Q2 2022 Xponential Fitness Inc Earnings Call
Yeah.
Greetings and welcome to the exponential fitness incorporated second quarter 2022 earnings Conference call.
At this time all participants are in a listen only mode.
<unk> and answer session will follow the formal presentation.
Should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded I would now like to turn the call over to Kimberly Astrachan of Investor Relations. Thank you you may begin.
You operator, good afternoon, and thank you all for joining our conference call to discuss exponential fitness, Inc. Second quarter 2022 financial result.
I am joined by Anthony Geisler, Chief Executive Officer.
President and John Malone, Chief Financial Officer.
A recording of this call will be posted on the investors section of our website at investor not exponential dotcom.
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 uncertainty 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 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.
Please also note that all numbers reported in today's prepared remarks referred to global figure unless otherwise noted.
I will now turn the call over to Anthony Geisler, Chief Executive Officer of exponential.
Thanks, Kimberly and good afternoon, everyone. We appreciate you joining our second quarter earnings conference call I'll begin with an overview of our performance. Sarah will then join me to speak about our progress against our growth strategies, John will conclude with a review of our second quarter financial results and an update to our full year outlook.
<unk> fitness as the largest global franchise or a boutique fitness workout brand our business model is straightforward we license our boutique studio operation share our business processes and branding with franchisees and an exchange charge royalties and other fees for our services.
As our <unk> grow and as we increase the number of studios, we become more profitable given.
Given that the royalties generated from system wide sales are very high margin and given our SG&A platform scales.
As of the end of the second quarter franchisees collectively operated over 2000, and 350 studios in 14 countries around the world across 10, leading brands and major workout modality we.
We are pleased with our operational execution, and resulting financial performance in the second quarter.
Total members in North America for the second quarter increased by approximately 32% year over year.
Our Q2, North American Systemwide sales grew for the eighth consecutive quarter up 45% year over year.
Finally, we ended the quarter with run rate North America, and <unk> of 480000 up from 384000 year over year.
The dynamic growth in run rate <unk> is a strong reminder, that despite inflationary pressures to date the workouts our franchisees provide across our diverse portfolio of 10 brands are an integral part of our members' lives.
Importantly, as we continue to open more studios and as our <unk> continue to grow our profitability increases driven by high margin royalties from growing system wide sales with an active pipeline of approximately 2800 studios contractually obligated to open globally and only about a <unk>.
<unk> of our Conservative North American total addressable market currently penetrated.
Studio openings are not expected to slow anytime soon continuing to drive profitability.
For the second quarter, we posted net revenues of $59 6 million, an increase of 66% year over year.
Q2, adjusted EBITDA of $17 6 million or 30% of revenue was up 112% from $8 3 million or 23% of revenue in the prior year period.
While we acknowledge we are operating in a time of inflation and macroeconomic pressures, including labor and supply chain constraints. Our business has remained resilient.
First exponential as customers continue to prioritize their health is a necessary investment our customers do not view fitness as discretionary spend.
Majority of our members have a typical household income of approximately 130000 and subscribed to reoccurring membership packages with fees that are a relatively small piece of their overall budgets.
Second as a franchise business model, we benefit from highly predictable reoccurring revenue streams and limited ongoing capital requirement.
In the second quarter, approximately 68% of our revenue was reoccurring.
Driven by royalties.
This percentage is lower than our 70% plus historical reoccurring revenues due to the high number of studio equipment installations in the quarter as we prepare to ramp openings in the second half of the year.
We expect the percentage of reoccurring revenues will continue to fluctuate from time to time based on the number of equipment installations and subsequent studio openings in the period.
Finally, paramount to exponential fitness is ongoing success is our ability to proactively support and grow our franchise system.
Our business has remained resilient and we have not experienced significant operational headwinds around talent acquisition or supply chain management.
Given that approximately 25% of health clubs and 30% of studios closed permanently during the pandemic there remains an adequate supply of fitness instructors in this space.
In terms of supply chain, our equipment is primarily sourced in the United States and.
And as previously mentioned, we continue to take steps to proactively purchase equipment inventory for brands with a high volume of studio openings in the pipeline to mitigate against any potential disruptions in the coming quarters.
In addition, these advanced purchases have been particularly beneficial given the current high inflationary environment.
Based on these factors despite the uncertain macroeconomic environment, we remain confident about the go forward trajectory of our business, particularly as the positive momentum has continued into the third quarter.
As one of the only scale boutique fitness franchise operators during the 2008 financial downturn I am keenly aware of the steps required to keep a business running successfully during economic volatility.
And Ali boxing I successfully scaled the business through the downturn before selling it in December of 2012.
More recently exponential has proven resilient in the face of COVID-19, growing our business significantly against the backdrop of industry contraction one of the most important things that I've learned in my career in fitness and franchising is that partnering with the right operators, who have the tenacity encouraging capital.
Essentially run their business no matter, how challenging the operating environment. They face is critical for success.
As you May have heard me speak to previously we take our franchisee selection process very seriously, it's only 2% of our Lee is becoming franchisees.
