?

Speaker 5

And maybe some help on how much is sort of Domestic versus international? Thanks.

Speaker 3

Yes. I mean, still, we're at about 90, 10, domestic versus international on openings, we're selling 75 to 25. So eventually that 75 to 25 will continue to pour in on the 90, 10 and we will see it Open Studios expanding there. The domestic business is continuing to be steady. And then the international openings are what are piling on top of the domestic business.

Speaker 3

But as far as interest rates go, we reached out to our lenders, rates are up 0.25% or 0.5% or something like that. And it's not against a lot of opening dollars when you think about I know people are asking the question around Planet and Stuff like that and their opening dollars are about 10x what ours are. So interest rate has a bigger effect In those large box type businesses than it does in small boutiques, Just because of the overall dollar amount it is to get open.

Speaker 5

Perfect. That's really helpful. And then just how do you think about the royalty rate increases from here? Is there an AUV that you sort of Target by concept, where you feel comfortable taking a royalty fee increase? And I guess maybe as for context, sort of what Permitted you to take the sort of increase in the Club Pilates royalty rate to 8%?

Speaker 5

And is there any other brands where you think you may be able to do that?

Speaker 3

Yes. I'm not sure if you've seen our recent STD filings, but we did increase StretchLab to 8% as well. And of course, there's a certain AUV threshold, but there's really a profitability threshold and sort of a sales Threshold, so just like you see supply and demand kind of take its course from the customer level. You saw it at Club Pilates where we basically sold out of the brand domestically, began to A lot of those open and then continue to see great demand in that brand given the AUV and its increases. And so the same was true with StretchLab.

Speaker 3

And so we've increased that in our new filing to 8%. And Typically, like I've said in the past is that we will take price effectively with our franchisees based on supply and demand Prior to increasing the royalty rate, the royalty rate has kind of the highest optic to it. And so it's really the last Thing that we do.

Speaker 5

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

Speaker 6

Great. Thanks, guys.

Operator

Our next question is from John Heinbockel with Guggenheim Securities. Please proceed with your question.

Speaker 7

Hey guys, I want to start with, so per member visitations, right, continue to go up and I think are pretty close to a record level. What are you looking at, right, in your dashboard, maybe across the network to see if the consumer in some respect is Pulling back, right? I don't know if it's engagement or change in composition of membership. And I guess, is there any place where you're seeing anything or hasn't shown up yet?

Speaker 3

Look, I mean, it's not that there's one silver bullet, right? We're looking at KPIs across, right? So we're looking at foot traffic. We're looking at utilization, Volume and demand, right, really kind of shows that this is non discretionary Spend for our members that are still going and still continue to grow. And as we look at our customer base, we're actually continuing to see younger customers that cohort grow A lot faster than even some of our older demographic.

Speaker 3

And so this is where people today get their entertainment They're health dollars, they're community. And so it's the volume that we see coming through that's great, the foot traffic, not necessarily Price driven, as I said in the past, is 95% volume and the rest really being price. And We look at all those metrics for the health of the business, right? So there's not One sort of silver bullet that we stare at, but we kind of look at them all. And now where we sit today, all of them are Continue to perform.

Speaker 3

As a matter of fact, if you look at what we comped in Q4, people kind of thought, well, That's not sustainable. And then if we went from 17%, 18% respectively on our less than 36 month mature stores and 36 months plus Stores and went to 20%, right? And so we're continuing to perform, the business is continuing to perform. And all of that is Right. It's not just the class or the leadership or the industry that we're in like anything great, it's a recipe and a metric of A lot of things working all at the same time.

Speaker 7

Well, as a follow-up to that, Rick, as I think you're right, the average Household income is $130,000 How low do you think you can take that and play where There's an awful lot of perceived value for what you're providing, right. I assume it can go lower than that. Maybe that's not your Target, right, there's still a lot of the market you're not covering, but how do you look at that accessibility and Ability to tap into a somewhat lower household income base.

Speaker 3

Yes, I think sometimes it's less of dollars that they make and more shifting a priority of the dollars. When you see in a post COVID world, people are Really taking their health and wellness seriously. And I've said before in boutique, especially in our brands that like a Rumble or RowHouse or AKT or Stride Or something like that where they're working out in a nightclub in essence. There's a lot of entertainment dollars there and a lot of community that's very hard to replace. That's where they're Club Pilates in the morning at 8 a.

