Xponential Fitness Inc. Q1 2023 Earnings Call

Greetings and welcome to exponential fitness incorporated first quarter 2023 earnings conference call. At this time, all participants are in a listen only mode.

Question and answer session will follow the formal presentation, if anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host Kimberly estrogen.

Thank you you may begin.

Thank you operator, good afternoon, and thank you all for joining our conference call to discuss exponential fitness, it's first quarter 2023 financial yourself I.

I am joined by Anthony Geiser, Chief Executive Officer, they're old enough precedent and John Malone, Chief Financial Officer, a recording of this call will be posted on the investors section of our website at Investor <unk> exponential dotcom.

We remind you that during this call we will make certain forward looking statements, including discussions of our business outlook and financial projections. These forward looking statements are based on management's current expectations and involve risks and uncertainties that could cause our actual results to differ materially from such expectations.

For a more detailed description of these risks and uncertainties. Please refer to our recent and subsequent filings with the SEC.

We assume no obligations to update the information provided on today's call.

In addition, we will be discussing certain non-GAAP financial measures in this conference call. We use non-GAAP measures because we believe they provide useful information about our operating performance that should be considered by investors in conjunction with the GAAP measures that we provide.

A reconciliation of these non-GAAP measures to comparable GAAP measures is included in our 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 refer to global figures unless otherwise noted.

I will now turn the call over to Anthony Geisler, Chief Executive officer of exponential fitness.

Thanks, Kimberly and good afternoon, everyone. We appreciate you joining our first quarter 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 b to b offerings, John will conclude with a review of our first.

Financials, and an update on our 'twenty to 'twenty three outlook. It was another strong quarter for exponential as our business has continued to perform across our key performance metrics exponential franchisees now operate over 2000, and 750 studios globally, an increase of 24% year over year with more than 5000.

600 licenses sold across our 10, leading fitness brands, we now have franchise master franchise and international expansion agreements in 18 countries also encouraging our mature studio cohorts are again exhibiting strong same store sales growth with profiles similar to our younger studios for.

For the quarter in North American studios over three 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 665000 at the end of the first quarter over 90% of these customers are actively paying members along with growth in our membership base North American studio visits for the three months and.

Being in March increased by 38% year over year, reaching a total of $12 6 million, the increasing foot traffic and utilization of the studios drove record North American system wide sales, which increased 42% year over year in the first quarter.

Freezes on memberships are also at their lowest level since prior to the pandemic.

Q1, North American Ao vs. A 542000 were up 21% from 450000 in Q1 of 2022 our 11th straight quarter of ANV growth. We believe that a UV growth is the most direct measure of the health of our franchise system and I am pleased to report the momentum in AAV.

Growth has continued to build in the second quarter.

We also saw same store sales growth of 20% in the first quarter up from 17% in the previous two quarters. This improvement is particularly impressive when considering the difficult comp in the first quarter of 2020 one when our studios were back running at full capacity and performing solidly post pandemic. These.

These numbers also bode well for our studio's 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 <unk> and same store sales in combination with a growing membership base demonstrate the consumers continue to view their health and wellness is a vital part of their budgets and not discretionary spend.

Turning to revenue for the quarter net revenue totaled $70 7 million, an increase of 40% year over year.

Adjusted EBITDA totaled $22 9 million in Q1, or 32% of revenue up 58% from $14 5 million or 29% of revenue in the prior year period. The resiliency of exponential business is best demonstrated by our franchisees opening new studios, while driving additional business to there.

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.

In addition to franchisees continuing to open studios studio members are continue to show that they are spending on experiences.

Sarah will speak about shortly many view their fitness memberships as part of their overall entertainment budgets.

Now I'll turn to our four strategic growth areas I'll discuss the first three and then turn the call over to Sarah to discuss the fourth.

Beginning with the increase of our franchise studio base. We ended Q1 with 2000 and 756 Global Open Studios opening 115 net new studios in the first quarter we.

We sold 188 licenses globally in Q1, bringing the total sold licenses to 5638, our pipeline of over 2000 licenses sold and contractually obligated to open on a global basis offers us multi year 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.

Turning to our second growth driver expanding internationally on the international front, we have over 1000 studios obligated to be opened under master franchise agreements and we continue to gain traction.

Just last week, we announced a master franchise agreement in Japan to franchise up to 40 stretch lab studios over the next 10 years.