Our franchisees generally our corporate veteran looking for an entrepreneurial opportunity their resilience and business acumen as evidenced by the fact that in the company's history, including most recently during the pandemic, we had zero studios closed permanently.
Our franchisees have borrowed over $200 million from the SBA without any non repayments under our ownership.
Between our strong franchisee base the support we provide our franchisees and the continued strength of our underlying business. We feel confident that exponential will not only be able to successfully weather, a slowdown or recession, but maintain a solid growth trajectory going forward.
As we continue to scale, our global footprint optimizing complex systems data and business intelligence is an increasingly important driver of our success with that I am excited to announce the appointment of Jai Eric Clark to serve on our board of directors as well as on our audit in human capital management committees.
Given <unk> current role as global Chief Technology Officer of commercial systems that Microsoft and US prior senior digital leadership roles at Disney and at IBM.
It's hard to imagine anyone who could be a better fit for the board as we continue to scale our global business.
With that as a background, let's move to our four key strategic areas of growth beginning with our first two growth levers increasing our franchise studio base across all of our brands in North America, and expanding our brands in studio base internationally.
We ended the quarter with 2000 and 357 Global Studios.
<unk> 128, net new studios in the second quarter.
We also experienced strong demand for our franchise licenses selling 251 licenses globally in Q2, maintaining our annualized run rate of 1000 licenses per year.
In North America, we have almost 1900 licenses sold and contractually obligated to open and have a replenishing pipeline of organic new studio expansion.
Offering us four to five years of visibility into our growth.
On the international front, we have almost 1000 studios obligated to be open and we continue to gain traction in terms of international expansion.
We recently announced new Master franchise agreements or Msas for club Pilates in the UK and cycle bar in Japan.
As a reminder, our msas are structured to provide exponential with high margin flow through given we require minimal ongoing SG&A to support MF a growth.
The club Pilates MFA in the U K gives the master franchisee the opportunity to license at least 50 clubs <unk> studios over the next 10 years.
In Japan, our new MFA provides the master franchisee the opportunity to license at least 30 cycle of our studios over the next eight years.
These new partnerships will bring exponential global reach to 14 countries.
On the M&A front, the <unk> integration remains on track as of today <unk> has over 200 open studios globally.
Guarding future M&A the pipeline of opportunities remains robust and we will continue to opportunistically evaluate potential brands and new modalities.
Turning to our third key growth driver expanding margins and driving free cash flow conversion.
As our business continues to grow we are increasingly reaping the benefits of our asset light scalable operating model, providing us with consistent and growing margin performance.
Considering the current macro environment. We are very pleased to have held our operating margin steady.
We continue to expect our adjusted EBITDA margin will be in the low 30% range for the full year 2022, and we remain on track to achieving our long term adjusted EBITDA margin John will discuss this further when he discusses our full year outlook.
With that I'll pass the call on to Sarah to discuss our fourth and final growth driver, increasing our same store sales and <unk>.
Thank you Anthony.
<unk> of our brand portfolio remains strong as noted earlier, despite the elevated inflationary environment exponential consumers continue to prioritize the health and wellness engaging with our brands through both in studio and digital experiences.
Visitation rates have continued to increase with total visits growing 28% year over year.
This member engagement demonstrates that our offerings are not considered discretionary, but rather an integral part of our customers' lifestyle.
Kpis are continuing to grow and our churn levels remained steady at approximately one 5% after 12 months.
During the second quarter, we continued to optimize the ways in which we attract prospective members.
Simultaneously focusing on delivering increased value to current members.
Continued investments into improving our customer experience will translate into growing memberships avs and overall system wide sales.
Beginning with our in person offering X.
<unk> provides subscribers access across our U S studio locations under a single monthly recurring subscription.
Pat has been a powerful engagement platform for us, helping us attract new retain existing and Reengage previously turned to customers.
Our platforms primary goal is to sell classes to a 100% capacity, which we are currently doing at a zero down our customer acquisition cost for the franchisees.
By driving more bookings into existing classes ex pass helped our franchisees increased studio profitability.
X pass has also proven to be a powerful acquisition tool for the broader exponential system with 25% of X pass members, having no prior studio relationships purchasing an additional membership our class pack at our studios.
Any of our cohorts are still in the earliest stages and we are excited about these early signals of customers adopting both X pass subscriptions and MTO membership.
Since being fully rolled out at the end of 2021 X pass has been profitable for exponential due in part to our careful management of acquisition and marketing spend.
In terms of digital engagement X plus offers thousands of live and on demand digital workouts on a single platform X plus continues to be a helpful tool to further promote brand awareness increased customer engagement and supplement our customers in person class of tenants. The majority of our brands offer promotional subscription to X.
With a membership purchase.
In fact during the height of the pandemic, we started to test the membership bundle offering its stretch lab, which provided in CDO classes and access to our digital library.
This test case was successful and we have since rolled this out to our entire stretch lab network. We continued to see great success. After the rollout and are expanding this offering as an enhanced value proposition to all club membership.