Speaker 3

M. Or Club Pilates on Tuesday at 5. That group that's there, that's their community, right? Those are the people they Look forward to seeing. So this is where friendships are formed and where people get entertainment dollars.

Speaker 3

So this is not something that's easy to replicate. Since 95% of it is volume and 5% is price, they are getting more perceived value, right, because they're As inflation happens and other things happen, they're still continuing to enjoy their original price that they came in at. And so It makes it stickier because we're not raising rates on past members. We're raising rates on new members coming in as the old ones Expire and cancel and we go up a tier in our kind of 5 tier pricing. But we're not going back to kind of customer number 1 And taking price on them.

Speaker 2

Okay. Thank you very much.

Operator

Our next question is from Randy Konik with Jefferies. Please proceed with your question.

Speaker 8

Thanks, guys. I guess, Senor or Anthony, can you give us some perspective on Drivers of we heard about drivers of AUV going forward, but maybe curious around as you think about drivers Within the across the portfolio as an opportunity to continue to drive AUV higher. We know that Club Pilates is the highest AUV concept. So maybe give us a little bit of perspective on the other concepts where you see kind of a massive ramp opportunity or they're already high AUVs that kind of continue to lift Total company AUV higher by just moving across the portfolio? Thanks.

Speaker 3

Thanks, Randy. I'll give you a quick point of clarification. Club Pilates is not the highest AUV at the company. It's kind of the highest AUV with the Highest sample set, right? Kind of the highest volume, that's why we point to that.

Speaker 3

But brands like BFT or like Rumble, actually come out It's some higher AUVs, which is a lot less locations, than we have across the country. So That makes us really excited. What I like to talk about the difference between Club Pilates and some of the other brands is what I call the born on date, right? And when you look at Club Pilates, when we first bought that brand, the AUV was $250,000,000 And today, it's over 3 times that, right, 7, 8 years later. And so what I'm excited about is brands like BFT and brands like Rumble, the brands that we're selling and opening the most up today, given the most white space in those brands, They're actually coming out at $500,000 $600,000 more AUVs.

Speaker 3

So they're kind of born on date. They're kind of being born twice as Smart as Club Pilates was originally. So there's still a lot to build off those brands as they're in their infancy. And we've got a lot of contributors to AUV, right? We've talked about this concept of negative CAC.

Speaker 3

And as we drive People on the cruise ships, I saw a posting on our StretchLab Facebook page for franchisees where they said, hey, I got my first Princess lead and I closed them, right? And that's proof of concept that people can go on a cruise ship, get associated with StretchLab and Go home, get marketed to and get closed by the franchisees. So as we continue to increase The customer lead base for our franchisees and of course, we're always continuing on our closing ratio to try and Close higher and close at higher dollars, but we're able to deliver more leads than we have before. And we look at the cohorts of 2023 versus 2022, and we do it by quarter, you continue to see quarter over quarter These cohorts and these ramps continue to increase. And so, as we Put stores next to each other as we put store neighborhoods, it kind of rises all ships.

Speaker 3

And Same is true with Princess, same with Lululemon Mirror being on LG TV. I mean, our Hyatt Hilton Hotels With Active, 11,000 locations that Active has. And so it's really our goal that by the And what I like to call our Starbucks mom is on her way to grab her coffee in the morning and she sees Pure Bar next door, Rumble So she doesn't know, it's not having to wonder what it is. She saw it on her television. She saw it on an app.

Speaker 3

She saw it on Mirror. If you remember too, those mirrors are being played as equipment in a lot of high end hotels, right? I was in a I in hotel the other day and Amir is sitting there playing our content inside the hotel gym while people are working out. So There's a lot of ways that people are becoming associated with Xponential and its brands. And so the idea is that by the time they actually see us In our kind of brick and mortar 4 wall state, they're not having to wonder who we are, what we stand for and what the value prop is that They walk in and then hopefully we have a very well qualified salesperson at the desk that was able to close that sale.