Exponential has five brands operating of Japan, including club Pilates Rumble cycle bar, a K T and stretch lab.

In addition, we recently signed master franchise agreements with cum plot ease in Ireland, and Switzerland and in Q1, we opened our first club Pilates in Frankfurt, Germany.

As a reminder, our MFA is our structure to provide exponential with high margin flow through given that we structure them as a revenue share model and require minimal incremental SG&A to support MFA growth.

Our third 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 EBITA margins again improved to 32, 4% during the first quarter as we continue to increase our operating leverage we remain confident that our adjusted EBITDA margins will expand into the 35 per se.

Went to 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 fourth and final growth driver, increasing our same store sales in <unk>.

Thank you Anthony at exponential, we understand the importance of empowering customers to exercise where and when they want. We also acknowledged 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 exterior.

Says 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% more on lodging, 15.6% more on airlines and 14.2 person.

Sent more on restaurants consumers are shifting their spending an exponential is benefiting from the spend on experiences as is evident from the increase in our visitation rates and membership count.

During the first quarter North America visitation rates grew 38% year over year, and our North American membership base has grown to over 665000 members, while we often see some seasonality in membership following the new year Q1 is typically our strongest quarter for membership growth. These results are further proof points that.

More individuals' are visiting our boutique fitness studios and <unk>.

Fortunately these trends have continued into the second quarter.

To keep this momentum going exponentially consistently innovating finding new ways to connect with our members increase retention and reduce churn all of which are vital to growing our same store sales and a disease or ex pass offering is one such example of a novel way in which we are providing our members frictionless access to all 10 of our <unk>.

On a single recurring monthly membership platform.

In addition to providing our customers with greater flexibility ex Pat served as a lead generator for our franchisees to drive in studio memberships.

Not only have we been able to sell traditional ex pass memberships to those frequenting our studios on land, but we now are actively offering our ex pass to individuals who work out with one of our boutique brands on Princess cruise ships.

We are excited that pure Barre yoga sex and stretch labs 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.

And taking our live classes onboard cruise guests also have the opportunity to stream, our digital offering X plus across Princess has more than 23000 state rooms.

X plus helps enable our members to work out whenever and wherever it's convenient for them, even if onboard cruise ship at the end of the first quarter. We had over 140000 subscribers on X plus many of whom also hold in studio memberships, including those who have subscriptions through their club pilates or stretch like membership.

X plus is also a key driver of our B to B partnerships recently, we announced the launch of X plus on LG electronics, Smart Tvs, which will provide on demand access to exponentially family of brands to millions of LG Smart T V owners in over 250 countries.

Our previously announced partnership with active solutions is progressing well active is leveraging our world class digital contents for X plus platform and one of a kind immersive exercise experiences tailored specifically for amenities located within leading hotels and resorts corporate campuses universities and high end.

My family housing properties, we've installed about 90 active base, so far and expect that these will all be activated at the end of June .

Our strategic beta be partnerships with industry, leading companies are made possible by the strength of the exponential brand as well as our expanding omni channel fitness capabilities.

We look forward to benefiting our 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.

Thank you again for your time.

Now I'll turn the call over to John to discuss our first quarter results and 2023 outlook.

Thanks, Sara it's great to speak with everyone to discuss exponential first quarter 2020 results first quarter, North America system wide sales of $317 8 million or up 42% year over year the growth in North American system wide sales was largely driven by the 20% same store sales and the existing base of open.

City is that continuing to acquire new members, coupled with 82 net new North American studios that opened in the first quarter.

On a consolidated basis revenue for the quarter was $70 7 million up 40% year over year.

Each of the five components that make up our revenue grew during the quarter.

Franchise revenue was 33 million up 29% year over year. This growth was primarily driven by an increase in royalty revenue as member visits and associated system wide sales reached 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 1 million up 68% year over year. This increase in equipment revenue is the result of continued higher volumes of global equipment installations merchandise.

Merchandise revenue was $7 2 million 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 2 million 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 b to B partnerships ex path and X plus amongst other items was $11 3 million up 71% from the prior year period the.

The increase in the period was primarily due to increased rebates from the processing of studio level system wide sales and our increased revenues from our <unk> partnerships.

Turning to our operating expenses cost of product revenue were $14 million up 46% year over year.

The increase was driven by a higher volume of equipment installations for new studio openings and merchandize revenue in the period.

Also franchise and service revenue were $4 million down 5% year over year.