We are eager to see the results of this new program, which addresses customer demand for further optionality in their fitness routine and increased membership volume. In addition, as a standalone digital platform that interfaces with consumers around the world, where we have yet to open our studio X plus is highly conducive to BW subscription options and commercial market.
<unk> partnerships for example, as previously announced we expanded our digital offering in collaboration with Lululemon and at home gym technology. The mirror. Our four featured brands hereby Rumble yoga six to 8-K T are on track to go live on the mirror this fall.
Another would be to be opportunity and driver in North American CTO growth is our nationwide partnership with la fitness.
This partnership provides us the exclusive right to open our exponential fitness studios within la fitness locations with a minimum development commitment of 350 franchise locations over five years.
Today, we currently have seven open tiers within la fitness locations and we will continue to build out this footprint.
Our <unk> partnerships continue to track nicely as well.
Recently announced three exponential brand partnerships with leading energy drink sales.
This is now the official energy drink partner of cycle bar and see for energy is now the proud energy drink partner of Roadhouse and Rumble Studios.
The mission of both before and Celsius align with our own brands growth initiatives, something we consider essential and securing brand partners. We are excited to continue to broaden the omnichannel offerings, we can provide to our consumers as we create unique fitness communities, where our membership base.
Thank you again for your time I'll now turn the call over to John to discuss our second quarter results and outlook in more detail.
Thanks, Sara it's great to speak with you to discuss exponential second quarter results.
Quarter, North America system wide sales of $249 8 million or up 45% from $172 million in the second quarter of 2021.
On a consolidated basis revenue for the quarter was $59 6 million up 66% from $35 8 million in the prior year period.
All five of the components that make up revenue grew during the quarter.
Franchise revenue was $27 6 billion up 55% from $17 8 million in the prior year period.
Growth was primarily driven by higher royalties as well as increased revenue generated from franchise placement fees.
Equipment revenue was $12 4 million up 160% from $4 8 million in the prior year period. This increase in equipment revenue continues to be driven by a higher number of equipment installed along with a greater concentration of installed within equipment intensive breath.
Merchandise revenue was $6 8 million up 50% from $4 5 million in the prior year period.
<unk> during the quarter was primarily driven by a higher number of open studios, along with increased foot traffic across videos.
Franchise marketing fund revenue of $4 9 million was up 49% from $3 3 million in the prior year period, primarily due to strong system wide sales and average unit volume growth.
Lastly, other service revenue was $7 9 million up 45% from $5 4 million in the prior year period. The increase in other service revenue was primarily driven by an increase in credit card rebates on higher system wide sales and higher <unk> in brand fee revenue.
Turning to our operating expenses also product revenue was $13 5 million up 115% from $6 3 million in the prior year period. The increase was driven by higher equipment installations for new studio openings and merchandise revenue in the period.
Cost of franchise and service revenue were $4 5 billion up 45% from $3 1 million in the prior year period.
The increase continues to be driven by costs related to franchise sales commissions from technology fee cost from a higher number of open video.
Selling general and administrative expenses of $29 $3 million were up 38% from $21 2 million in the prior year period.
This increase was largely due to costs associated with public company expenses and higher noncash equity based compensation as well as expenses related to one time legal costs.
As a percentage of revenue SG&A expenses were 49% of revenue in the second quarter compared to 59% in the prior year period.
Depreciation and amortization expense was $3 6 million, an increase of 49% from $2 4 million in the prior year period.
Marketing fund expenses, which include expenses related to corporate marketing.
$4 1 million up 43% from $2 9 million in the prior year period.
The increase was driven by higher spend afforded by higher marketing fund revenue and due to lower spend in the prior year period due to the pandemic.
Acquisition and transaction expenses were a credit of $31 6 billion versus an expense of $4.
$3 million in the second quarter of 2021.
This improvement is due to the change in noncash contingent consideration primarily related to our acquisition of Rumble as I noted on prior earnings calls the Rumble contingent consideration is driven by our share price, we mark to market each quarter and accrue for the earn out.
We recorded net income of $31 5 million in the second quarter compared to a net loss of $8 million in the prior year period.
The increase was the result of 11 6 million of higher overall profitability and $31 8 billion of lower noncash contingent consideration primarily related to the Rumble acquisition and was offset by a $4 million increase in noncash equity based compensation expense.
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 to adjusted net income is provided in our earnings press release.
Adjusted net income for the second quarter, which excludes the $31 6 million change in fair value of noncash contingent consideration and point 2 million expense related to the second quarter Remeasurement of the company's tax receivable agreement liability was <unk> 1 million compared to an adjusted net loss of $7 8 million in.
The prior year period.
The calculated adjusted net loss per share we isolate the portion of the net income loss that is attributable to exponential fitness, Inc, which is point $1 million and we reduced this number by $1 7 million to account for the dividend attributable to exponential fitness, Inc. Paid on our preferred shares.
This results in an adjusted net loss of seven cents per share on $25 4 million shares.