Speaker 8

Super helpful. And then just a follow-up. How does AUV kind of look like Maybe perhaps on a constant currency basis, when you look think about your international units, what you've learned so far and how they perform Similar or dissimilar to their concept counterpart in the U.

Speaker 9

S? Thanks.

Speaker 3

John and I actually talked about this this morning. On an international basis, so for instance, if Now if AUVs are 500 here in the U. S. And they're Rumble doing 500 in Australia, right, in AUD, On a country over country basis, the AUV is about the same. So we're getting Better and better data on our international side for system wide sales and AUV and things of that nature, and we're continuing to kind of hone in on that.

Speaker 3

Obviously, our big international regions APAC and inside APAC BST is kind of the big driver there, Much like Club Pilates in the early days and had the most volume in AUV here was sort of the biggest driver. But We do have Club Pilates operating and Rumble is operating. We just opened a Rumble Boxing in Bondi Beach in Sydney, which is kind Like the premier location in Australia is doing very well. So we're constantly encouraged by what we're seeing both from the brand All AUVs and kind of overall system wide sales in the countries.

Speaker 8

Super helpful. Thanks guys.

Operator

Our next question is from Joe Altobello with Raymond James. Please proceed with your question.

Speaker 10

Thanks. Hey, guys. Good afternoon.

Speaker 6

I want to go back to the franchisee financial health sort of topic. If We look at the cash on cash returns that your franchisees are earning today. What does that look like versus when you went public? I would imagine it's actually gotten a little bit better the last couple of years.

Speaker 2

So Joe, I think when you go back to what it was kind of around IPO, it's kind of an unfair measurement given they were in kind of the COVID recovery period, So I think if you talk about pre COVID when we were just under kind of the 500 ks AUV And then now you fast forward, we've met that and now exceeded it. Obviously, the cash on cash returns and the overall profitability and strength of the franchisee is better Today than it was. Pre COVID, at IPO, it's kind of an unfair measurement given studios were still recovering as restrictions lifted and Members return back to the studios. But overall today, you would argue franchisees are much healthier, more profitable than they have been Ever in the company's history.

Speaker 6

And has their access to capital been impacted at all given what's going on in the banking sector?

Speaker 2

No, actually, I partner with our lender on a daily basis, reviewing incoming franchisees getting Loans, the access to capital has not slowed. There is a healthy backlog of franchisees that are in the process of getting financing and or opening studios. As Anthony mentioned, the rate has gone up, 0.25%. I talked to the lender this morning and just wanted to get Feedback on anything they're seeing related to the most current interest rate hike and franchisees are not really balking at the fact that Interest rates have gone up. I understand it, but it's not a material portion to them given the investment is fairly low.

Speaker 2

So the financing is there. They're getting it and studios will continue to get open. It's not becoming a headwind for the business.

Operator

Okay. And just

Speaker 6

one last one for you. If I look at your revenue and EBITDA Guidance, it looks like you're applying the low end of that 35% to 39% EBITDA margin spectrum. What would have to happen for you to get to the high end of that range, say 39% margins this year?

Speaker 2

Yes. I mean, there's 2 levers, right? High margin flow through on revenue and SG and A costs, right? So controlling OpEx, We raised guidance in this quarter purely on the fact that we just saw an acceleration of same store sales in Q1, very strong Q1. We take a conservative approach given the macro and uncertainty as you look out into the future quarters.

Speaker 2

So when we set guidance originally, but when Q1 came in with an Acceleration of system wide sales, same store sales, the additional royalties we've provided in the quarter, Yes, that's high margin flow through for us. So as we continue to see that kind of performance, that will give us the ability We don't push that margin expansion higher. And obviously, focusing on OpEx is key for us. We mentioned bringing in Andrew Hagopian, who is focused on legal, so from that perspective, OpEx is we are laser focused on that and trying to cut costs wherever We can.

Speaker 6

Great. Thank you.

Operator

Our next question is from James Hardiman with Citigroup, please proceed with your question.

Speaker 6

Hi. This is Sean Rooney on for James Hardiman. Thanks for taking my question. So touching on the SG and A part, excluding equity based comp, it looks like SG and A as a percent of revenue came down about 7 basis points sequentially. I believe on the last call, John spoke about an SG and A ramp down to around 35% to 36 Percent for the year and low 30s in the second half.