The decrease was driven by fewer license terminations and video transfers in Q1 of 2023.

Selling general and administrative expenses of $34 9 million 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&A expenses were 49% of revenue in the first quarter.

Down from 67% in the prior year period, demonstrating the continued leveraging of SG&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&A. We are focused on growing the sales in these studios optimizing operating costs to achieve four wall profitability, and then finding new franchisee owners to which to sell them.

We also expect to see legal costs declined in the second half of the year as a result of increased efficiencies.

Further in the first quarter, 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 2 million, an increase of 20% from the prior year period.

Marketing fund expenses were 5 million up 15% year over year, driven by increased spend afforded by higher franchise marketing fund revenue.

Acquisition and transaction expenses were $15 7 million primarily related to the noncash contingent consideration as part of our acquisition of Rumble.

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 our crew for the earn out.

We recorded a net loss of approximately $15 million in the first quarter compared to a net loss of $15 2 million in the prior year period.

The decrease in net loss was the result of $2 8 million of lower overall profitability of $6 2 million increase in noncash contingent consideration primarily related to the Rumble acquisition and a $9 2 million decrease 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 first quarter was $1 3 million, which excludes the $15 7 million change in fair value of noncash contingent consideration and a point 6 million liability increase related to the first quarter re measurement of the company's tax receivable agreement.

This results in adjusted net loss of two cents per basic share on a share count of 38 million shares of class a common stock after accounting for income attributable to noncontrolling interest and dividends on preferred shares.

Adjusted EBITDA was $22 9 million in the first quarter up 58% compared to $14 5 million in the prior year period, adjusted EBITDA margin grew to 32% in the first quarter compared to 29% in the prior year period as a reminder, our 'twenty two 'twenty three outlook anticipates adjusted.

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 1 million up from $15 8 million as of March 31 2022.

Total long term debt was $266 7 million as of March 31, 2023, compared to $132 5 million as of March 31 2022 the.

The increase in total long term debt is primarily due to the repurchase of 85340 shares of convertible preferred stock at a price of $22 seven per share announced in January these shares prior to the repurchase would've been convertible into five 9 million shares of class a common stock.

Now turning to our outlook.

After a solid first quarter and it continued the positive momentum in the second quarter. 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.

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 1.37 billion to 1.38 billion up from the previous 1.34 billion to 1.35 billion or 33% increase at the midpoint from the prior year.

Total 2020 three revenue is now expected to be between 290 million to 300 million up from the previous 285 million to 295 million a 20% year over year increase at the midpoint of our guided range.

Adjusted EBITDA is now expected to range from 102 million to $106 million up from $101 million to $105 million, a 40% year over year increase at the midpoint of our guided range.

This range translates into roughly 35, 3% adjusted EBITDA margin at the midpoint.

In terms of capital expenditures, we anticipate approximately $10 million to 12 billion for the year or approximately 4% of revenue at the midpoint.

Going forward capital expenditures will be primarily focused on the BMT integration X pass and X plus 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 6 million and $1 9 million in quarterly dividends to be paid related to our convertible preferred stock.

A full explanation of our share count calculation and associated pro forma 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 F. A Q on our Investor website.

Thank you again for your time today and for your support of exponential we look forward to speaking with you on our next earnings call.

I'll now open the call for questions operator.

Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.

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We ask that you please limit to one question and one follow up.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the darkies one moment. Please while we poll for questions.

My first question is from Jeff Van <unk> with B Riley. Please proceed with your question.

Hi, everyone and thanks for taking my question just wanted to check on.

Promotional activity pricing any thoughts on well I guess are there any changes happening there at all and promotional activity or pricing and then how might those elements involved this year as you're thinking about the remainder.

No substantial changes in our business in terms of how we're approaching pricing and promotion.

And you know focus on various marketing promotion throughout the quarters and drive each month.

It makes sense I'm tracking your customer base.

Tons of focus on our B to b activity and driving negative CAC back to the studios with the leads that we're bringing in and that's so far are performing very well a lot of those partnerships are starting to stand up this year. So we're starting to see the fruits of that labor, which we're excited about.

Yeah.

Okay, Great and then as a follow up just I know you mentioned the F T. But any update you can provide on the.

Integration process, Oh, that's going.

Yeah, he's going according to plan. So we're you know we're integrated with P. S T.

Yeah, we're we're continuing that process.

It's you know it's operating today, just like our normal domestic business and our normal MSA is operating.

Yeah.