A reconciliation of net income to adjusted net income is provided in our earnings press release.
Adjusted EBITDA was $17 6 million in the second quarter compared to $8 3 million in the prior year period adjusted.
Adjusted EBITDA margin grew to 30% in the second quarter compared to 23% in the prior year period.
Our 2022 outlook anticipates adjusted EBITDA margins of over 30% and long term, we expect this number to grow to over 40% to 45%.
Turning to the balance sheet as of June 32022, cash cash equivalents and restricted cash were $29 3 million up from $21 3 million as of December 31, 2021.
Total long term debt was $131 7 million as of June 32022, compared to $133 2 million as of December 31, 2021.
Moving to our outlook.
On current business conditions, our year to date performance and our expectations as of the date of this call. We are increasing our full year 2022 outlook for revenue and adjusted EBITDA and reaffirming our guidance for studio opening in system wide sales in North America as follows.
We continue to expect our total 2022 global new studio openings to be in the range of 500 to 520.
This range represents the highest number of studio openings in our company's history.
We also continued to project North American system wide sales to range from $995 million to $1 5 billion or $1 billion at the midpoint, which represents a 41% increase from the prior year and the highest north American system wide sales in our history.
Total 2022 revenue will be higher than initially forecasted and is now expected to be between $211 million to $221 million, an increase of 39% from 2021 at the midpoint of our guided range.
The increase in the range was primarily attributed to higher overall franchise revenues higher revenue from <unk> in brand fee partnerships and better performance in our company owned transitioned video.
Adjusted EBITDA is now expected to range from $68 million to $72 million, a 156% year over year increase at the midpoint of our guided range.
This new adjusted EBITDA guidance range translates into roughly a 32, 4% adjusted EBITDA margin at the midpoint.
With regards to SG&A spend we are seeing some cost pressure from general operations in particular illegal which was $7 4 million in the first half of 2022, we view this legal spend as an isolated event for purposes of our adjusted EBITDA.
Just on the visibility today SG&A, excluding equity based compensation for 2022 will now be roughly 42% of total revenue at the midpoint of our outlook.
Longer term, we are anticipating SG&A at approximately 25% to 30% of revenue.
Given our asset light model Capex continues to be a small percent of overall revenue.
We anticipate our capital expenditures for 2022 to be approximately $7 5 million to $9 5 million or 4% of revenue at the midpoint.
Going forward capital expenditures will be primarily focused on the BMT integration tenant improvements related to our larger retail warehouses scaled merchandize sales and maintenance and other technology investments to support our digital offering.
For the full year, we expect our tax rate to be in the mid to high single digit share count for purposes of earnings per share calculation to be $25 7 million and $3. Two 5 billion in quarterly dividends to be paid related to our 200 million convertible preferred stock.
A full explanation of our share count calculation and associated pro forma EPS and adjusted EPS calculation can be found in the tables at the back of our earnings press release as well as our corporate structure and capitalization F. Q on our Investor website.
Thank you again for your time and for your support of exponential.
Look forward to speaking with you on our next earnings call. We will now open the call for questions operator.
Thank you we will now be conducting a question and answer session.
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Yeah.
Our first questions come from the line of Alex Perry with Bank of America. Please proceed with your questions.
Hi, Thanks for taking my questions and congrats on a strong quarter here.
So just wanted to get maybe a little more color on the guidance in terms of the revenue guidance you kept the system wide sales number the same and the studio openings sustained so presumably the equipment number would sort of be in line with your expectation what was the delta that brought the Rev Guide up.
Thank you.
Yeah. Thanks, Alex so from a revenue perspective, the three categories that we saw upside in the first half, which we wanted to adjust guidance from a mixed perspective is.
Upside in the franchise revenue.
It's a number of these need to be deals, which have provided some revenue upside that.
It was favorable and we perceive as favorable through the rest of the year and then we've seen better performance in the transition studios that.
That we've spoken of in the past roughly half to a 1% of transition studios that we own have been performing better than the assumptions. We originally had in our original guidance. So the three of those combined.
<unk> gave us the opportunity to adjust the guidance upwards on revenue.
Perfect and then just in terms of the system wide sales guidance in particular, what is it sort of assume in terms of run rate <unk> you expect a continued progression at the.
At the franchise level I think you already sort of pre pandemic avs. So.
And then maybe if you could also speak to you do you normally see.
It seems sort of churn as the rest of the fitness industry in the back half in terms of.
Members, leaving as people go back to school and the holiday season, maybe just speak to us about sort of the seasonality as well. Thanks.
Yes, so Alex as it relates to you had a couple of questions. There I'll tackle a couple and I'll turn it over to Sarah.
From an <unk> perspective, yes, we have exceeded pre COVID-19 levels 480000 on average per studio in Q2.
We do expect <unk> continue to grow into.
Into the foreseeable future, which will drive the system wide sales.
I think that answered the first part of your question I think you had a couple of them else in there that what was the second part to that.