Speaker 6

Is that still a fair target? And any color on the potential risks to that ramp down?

Speaker 2

Yes. So that's still the way we're seeing it. From our perspective, we are going to be in the high 30s in the first half and then trend down in still low 30s, Excluding stock based comp in the second half. So we're still seeing that trend continue. So the business will leverage.

Speaker 2

We don't need to add a lot of SG and A there. For us, we're more focused on removing SG and A versus adding SG and A. So the business should leverage into the low 30%, excluding stock based comp in the second half.

Speaker 6

Okay. And are company owned studios still in a headwind there? Or what's the status on that in transferring those to franchisees?

Speaker 2

Yes. There are costs in Q1 related to the company owned studios. We've taken a more investable approach We're really focused on getting these corporate studios to the desired AUV level, while really focusing on getting the OpEx Efficient and from a 4 wall perspective, the way they're designed to be. And then when we get into a healthy point, that's when we're actually going out and trying to refranchise them. The intent there is to make sure that when they do launch, they're successful, and we don't have challenges with them going forward.

Speaker 2

So in Q1, there was higher SG and A related The company owned studios, you could expect that to decrease in Q2, Q3 and Q4 and get back to what we believe is a more normal run rate from where we are today.

Speaker 6

All right. Thanks a lot for the color.

Operator

Our next question is from Warren Jang with Evercore. Please proceed with your question.

Speaker 10

Hey, good afternoon, guys. Great quarter. I just had one more follow-up on this franchisee health question and exposure to macro. So obviously, you've got the new unit guidance unchanged there. You did a really good job of articulating some of the differences between your franchisees and planets.

Speaker 10

And I think the AUV going in the right direction for you Has clearly been an insulating factor for your cash flows and your unit economics. But if we had to sort of just rank order the macro factors That has the potential if things were to if macro conditions were to worsen, have the potential to be an impact for your franchisees. Is there a way to drink water, what would be at

Speaker 8

the top of that list?

Speaker 2

Yes. I think if you kind of look at it, it maybe might cause Some hesitancy related to franchise sales. We haven't seen that yet, but I think if consumers get scared, would people be less willing to want to invest a lot front end of more longer term franchise, I think that's possibly, we haven't seen that yet. In regards to, again, the investments around equipment or getting a new studio open, most people have already paid for their license upfront. They're committed.

Speaker 2

They know they have a build out schedule That's the option to operate to. So when it comes to the upfront investment and not much has changed there. Our franchisees continue to open their 2nd and third units per schedule. So haven't seen Any impact related to future development around openings? I'll say as of yet, we haven't seen any signals that it's coming, But that would probably be the one that comes to the top of my mind.

Speaker 10

Got you. Thanks, John. And a follow-up question on a different topic. The 12 AUV, 542,000, that's a pretty big step up if we look at where you stand with pre COVID levels compared to what you've been doing. And if I overlay sort of the historical seasonality onto that, just progress that 1 through number, let's say flat, flat and then give a bump for holiday, I'm getting to some upside to the system wide sales guidance.

Speaker 10

Just curious if there's anything worth noting about the seasonality this year Or is that just some conservatism baked in?

Speaker 2

Yes. I mean, when you look at the Q1, same store sales going from Q4 at 17 to Q1 at 2020. There obviously was a real strong surge of new members and growth at that level. And obviously, that impacts AUV and drove it up quite a bit. Historically, when you look at like last year, the AUV growth We're still there from Q1 to Q2.

Speaker 2

We expect to see similar patterns this year, even though Q1 was really strong. In response to upside in same store sales compared to guidance, yes, again, as I've mentioned, we've always taken more conservative approach to our guidance. We don't want to overpromise and underdeliver. We have some hesitancy for our conservatism built into Our guidance around the outer or second half of this year, given a lot of the headline, a lot of the macros. So we'll continue to perform.

Speaker 2

And in Q2, if we do see favorable outcomes as we did in Q1, we'll adjust guidance then. But at this point, we did take up guidance by the upside We realized in Q1 and what we're seeing as we to date in Q2, and made that reflective in our guidance. So Conservative still, yes, but we're doing that knowing that we can't predict the future and the second half could face headwinds, although we haven't seen it yet.