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

Great. Thank you so much.

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

Hi, Thanks for taking my questions and congrats on a strong quarter here I guess, just first you kept it in that's reopening 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 dealt developed being sort of in line with schedule have you seen any pause and then just.

The $5 40 to 560 <unk> openings, how much of visibility do you have on that and maybe some help on how much is sort of domestic versus international. Thanks.

Yeah, I mean still are worried 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 opened studios.

Now expanding their <unk>.

Domestic business is continuing to be steady.

And then the international openings are what are piling on top of that then that the domestic business.

But as far as interest rates go.

We reached out to our lenders rates are up quarter percent or half a percent or something like that.

And as you know is not against a lot of opening dollars. When you think about I know you know people are asking the question around you know planet and stuff like that in their opening dollars or about 10 X what ours are.

So we know interest rate has a bigger effect.

And those large box type businesses than it does in small boutiques.

Just because of the overall dollar amount it is too to get open.

Perfect. That's really helpful. And then just how do you think about the royalty rate increases from here is there a V 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 this.

The increase in the club plot east royalty rate to 8% and is there any other brands, where do you think you may be able to do that.

Yeah, I'm not sure if you've seen our recent FCC filings, but we did increase stretch lab to 8% as well and of course, there's a there's a certain <unk>.

Threshold, but there's really a profitability threshold in 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 in clubs bodies, where we basically sold out of the brand domestically began to get a lot of those open and then continuing to see great demand in that brand you know given the AAV.

And as increases and so the same was true with stretch lab and so we've.

Increased that in our new filing a two 8% and you know 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 raised the royalty rate has its kind of the highest optics to it.

And so it's really the last thing that we do.

Okay.

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

Great. Thanks, guys.

Our next question is from John Heimbach <unk> with Guggenheim Securities. Please proceed with your question.

Hey, guys wanted to start with so per member visitations, where I can continue to go up and I think are pretty close to a record level. What are you looking at right and your dashboard maybe across the network to see if.

So the consumer and in some respect is pulling back right I don't know if its engagement or a change in composition of membership.

And I guess is there any place where you are seeing anything or you know it hasn't shown up yet.

Look I mean, it's not it's not that there is one silver bullet right. We're looking at Kpis across right. So we're looking at flood traffic, we're looking at utilization.

You know volume and demand right really kind of shows that you know this is non discretionary spend for our members and there is 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.

You know a lot faster than even some of our older demographic and so this is where you know people today get their entertainment dollars or health dollars in their community.

And so you know it's it's the volumes that we see coming through that's great. The foot traffic not necessarily price driven or you said in the past is 95% volume.

And the rest really being price and so you know.

When we look at all of those metrics for the health of the business right. So.

Theres not one one sort of silver bullet that we stare at AR, but we we kind of look at them all and now where we sit today at all of them are continuing to perform as matter of fact, if you look at now what we comped in Q4.

You know people kind of thought well that that's not sustainable and then you know we went from 17 and 18% respectively. On our you know less than 36 months mature stores in 36 months plus stores and went to 20% right and so you know we're we're continuing to perform as a business is continuing to perform and how all of that is a recipe.

All right. So it's not just the class of the leadership for the industry that we're in like anything great. It's a recipe in our metric of a lot of things working well at the same time.

Well as a follow up to that right because I think you're right the average.

Household incomes of 130000.

How low do you think you can you can take that and play you know where.

There's there's.

An awful lot of perceived value for what youre, providing and somebody can it can go lower than that.

Maybe that's not your your target right because there's still a lot of.

The market youre not covering but.

How do you look at that accessibility and.

Our ability to tap into somewhat lower household income base.

Yeah, I think sometimes it's a less of dollars that they make it more shifting of priority of the dollars. When you see in a post COVID-19 world people are really taking their health and wellness seriously and I've said before and boutique, especially in our brands that you know.

Like a rumble or rowhouse, or AK, T 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 it's very hard to replace that's where they are you know called <unk> in the morning at eight a M or club Pilates on Tuesday at five 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 you know where people get entertainment dollars. So it's not something that's easy to replicate.

You know since 95% of it is volume and 5% is price.

They are getting more perceived value right because there.

As inflation happens and other things happen, they're still continuing to enjoy their original price that they came in that and so it makes it stickier because where we're not raising rates on past members are we raising rates on new members coming in as the old ones expiring cancel when we go up a tier in our kind of five tiered.