Just in terms of the seasonality of the business could you just talk to that.
The AAV progression and how you tie that back to potential membership churn in the back half do you normally lose members.
And <unk> like like other fitness players.
And typically what we see on the second half of the year is that Q4 tends to be a little bit higher in terms of <unk> because of the black Friday promotions and some of the year end promotions that lead into a strong January interest across our membership base.
We hired a recurring subscription model.
Typically see that turn increases or that people cancel because theyre away for Thanksgiving for four days or away from Christmas and the holidays.
A week they typically keep their membership and continue to come as often as they can during those times, but they're not canceling and then re upping once they're back into the regular routine. So we do anticipate that <unk> will continue to grow and you know in steady state.
For the rest of the year.
And one other point to add you know prior to Covid <unk> climbed and we never really saw the top end of where the studios.
Could perform too so the expectation going forward is <unk> will kind of get back onto that that trend, where they'll continue to climb as we fill capacity.
New members to the studio and as the younger cohorts of studios that have opened last year this year get to.
I don't want to say full potential but continue to grow to higher capacity.
Perfect. That's really helpful best of luck going forward.
Thank you. Our next question is coming from the line of Brian Harbor with Morgan Stanley . Please proceed with your questions.
Hey, guys maybe.
Maybe the first one how many of the openings in the second quarter were international and.
What kind of countries and brands are you seeing really drive that right now.
Yes, so from a mix perspective, we're still seeing about a 75% to 25% split between domestic and international so about 25% of the openings in the in the second quarter were international some of the brands that typically drive more of the openings are the ones. We've sold the most of our relatively new clubs.
<unk> still seems to be a top performer as we sold a lot of licenses and they have a pretty strong <unk>. So we're getting openings continue there.
Stress lab with another brand, where we sold a lot of licenses and those licenses are now translating into openings at our most recent acquisition of DFT.
<unk> to be one of the top opener. So the three top our club pilates stress I Havent BMT.
Okay, Great. John also just your comment on on SG&A and the cost pressure and there is that mainly just personnel related or are you hiring more than you expected to in.
In the past and because I assume that kind of.
Stays in the base or I don't know if theres anything one time in there.
Yes, so related to SG&A there was some one time expenses that I called out.
Particularly around legal we did have to do some defensive legal work around trademarks.
Particularly around BMT and then we had some patent issues again related to one of our.
Public competitors around defending our patents around <unk> as well so we do view those legal costs as one time.
Don't believe that they will be a material spend going forward. However, if they are we will treat those as one time add backs as we did in this quarter.
Thank you.
Thank you. Our next question comes from the line of Jonathan Komp with Baird. Please proceed with your questions.
Yes, hi, Thank you I wanted to just ask about <unk>.
At the recent consumer behavior, Youre seeing if youre seeing any changes in the membership or the packs that members are buying.
Within the concepts or if you expect to see any differences across the concept.
If there is a tougher consumer environment and if that were the case how might you react.
Yes. The answer is no we're continuing to see membership up usage of the consumers continue to spend money.
So we're still seeing that 25% of our membership is on the reoccurring four times a month, 25% on the reoccurring eight times, a month and about 50% of the member units on the unlimited about 60% of the dollars gathered are coming from the unlimited members, but the unit splits about $25 25.
<unk>.
That's remained constant and still continues to be the case today.
Okay, that's great to hear and then John maybe one follow up on the on the outlook for the year could you maybe just.
Help to clarify when I look at your revenue year to date.
It's up a lot, 70% and the full year at the midpoint up 39%. So could you just provide any other shaping comments factors, we should think about when modeling revenue in the second half and some of the pieces.
Yes, I mean, the position were taking related to raising guidance is kind of looking at the performance in the first half and making the adjustment to the full year based off of the upside we've seen so far.
Given the macro environment, you'd always still want to remain somewhat cautious and not be naive to think that you know things.
Things couldn't change your go flat were not seeing that we are seeing the momentum continue into.
The point of this call.
We've taken <unk> taken a conservative approach and make sure that we deliver on the outlook that we've put out there so.
The $2 21 on the top and that's kind of where we are we're committing.
Our outlook from a revenue perspective.
Roughly the $72 million on the bottom line adjusted EBITDA.
Where we see the high end right now as we continue to perform through Q3, we'll come back to you guys and provide updates at that point, but.
I think the outlook now represents based off of the performance in the first half the upside. We saw you know we will continue to adjust through the back end of this year the.
The guidance as we see as we see fit.
Okay, and just last clarification, if I could the master franchise agreements, we have signed this year.
Could you could you quantify how much that's contributing to the year or any rough perspective.
Thanks again.
Yes, I mean from an international perspective, we don't break out what the contribution is again when you think about the international business, though the flow through as much higher as we.
We arrange these master franchise agreements, where we get an upfront fee for the initial licenses to sell in those markets and that as they sell licenses to their sub franchisees, we don't have the SG&A cost too.