Speaker 10

Understood. Thanks, John. Thanks, Anthony. Good luck.

Operator

Our next question is from Ryan Myers with Lake Street Capital Markets. Please proceed with your question.

Speaker 6

Hey, guys. Thanks for taking my question. First one for me, just curious if you could comment on what sort of demand you've seen here domestically for BFT?

Speaker 3

I mean demand has been in line with our other brands, right, with Rumble and those The first 18 months to 24 months is primarily selling of the territories. And then call it 6 to 12 months into that, you're beginning to see openings. So right now, we're in the selling and lease signing Kind of process of that in construction. And then you'll start to see openings in the first couple of dozen openings Of BFT domestically this year and then it will continue to increase, of course, in 2024 and 2025.

Speaker 2

BFT was our 3rd highest Selling brand in the Q1 from a license perspective, and it's kind of it's tied for 4th with Rumble as far as openings in the Q1.

Speaker 6

Got it. That's helpful. And I was wondering if you could just quantify what the B2B contribution was during the quarter as This business has gotten larger and larger over the past couple of quarters. I think it would be helpful to kind of understand what the contribution was.

Speaker 2

Yes. So the way to kind of look at I've got a lot of questions on the other service revenue over the last couple of months. The B2B will be about 25% Of the revenue of the other service revenue. So if you just took other service revenue for the quarter, B2B represented around 25 percent of that revenue. Yes.

Speaker 2

And we expect that to hold consistent over

Speaker 6

time. Got it. Thank you.

Operator

Our next question is from Jonathan Komp with Baird. Please proceed with your question. Yes.

Speaker 11

Hi, thanks. Good afternoon. I just want to maybe follow-up on the Strength in the same store sales you're seeing and just curious if you're willing to share any observations when you look across the concepts or across regions or any And trends that stand out to you?

Speaker 2

Yes. So I mean, in regards to same store sales, When you look at Q1 compared to Q4, virtually 100% of the growth in system wide sales came from volume. So from a same store sales perspective, The growth that you saw, the 20% was really driven by new members coming into the system. When you look at Even at 36 months, older studios, those studios that have been open for 3 years plus, they still comp at 21%, which is again New members coming into existing locations, as Anthony mentioned, brand awareness, negative CAC. You look regionally, not much there's not much differentiation when you look across So U.

Speaker 2

S. From what same store sales? You are seeing really strong same store sales in Club Pilates. Obviously, it's our largest brand, But has done really well. I think if you look at all the other brands except Club Pilates, you're still seeing Mid to high teens in regards to how their same store sales is performing.

Speaker 2

So In my opinion, when you look back pre COVID, most of our brands comped at 8% on average per quarter or Twice that, even in the brands that are in the mid to high teens. So there's no regional focus. There is a little bit of brand focus related to Club Pilates. But when you look across the other brands, you're still seeing really strong comps.

Speaker 11

Yes, great. Thanks for sharing that color. Maybe just one A follow-up then. I want to ask about the health of the license pipeline that you have. And I've noticed the last couple of years Cleaned up some of the legacy licenses.

Speaker 11

So could you maybe just share any perspective on what drove some of the past terminations and sort of the health of That strong pipeline that you have of licenses sold?

Speaker 3

Yes. I mean, obviously, during COVID, that was not a good time to terminate franchisees These were not opening. So we took a big chunk of time off from doing that. But the reality is Contractually, the franchisees have 6 months to get their store open. Obviously, if it's 6 months and they're painting their walls and about to open 4 weeks, we're not going to terminate them.

Speaker 3

But if they're sitting on the couch and aren't making moves to continue with their development and somebody wants That territory, then we're going to terminate it and move on. It's really kind of whatever Pass is the most efficient to getting stores open because we're in the opening store business, not in the selling store business. We obviously have a backlog of Sold stores, they're available for us to develop. Said before in past quarters, Since we're at 10 brands, if we don't acquire an 11th brand, we're not going to oversell these brands regardless of how great they are a Club Pilates or Rumble or VSP or kind of any of our brands, we're going to sell consistent with Our scientific demographic approach, which tells us what stores go where, so that we can continue to climb AUVs like we're seeing For the health of our system, the health of all franchisees, so with 10 brands and not overselling, we have always said that we are going to see Sequential sales of franchises go down. We obviously have 4 to 5 year backlog.