But we're not going back to kind of customer number one.

And taking price on that.

Okay. Thank you very much.

Yeah.

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

Thanks, guys I guess, a center or Anthony give me some can you give us some perspective on <unk>.

Drivers of we heard about drivers of ANV going forward, but maybe curious around.

You'd think about drivers within the poor across the portfolio as an opportunity to continue to drive a higher we know that club pilates is the highest <unk> concepts, but maybe give us a little bit of perspective on the other concepts, where you see kind of a massive ramp opportunity where they're already high <unk> kind of can continue to lift total.

Company, a b higher by just.

Moving across the portfolio. Thanks.

Thanks, Randy I'll give you a quick point of clarification club Pilates is not the highest AAV at the company, it's kind of the highest D V with the highest samples that right kind of the highest volume and that's why we point to that but brands like B S T or like Rumble actually come out you know it had some higher.

But just a lot less locations.

And we have across the country. So that makes us really excited when I like to talk about the difference between club Pilates and some of the other brands as what I call. The born on date right and when you look at club Pilates. When we first bought that brand. The Au V was 250 and you know today, it's over three times that rate.

Seven eight years later.

So what I'm excited about is brands like the FTE in brands like Rumble, the brands that were selling in opening the most up today given the most white space and those brands are actually you know coming out at you know 500, and 600000 dollar more <unk>. So they're kind of born on days, they're kind of being born twice as smart as club Pilates.

<unk> originally so there's there's still a lot to build off those brands is there they are in their infancy.

And we've got a lot of contributors to a UV right. We've talked about this concept of negative CAC and as we drive.

People on the cruise ships I saw you know a posting on.

Our stretch labs Facebook page for franchisees, where they've said Hey, I got my first Princess lead not close them right and that's proof of concept that people can go on a cruise ship get associated with stretch lab and then go home get marketed to and get closed by the franchisees. So.

As we continue to increase.

You know the customer lead base for our franchisees and of course, we're always continue on our closing ratio to try and close higher and close at higher dollars mm.

But we're able to deliver more leads than we have before and when we look at the cohorts of you know 2023 versus 2022, you know when we do it by quarter, you continue to see quarter over quarter.

Cohorts and these ramps are continued to increase.

And so you know as we put stores next to each other as we put store and neighborhoods.

Raises all ships and so on.

The same is true with Princess same with you know little lemon near or being an L. G. T V. I mean, our our Hyatt and Hilton hotels with you know with active.

11000 locations in active hasn't so it's really our goal that by the time, you know what I like to call. Our Starbucks mom is on her way to the grab a coffee in the morning, and she sees pier bar next door Rumbled next door. She doesn't know it's not having to wonder what it is she saw it on our TV. She saw it on an app she is.

On Nir.

Yeah. If you remember two of those mirrors are being played as equipment and a lot of high end hotels right I was in a I N hotel the other day and the mere sitting there playing or content inside the hotel GM. While people are working out. So there's a lot of ways that people are becoming associated with exponential and its brands and so the idea is that by the <unk>.

Time, they actually see us in our brick and mortar four wall state, they're not having to wonder you know who we are what we stand for and what the value prop is that you know they walk in and then hopefully we have a very well qualified salesperson at the das that it was able to close that sale.

Yeah.

Super Helpful. And then just a follow up.

Easy 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 performed.

Similar or dissimilar to their.

Their concept counterparts are in the U S. Thanks.

You know John I actually talking about this this morning.

You know on a on an international basis. So for instance, if if any.

These are 500 here in the U S and there you know Rumble doing 500 in Australia right in a U D. You.

You know on a country per country basis. The the AUC is about the same and so where we're getting better and better data on our international side for system wide sales in AAV and things of that nature, and we're continuing to you know to kind of hone in on that.

Obviously, you know our big international regions, APAC and inside APAC. The S. T is kind of the big driver there.

You know much like club Pilates in the early days and you know I had the most volume in a UV here was sort of the biggest driver, but we do have club pilates operating and Rumbles operating you know just shopping Uh huh.

Hey, Rumble boxing in Bondi Beach, and in Sydney, which is kind of like the premier location in Australia is doing very well so.

So yeah, we're constantly encourage by our by what we're seeing both from the brand level.

And kind of overall system wide sales in the countries.

Super helpful. Thanks, guys.

Our next question is from Joe I'll Sabella with Raymond James. Please proceed with your question.