Support that because that's borne by the master franchise or so there's high margin flow through so although we don't break it out or segments International. The there is a very profitable margin flow through on the international and particularly with the acquisition of <unk> being a contributor from day one.
They do have a the international side of the business does have pretty high margin contribution and we will continue to increase quarter on quarter as they open more studios and sell more licenses.
Okay understood. Thank you.
Thank you our next questions come from the line of Randy <unk> with Jefferies. Please proceed with your questions.
Hey, guys I just wanted to follow up actually first on that the Master franchise agreement, maybe just remind us where you have them.
Or are you or don't have that in our planning to potentially have them going forward and just just like longer term. How do you think about international let's say like five years out from now again.
Pretty nice margin opportunities and so forth and just adding to your Tam I just wanted to get more flavor on that longer term piece on the unmatched franchise side. Thanks guys.
Yeah happy to take that question. So today, we have MSA commitments of roughly 1100 Canadians across 12 different international countries.
And.
International strategy is to find the best partner to grow and scale our brands internationally on behalf of the brand so were going out looking for.
Various countries, where we know that we can be successful both economically and the legal conditions are conducive to franchising, but more importantly, we're looking for the right partner to be us.
Given country. So today, we've got some good presence in Australia as well.
And then some of our other countries are kind of in the early innings are starting to develop and open our studios from a contribution standpoint.
It's still about 25% at this point, but we'll start to see that shift.
Yes.
The countries continue to grow and develop and we will see a little bit of that shift on the P&L.
That's super helpful and then.
As we think about you talked a little bit about some cost items impacting things any thoughts around.
Any offsets you guys can kind of have with that potential changes in royalty rates or anything like that.
Mandating kind of pricing changes on the studio side, just kind of curious on how youre thinking about you know inflation and just maybe some offsets or things to react thanks guys.
Thanks Randy.
Continue to be focused on that in Q1 as well as in Q2, we did.
Procure some equipment, which allowed us to not only.
Hit the opening numbers, we needed, but also allowed us to kind of hedge against.
Any of that type of inflationary situation. So.
We continue to look at that and <unk>.
Their progress forward, but.
John had some more thoughts on that too as well.
Some of the other things we're looking at in the second half as opportunities around some of our pub co expenses, obviously going public D&O insurance is one of the high ticket items that we had and recently going through a renewal of that policy and seeing some favorable expenses. There. So we are looking pretty much across all of our vendors to optimize spend in the second half and again try and drive margin expansion.
We do see.
The commitments, we made around getting to the 40 40, 40% to 45% adjusted EBITDA margins.
Long term, we're on track to achieve that.
Even though we had a little bit of higher SG&A. This quarter again, we view that as one time. So the focus is in Q3 and Q4 is getting back on track driving optimization out of SG&A continue to focus on vendors.
And he mentioned, making sure we we mitigate inflation or cost increases around equipment by procuring and advance <unk> and larger volumes to make sure that we hit the openings, but again hit the margin targets. So that's kind of all hands on deck effort across the company to continue to drive down costs.
Through various strategies.
Very helpful. Thanks, guys.
Thank you our next questions come from the line of John <unk> with Guggenheim Securities. Please proceed with your question.
So maybe you can talk to I know all the brands are different.
Maybe talk to the issue is.
I'm towards 500000 SUV.
<unk>, Utah.
Utilization of excess capacity still to be utilized.
In the studios, that's where do we stand on that.
From a functional standpoint right.
Now those slots are created equal, but they're obviously more popular slots.
And then I don't know if you have a thought what <unk> level, maybe we're not even close to it.
Does capacity become an issue.
Before the member experience.
It would be helpful.
There are actually a couple of different strategies that we deploy when we're looking at capacity and how that correlates with Aes <unk>.
Openness, we opened with a pretty minimal schedule. So that we can fill the CDO sale the schedule and create this community feel across.
It's longer than that.
Location.
And we start with very aggressive pricing as we start to see that theres more demand.
Add more classes carefully but also start to increase their price point. So that we are able to then meet to supply and demand curves with the appetite that the consumer habits are spending on their membership once you get to a mature CDO. That's it in a sustainable business. We then look at driving Evs with some of the vendor partners that we have.
So trading retail and some of the brands is striving private training workshops teeth.
Teacher training with.
With a brand with <unk> and now that we have a <unk> department now, bringing in additional lead flow and.
Revenue opportunities to those partnerships as well so we're looking at continuing to expand the four wall economics without necessarily driving additional utilization at the CEO level, we chatted about.
Bringing X plus two the club Pilates and stretch lab membership and part of that idea was to continue to add value and benefit to the existing brick and mortar membership, but also giving the member of the opportunity if I can't get into classroom to a stretch session.
As still being able to enjoying an extra experience. So we're looking at a lot of different ways of how we continue to meet.
Meet demand, where it is while also driving agencies.
Right and then maybe as a.
As a follow up to that do you think about the real estate strategy going forward.
The tension between cannibalization a network effect.
I guess I would think most of the brands rider at such a young level.
The network effect and convenience benefit far outweighs cannibalization.