Speaker 3

And so we're trying to keep that backlog fresh of people that want to open and want to develop and are seeing the We'll see in Q2 where we have to refile all the FDDs in Q2. So they're we're in a blackout period Right now, in most of our brands, so waiting to get all the different filings and all the different brands. I don't know if you're aware, but You file, you get 33 states with the FDD and then you have to file 17 independent states. You're talking about 18 filings times 10 brands. So the Pennant States, you're talking about 18 filings times 10 brands.

Speaker 3

So the permutations there, there's 180 filings out there at the exponential level. And so as those clearances come back in per brand, per state, then we're able to start to go service the franchise sales part again. So but we're still outselling our opening pace. And so if we continue to sell 500, 600, 700 a year while we're opening 500, 600 a year then we're kind of outselling our opening pace and our backlog of 4 to 5 years It isn't even being burned. It's still staying together.

Speaker 3

So

Speaker 11

That's great. That makes sense. Thank you.

Speaker 8

Yes.

Operator

Our next question is from JP Wallum with ROTH Capital Partners. Please proceed with your question.

Speaker 9

Hi, everyone. Thanks for taking the question. I just want To focus on the increased engagement and maybe look at it kind of from a different angle, but I'm just curious if Via the lens of the consumer, if the increased engagement has maybe caused any frictions in terms of not being able to get Classes at peak hours or also whether you're seeing more usage during the day and that gives you guys confidence Maybe there's even further room to grow AUVs. If there's any kind of trends you can point out, that would be great.

Speaker 1

Yes, I can take that one. There may be the one off consumer that can only go on Tuesdays at 5 Clock and Thursdays at 5 o'clock, something like that. But our studios are open 7 days a week. We offer classes, all over the map. And as we're starting to bundle in XPath and XPath and give them different options so that they can take their fitness anywhere, anytime,

Speaker 8

They're able

Speaker 1

to take classes both virtually or on demand and in our studios, so that alleviates some of the pressure. But the truth of the matter is that If that backlog happens and what ends up happening at the franchise level is that you have some natural churn from those customers And we backfill with a more expensive member who is willing to either put up with the scheduling or has different scheduling demands. We are also putting together various challenges and other ways that members can engage with the studio and portfolio studios. So, We're always looking at ways to engage and make sure that we don't see that turn, but if we do, then the member is getting right behind them to jump back in.

Speaker 9

Great. That makes sense. And then just maybe switching to the partnership with LG TV. There's been a lot of headlines around MIRROR and its performance under Lululemon. I'm just kind of curious, maybe all of that doesn't impact kind of the benefits you received from MiR, but just maybe help me Think through the partnership with LGTB, given what's going on at Mirror?

Speaker 1

Yes. So, with all of our partnerships, we really have Three business models and each model is kind of different depending on what the partner and Ekso mutually agree upon. But In that case, we've already started to see thousands and thousands of downloads of the application. It's too early to see how those downloads will then convert into sustained Subscribers, but we are seeing a really great take there with LG. On the Mirror front, Things are performing very well.

Speaker 1

We just got KPIs over the last couple of days on how the brands are performing and how members are consuming our brands. So, from a content standpoint, things are good for us with MiR in conversations of Looking to distribute even more content to the Mirror platform. So regardless of where Mirror ends up, our content We'll likely go with it or we'll go with it and things are looking good there in terms of developing additional content. So I don't think that conversation really affects EXFO.

Speaker 9

Okay, Great. Thank you for your time. Best of luck.

Speaker 1

Thank you. We've reached the

Operator

end of the question and answer session. I would now like to I'll turn the call back over to Anthony Geisler, CEO, for closing comments.

Speaker 3

Thanks again for joining today's earnings call and for your continued support. I'd also like to acknowledge our franchisees and entire Xponential Fitness team for their strong operational execution in this Q1. We look forward to seeing many of you at our upcoming marketing events this May June, and we'll speak to you again in August on our Q2 call.

Operator

This concludes today's conference. You may disconnect your lines at this time and we thank you for your participation.

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Earnings Conference Call
Xponential Fitness Q1 2023
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