Thanks, Hey, guys. Good afternoon, I wanted to go back to the franchisee.

Financial health sort of topic, if we look at you know the cash on cash returns that your franchisees are earning today, what does that look like versus when you went public I would imagine that that it's actually gotten a little bit better the last couple of years.

So Joel I think when you go back to what it was kind of around the IPO, it's kind of an unfair measurements given they're in kind of the COVID-19 recovery period.

I think if you talk about pre Covid. When we were just under you know kind of a 500 K a V.

And then now you fast forward means.

Met that now exceeded it.

The cash on cash returns and the overall profitability of the strength of the franchisee is better today than it was pre COVID-19.

At IPO, it's kind of an unfair measurement even studios, we're still recovering.

Is no restrictions lifted and members returned back to the studios, but overall today you would argue franchisees are much healthier more profitable, but they happened ever in the company's history.

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

No actually I I partner with our lender on a daily basis, we're viewing incoming franchisees getting loans are the access to capital has not slowed there is a healthy backlog of franchisees that are in the process of getting financing and our opening studios.

Anthony mentioned the rate has gone up.

A quarter to a half percent I talked about a little under this morning, and just wanted to get feedback on anything youre seeing related to the most current interest rate hike and franchisees are not really backing up. The fact that you know interest rates have gone up I understand it but it's not a material portion to that and given the investment is fairly low.

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

Okay, and just one last one for you.

Look at your revenue and EBITDA guide.

Guidance it looks like you're you're playing 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.

Yeah, I mean, there's two levers right high margin flow through on revenue and SG&A costs right. So controlling opex you know, we we raise 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 in the future quarters.

When we set guidance originally but when Q1 came in with an acceleration.

System wide sales same store sales. They just know royalties it provided in the quarter, that's high margin flow through for us So as we continue.

To see that kind of performance you know that'll give us the ability to push that margin expansion higher and obviously focusing on Opex is key for US we mentioned, bringing in Andrew.

Oh go Pee in who is focused on legal.

So from that perspective, you know Opex is we are laser focused.

On that and trying to cut costs wherever we can.

Great. Thank you.

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

Hi, This is Shawn Rooney on for James Hardiman, Oh, Thanks for taking my question. So.

So a question on the SG&A part excluding equity based comp it looks like SG&A.

As a percent of revenue came down about 70 basis points sequentially I believe on the last call John spoke about them when they ramp down to around 35% to 36% for the year in both third ease in the second half is that still a fair target and any color on the potential risks to that ramp down.

Yeah. So that's still the way we're seeing it from our perspective, we're going to be in the high thirties.

In the first half and then trend down into the low thirties.

Excluding stock based comp in the second half. So we're still seeing that trend continue so that the business will leverage we don't need to add a lot of SG&A. There you know for US we're more focused on removing SG&A versus adding SG&A. So the business should leverage into the low 30% excluding stock based comp in the second half.

Okay and are company owned studios still Lindbergh or what's the status on that and transferring those two franchisees.

Yeah, there are costs in Q1 related to the company on city as you know we've taken a more investable approach related to company owned studios and focusing on.

The tailwind, we're having around our system wide sales growth and a UV growth, we're really focused on getting these corporate videos to the desired U V level, while really focusing on getting the opex efficiency and from a four wall perspective, the way, they're designed to be and then when we get into a healthy.

<unk> point, that's one we're actually going out and trying to refranchising them. The intent there is to make sure that when they do launch their successful and we don't have challenges with them going forward. So in Q1, Yeah. There was higher SG&A related to company owned studios.

You could expect that the decrease in Q2, Q3, and Q4 and get back to what we believe is a more normal run rate from where we are today.

Alright, Thanks, a lot for the color.

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

Hey, good afternoon, guys great quarter I.

I just had one more follow up on this franchisee health question exposure to macro so obviously, you've got the the the new unit guidance unchanged. There you did a really good job of articulating some of the differences between your franchisees planets.

And I think the ANV going in the right direction for you has 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 have the potential if things were to macro conditions were to worsen.

The potential to be an impact for your franchisees is there a way to drinkwater won't be at the top of that list.

Yeah, I think if you kind of look at it maybe might cause some hesitancy related to franchise sales, we haven't seen that yet, but you know I think its consumers get scared when people will be less willing to want to invest a lot upfront and more longer term.

Yeah.

Franchise, I think that possibly we haven't seen that yet in regards to again the investments around equivalent or getting a new studio open but most people have already paid for their license upfront they're committed they know they have a build out schedule.