But how do you think about that dynamic.
When we launch a brand we'd go through a very aggressive.
<unk> research analysis, we really take the members that we know like the brand followed a brand and take that demographic in the map it across the country.
And we now then have enough data within the 10 brands to look at various fitness rose and what happens within the fitness Roes as they continue to open various studios in various concepts within a concentrated area.
We watch that very closely we haven't seen any sort of cannibalization if anything we actually see that it becomes an attractor. So you have kind of like a food court people go to that area, everyone has something to eat.
And it becomes a hub that we find that with our with our studios as well.
So if anything the data is actually a little bit stronger.
Dictating that that's actually a good model rather than saying that.
Studios in various concepts need to be.
Set apart.
Yes.
Okay. Thank you.
Thank you. Our next question comes from the line of Warren Cheng with Evercore ISI. Please proceed with your questions.
Hey, good afternoon, nice job in a pretty tough environment.
Can you just give us an update just on your Franchisees' unit economics because.
<unk> side continues to trend really nicely in the right direction, but are your franchisees starting to see inflation show up on the cost side, especially just on.
On the labor rent or financing side that are offsetting that AEP accretion.
Yes, I mean, theres minimal not material inflation of course everywhere.
But we're not seeing that stores are continuing to operate <unk> continuing to grow.
So we're not when you look at kind of labor costs or things like that.
So the labor that we have typically makes 40 to $50 per class. So as there's kind of pressure on minimum wage or things like that and labor, they're not coming back to us looking for 51 or $52 a class.
So our employees are already paid kind of above the minimum wage so as minimum wage or are the labor side increases, we're not really seeing any flavor of wage inflation.
So the stores are continuing to operate profitably obviously, we opened.
More units in Q2 than we did in Q1 continued to sell at the current $2 50 or more pace per quarter. So at the top of the funnel, where we're seeing franchisees want to continue to buy more franchises and we're seeing franchisees continuing to want to open as we see.
<unk> continued to grow so the economics are still strong.
Got it that's really helpful.
You gave a nice update on some of the partnerships that you've done.
And you seem to continue to have new partnerships.
New shapes and sizes are there certain types that have been the most fruitful from a customer acquisition perspective that you'd lean into going forward are that we can expect you to lean into going forward.
I mean, it's early innings on on these partnerships, but obviously, there's there's really a couple of kinds of partnerships that we've been doing one or partnerships that drive real.
Butts in seats ultimately right how do we how do we fill that that last seat or those last three seats or whatever it might be.
Particular brand or for particular franchisee in a certain location.
So that's one and then the other one is really kind of on the vendor side things that you see with <unk>.
For Celsius or things of that nature gives another product for the franchisees to be able to sell and service the customer.
But it doesn't necessarily.
Put somebody in class right, they're not going to come in.
Line up to take a cycle of our cloud so they can drink Celsius.
But there are other drivers like our health care deals in the beer deal and other things that we're doing to drive our digital customers even in the into the brick and mortar.
Partnerships really broke up and those those two ways, but it's still early innings on the partnerships that are continuing to drive.
More people in seats, but you are seeing the AAV increase and that's increasing.
Somewhat from price, but also from driving more people into the studios.
Got you. Thank you good luck.
Thank you. Our next question is coming from the line of Joe also Birla with Raymond James. Please proceed with your questions. Thanks, Hey, guys. Good afternoon.
I'd go back to your franchisee base for a second maybe speak to the health of the financial health.
Of your franchisees are you seeing any signs that the macro pressures that having any impact on that base for example, our franchisees buying one or two licenses.
Other than three to four for example.
No, we're not necessarily seeing that.
Even in Q2, we were able to hit our current run rate number.
That's difficult to do typically in Q2, because it is a franchise or we have to re file in all the states.
To be able to sell franchises. So we're blacked out.
So even in Q2 for a couple of our top selling brands like Rumble of DFT, we were still in the re filing process in Q2 in states like California, and New York, which are places, we sell well and want to be in.
So we're still seeing franchisees continue to buy we've never been a big company on doing 20 packs or 30 packs or 50, pax or things of that nature.
Typically always sold on average about three per franchisee.
Because that allows them to get out and get open and develop or for a shorter period of time as a business. We've never had a problem scaling from the franchise sales side.
Another concepts people may look at it and say hey, if somebody wants to buy 10, I better sell them, the 10 and way to develop that over five years, because they can't they can't sell our scale as quickly.
For us we would rather sell three three packs to get to nine and sell 109 pack and wait right because we can be developing those three three packs in conjunction with each other.
So.
Not necessarily people come in and getting ones and twos, we still give a discount at three.
So it tends to drive a lot of the sales part towards the three pack.
That's helpful. Maybe just to follow up on that looking at the cash flow was very strong here in the first half and I guess you guys are going to have a high class problem in the sense that you're going to see cash build up on the balance sheet what's the.
I guess top priorities in terms of cash deployment over the next call it 18 or 24 months.
Yes, so as far as cash and Youre right I mean, as the company continues to generate cash operationally there will be a.
You know more or less.
Stacking of cash on the balance sheet.
The current capital structure.
We continue to evaluate and determine whether or not its more efficient too.
Change the preferable or convertible preferred or how we have our debt structure. So we are evaluating that it is something that's on our radar.
Long term if you look out 234 years.
The company will be putting off a lot of cash so things that we have considered and talked about is the opportunity to do things like share buybacks or potentially dividends and we'll continue to evaluate that this year and into the into the next year, but from our perspective, our focus right now is driving operations.
And in parallel looking at how we could potentially.
Change the capital structure, so it's more efficient for us long term.
Okay, great. Thanks, guys.
Thank you. Our next question comes from the line of George Kelly with Roth Capital Partners. Please proceed with your questions.
Yes.
Hi, Thanks, everybody.
Two questions for you first on X Pat.
Just curious what the plan is.
Keep growing that product and how soon could it be.
That we start seeing an impact on your overall royalty rate.
Is that volume through ex Pats builds.
Okay.
And we're continuing to look at the way that our members are.
Interfacing with ex Pats.
Today or over the last quarter, we were actually able to drive down our cost per conversion so that that declined even after and being able to do that in Q1. So we're looking at ways that we can.
<unk>.
Our acquisition.
Customers to make sure that we're not paying for every customer that's coming in and then putting those customers into each of the individual studios.
We're working on optimizing the marketing efficient efficiency X pass and then making that beneficial to the franchise partners and then we're constantly looking at the technology in ways that we can continue to optimize the technology based on how consumers are using the.
Membership as well as additional experience.
Yeah.
Okay got you and then next.
Question was on.
Pricing. So curious I know you are.
<unk> now are exceeding pre COVID-19 that pre Covid has just curious how much of that is pricing and how much of that is member growth.
Yes.
Today, it's actually both so we're seeing that the membership average memberships per unit is growing but we're also taking price on a daily basis. So as I mentioned earlier as we start to see that demand.
Demand is high as supply is low we work with our franchise partners at the corporate office to help them with their pricing model, we have five different pricing tiers across each of the brands. So as we start to see that.
Utilization is high and our capacity is low we first evaluate pricing and increased pricing, where we feel that we can where we can do that for new customers and that will start to decrease some of the weightless that we see across the Cvs.
And allow us to backfill cancelled members with more extensive membership.
Okay I don't know if you have made.
Is your consolidated member count sort of on par with pre COVID-19 levels or maybe you.
On a unit level basis, or maybe you've exceeded it.
That's definitely way higher utilization is higher membership counts higher <unk> higher.
So all of those all those kpis or our past.
Pre COVID-19 and continuing to climb.
And on a per studio basis as well so the average members per studio as well above pre COVID-19 levels.
Okay excellent. Thank you.
Okay.
Thank you. Our next question is coming from the line of Peter Keith with Piper Sandler. Please proceed with your question.
This is Matt on for Peter I appreciate you taking the time.
One quick one from us.
You mentioned some revenue revenue growth in the prepared prepared remarks was driven by higher royalty rates.
I was just curious I thought that was kind of a steady maybe not as much of a lever so I guess what.
Do you have in terms of ways you can increase your royalty rates. Obviously, there is a balance there. So just and then maybe what's the long term target for that.
Yes, higher royalty dollars come from 7% times higher system wide sales not from driving a higher percentage. However club Pilates for instance has increased from 6% to 7% to 8%.
So now on a go forward basis called <unk>, which is our one of our highest day UV drivers of course high system wide sales driver at the most open units.
On a go forward basis for new units coming on not existing but for new units being.
Added to the system and opened and sold.
We will drive at 8%, but the royalty growth we're talking about simply comes from the same average percentage.
<unk> a larger system.
Wide sales number.
Okay got it understood and then also going back on the business the business updates with Mir and la fitness and some of the others you've mentioned.
It was once ramped up that you can go to say, a corporate and roll it out.
Third corporate.
Employee base. So I was just curious if you all have any updates on on doing anything like that on the <unk> front. Thanks.
Still an opportunity for us and we don't have anything we can announce yet.
But the so continuing to do that and it's still a focus like many others for us as we find ways to leverage our assets like X plus X path.
Sure.
Yes.
Thanks.
Thank you there are no further questions at this time I would now like to turn the call back over to Anthony Gardner for any closing comments.
Thank you and thank you again for joining today's earnings call. In addition to our investors support I'd like to acknowledge the entire X financial fitness team and our franchisees for their strong operational execution in the second quarter.
The team for your hard work and dedication to making boutique fitness accessible to everyone.
Also like to note that next month, we will be participating in the Jefferies virtual fitness and wellness summit as well as the Piper Sandler Global Consumer Technology Conference in Nashville, and the Raymond James' Consumer Conference in New York City, We hope to see many of you out there.
Make it a great day. Thank you.
This does concludes today's teleconference.
Appreciate your participation you may disconnect your lines at this time enjoy the rest of your day.