That's already too so.

When it comes to the.

Upfront investment and then not much has changed there are franchisees continue to open their second and third units per schedule. So.

Haven't seen any any impact related to future development around openings.

I'll say as of yet we havent seen any signals that it's coming.

But that would probably be the one that comes to the top of my mind.

Got you Thanks, John and a follow up question on that.

Topic, the <unk> E V 542000, and that's a pretty big step up if we look at where you stand, which because of levels compared to what you've been doing.

And if I overlay sort of the historical seasonality on to that.

You know just progressed that one two number let's say flat flat given a bump for holiday I'm getting to some upside to the system wide sales guidance. Just curious if there's any anything worth noting about the seasonality this year or is that just some conservatism baked in.

Yeah, I mean, when you look at the Q1 same store sales going from Q4, 2000, Seventeens acute Q1 of 'twenty. There. Obviously it was a real strong surge of new members and growth at that level.

And obviously that impacts a V and drove it up quite a bit you know historically when you look at it like last year. The AAV growth you know it was still there from Q1 to Q2.

And we expect to see similar patterns you know this year, even though Q1 was really strong.

Response to upside in same store sales compared to guidance, Yeah again as I've mentioned, you know, we've always take a more conservative approach to our guidance.

Yeah, we don't we don't want to over you know over promise and under deliver.

We have some hesitancy for or conservatism built into our guidance around the outer or second half of this year given a lot of the headlines a lot of the macros.

So well continue to perform you know and in Q2, if we do see a favorable outcomes as we did in Q1, well just 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 you know to date in Q2.

They made that reflective in our guidance, so conservatives still yes, but we're doing that knowing that we cannot predict the future in the second half could face headwinds, although we haven't seen it yet.

Understood. Thanks, John Thanks, Anthony Good luck.

Our next question is from Ryan Meyers with Lake Street Capital markets. Please proceed with your question.

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 P. S T.

I mean demand has been in line with our with our other brands ripe with Rumble and those types of things.

First 18 to 24 months is primarily selling of the territories and then you know call. It six to 12 months into that you're beginning to see openings. So right now we're in the selling and lease signing.

I'm kind of process of that in construction and then you'll you'll start to see openings in the first couple of dozen openings of a b S. T. Domestically. This year and then then I'll continue to increase of course in 'twenty four 'twenty five.

<unk> was our third highest selling brand in the first quarter from a license perspective, and it's kind of it's it's tied for fourth with Rumble as far as openings in the first quarter.

Got it that's helpful. And then I was wondering if you could just quantify.

You know what the <unk> contribution was during the quarter as obviously this business has gotten larger and larger over the past couple of quarters I think it'd be helpful to kind of understand what the contribution was.

Yeah, 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, but b well they'll be about 25% of the revenue.

All of the other service revenue. So if you just took other service revenue for the quarter <unk> represented around 25% of that revenue.

Got it that's what we expect that the whole time.

And we expect that the whole consistent you know overtime.

Sure got it thank you.

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

Yeah, Hi, Thanks, Good afternoon, I just wanted 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 of.

Observations when you look across our concepts or across regions or any any trends trends that stand out to you.

Yeah. 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.

But you saw the 20% it was really driven by new members coming into the system. When you look at even at 36 months older Studios, both videos that have been opened for three years plus.

Plus they still come up with 21%, which is again new members coming into existing locations as Anthony mentioned brand aware negative CAC, you look regionally not much Ah theres not much differentiation when you look across the U S. From what same store sales you are seeing really strong same store sales in club Pilates, obviously it.

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 mid to high teens.

In regards to how their same store sales is performing so in my opinion. When you look back pre Covid. Most of our you know brands Comped at 8% on average per quarter or twice that even in the you know the brands that are in the mid to high teens. So theres no regional focus there is a little bit of brand focus related to club pilates.

But when you look across the other brands are still seeing really strong comps.

Yeah, great. Thanks for sharing that color and maybe just one follow up then I want to ask you about the health of the license pipeline that you have and you know I've noticed the last couple of years, you've cleaned up some of the legacy licenses. So could you maybe just.

Sure any perspective on what what drove some of the past terminations and sort of the health of.

The strong pipeline that you have of licenses sold.

Yeah, I mean, obviously during COVID-19 there was not a good time to terminate franchisees, we're not opening so.

So we took a big chunk of time off from doing that but the reality is contractually the franchisees have six months to get their store open.

Obviously, if it's at six months and they're painting their walls and about to open in four weeks were not going to terminate them.

If they're sitting on the couch and aren't making moves to continue with their development and if somebody wants that territory than were going to terminate it and move on.

It's really kind of whenever.

The path is the most efficient to getting stores open because we're in the opening store business not in the selling store business will always have a backlog of sold stores.

That are available for you know for us to develop them and I've said before and in past quarters. You know since we're at 10 brands. If we don't acquire an 11th brand them, we're not going to oversell. These brands regardless of how great. They are like a club pilates around what would be S T or kind of any of our brands.

You know, we're going to sell consistent with you now.

Our scientific demographic approach, which tells US you know what stores go where so that we can continue to climb <unk> like we're seeing.

For the health of our system in the house of all franchisees.

So with 10 brands and not overselling, we have always said that we are going to see.

The sequential sales of our franchises go down.

You know, we obviously have a four to five year backlog and so you know we're trying to keep that backlog frasch of people that want to open and want to develop.

Seeing the opportunity.

We'll see in Q2, where you know we have to refile all the Ftes in Q2. So there you know we're in a blackout period.

Right now in most of our brands so waiting to get you know 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.

With T F D D. And then you have to file 17 independent states. So you're talking about 18 filings times 10 brands. So the permutations there there's 180 filings out there at the exponential level.

So as those clearances come back in per brand per state than we were able to start to go service. The franchise sales part again, so, but you know where we're still selling.

Selling our opening pace and so you know we continue to sell 567 hundred a year, while we're opening five 600, a year, then where we're kind of outselling our opening pace and our backlog of four to five years isn't even being burned it still staying I'm.

So staying together so.

That's great that makes sense. Thank you.

Yep.

Our next question is from J P wall them with Roth Capital Partners. Please proceed with your question.

Hey, 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 you know 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 know you're seeing more usage during the day and that gives you guys confidence that maybe there's even further room to grow a vs. If theres any kind of.

And you can point out that'd be great.

Yeah, I can take that one they're.

There may be the one off consumer that can only go on Tuesdays at five o'clock and yeah Thursday, something like that but you are seeing are open seven days a week, we offer classes them all over the map and as we're starting to bundle and ex Pats in X class and give them different options. So that they can take anywhere anytime.

And they're able to take classes and bulk virtually on demand and in our studios so that alleviates some of the pressure.

The truth of the matter is is that if you sat back when it happens and what ends up happening at the franchise level or is that you have some natural churn them from those customers and we backfill it with a more extensive member who is willing to.

You can put up with the scheduling or has different scheduling demands.

We are also putting together various challenges in other ways that members can engage with the studio.

And what's the latest C. D. So we're always looking at ways to engage and make sure that we don't see that turn but if we do that.

And then right behind them.

To jump back in.

Yeah.

Okay.

Great that makes sense and then just maybe switching to the partnership with LG Tvs.

There's been a lot of headlines around mirror and it's it's a performance under new I mean, I'm just kind of curious.

Maybe all of that doesn't impact kind of the benefits you received from here, but just maybe help me think through the partnership with L. G. T B, a given what's going on out here.

Yeah, and so with all of our parents definitely now we really have three business models and each model and it's kind of different depending on what the partner and XL mutually agree upon.

Yeah in that case, we've already starting to see thousands and thousands of downloads of the application.

Early to see how those downloads will then convert into sustained subscribers and but we are seeing really great take they're with LNG on the near friends. You know things are performing very well, we just got keep your eyes on over the last couple of days on how the brands are performing now members are consuming our brands stand for that.

Content standpoint things are good for us with Mir.

In conversations as you know looking to distribute even more content to the platform. So regardless of where you know where it ends up our content. It will likely go with it or we'll go with it and things are looking good there.

And in terms of developing additional content. So I don't think that conversation really effects.

Ex though.

Okay, great. Thank you for your time best of luck.

Thank you.

We have reached the end of the question and answer session I would now like to turn the call back over to Ana. Thank Eisler CEO for closing comments.

Thanks again for joining today's earnings call and for your continued support I would also like to acknowledge our franchisees an entire exponential fitness team for their strong operational execution. In this first quarter. We look forward to seeing many of you at our upcoming marketing events as May and June and we'll speak to you again in August on our second quarter call.

Yeah.

Yeah.

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