Q2 2023 Xponential Fitness Inc Earnings Call
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Ladies and gentlemen, please remain online this evening will begin shortly ladies and gentlemen, please stay online what does he bring to begin in a few minutes. Thank you.
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Greetings and welcome to the exponential fitness.
First quarter 'twenty to 'twenty three earnings conference call.
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A brief question answer session will follow the formal presentation.
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It is now my pleasure to introduce your host everyone in Mecca Investor Relations. Please go ahead.
Thank you operator, good afternoon, and thank you all for joining our conference call to discuss exponential fitness second quarter 2023 financial results.
I am joined by Anthony Geisler, Chief Executive Officer, Arizona, President and John Malone, Chief Financial Officer a.
A recording of this call will be posted on the investors section of our website at Investor Dot 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 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 information about our operating performance that should be considered by investors in conjunction with the GAAP measures that we provide a.
A reconciliation of these non-GAAP measures to comparable GAAP measures is included in the earnings release that was issued earlier today prior to this call.
Please also note that all numbers reported in today's prepared remarks refer to global figures unless otherwise noted I will now turn the call over to Anthony Geisler, Chief Executive officer of exponential fitness.
Thanks, Dave and good afternoon, everyone. We appreciate you joining our second quarter earnings conference call I'm proud to share yet another consistent quarter of results that continue to highlight the strength of our business and the health of our franchisees.
On the call today, we will address several key concepts aimed at providing additional clarity on the business. We will also be speaking about these items in more detail at our analyst and Investor Day on September six when we will provide a full overview of the business and financial performance lay out company strategy and discuss longer term growth metrics.
Let's turn to our second quarter results exponential franchisees now operate nearly 2900 studios globally with over 5800 licenses sold across our 10, leading fitness brands, we have franchise master franchise and international expansion agreements in 19 countries outside of North America.
Total members across North America saw growth of 29% year over year to a total of 697000 at the end of the second quarter over 90% of these customers are actively paying members.
Along with growth in our membership base North American studio visits for the second quarter increased by 32% year over year, reaching a total of $12 9 million.
This drove record North American system wide sales of 341 million, which represents a 37% increase over the second quarter of 2022.
Q2, North American run rate average unit volumes of 561000 were up 17% from 480000 in Q2 of 2022 or 12 straight quarter of ANV growth.
We continue to believe that a UV growth is the most direct measure of our franchise systems health.
Worth America same store sales growth remained strong at 15% in the second quarter, and we were particularly pleased with the performance of our more mature cohort with studios over three years old increasing same store sales by 16% now.
Now that we're further removed from Covid impacted time periods. We believe this metric has begun to normalize John will speak about these calculations in more detail shortly.
Turning to revenue.
For the quarter net revenue totaled $77 3 million, an increase of 30% year over year adjusted EBITDA totaled $25 3 million in Q2, or 33% of revenue up 43% from $17 6 million or 30% of revenue in the prior year period.
Let's now turn to our four strategic growth areas I'll discuss our first three and then turn the call over to Sarah to discuss our fourth.
Beginning with the increase of our franchise studio base. We ended Q2 with 2892 Global Open Studios opening 141 net new studios in the second quarter. We sold 234 licenses globally in Q2, 2020 three with about 30% of licenses bought by existing franchisees.
Bringing total sold licenses to 5872.
We also continue to have an increasing pipeline with almost 2000 licenses sold are contractually obligated to open on a global basis, excluding our master franchise agreement obligations.
We are always pleased when an existing franchisee purchases additional licenses as it reinforces their satisfaction with our model and the success of their businesses.
In fact over 56% of our studios have owners, who have purchased multiple exponential licenses looks.
Looking at this in a bit more detail. Our average franchisee has bought 2.6 licenses with 1.3 Studios currently open.
Turning to our next growth driver International expansion, we have over 1000 studios obligated to open under Master franchise agreements of note. Just recently, we announced the signing of a master franchise agreement in France for a club Pilates brand, which represents our 19th country outside of North America.
The agreement gives the master franchisee the opportunity to license a minimum of 75 club Plotty Studios in France over the next 10 years and is indicative of Exponentials approach to international expansion, where and we partner with World class experienced operators, who can rapidly scale our brands.
As a reminder, our msas are structured to provide exponential with high margin flow through we typically receive a percentage of revenue share with very little corresponding SG&A.
Exponential is currently targeting approximately 50 countries with our 10 existing brands or potentially 500 different MFA opportunities, which provides significant white space for future growth.
Our third key growth driver is to expand margins and drive free cash flow conversion.
Adjusted EBITDA margins again increased to 32.6% during the second quarter demonstrating continued operating leverage as we continue to scale holding company owned transition studios will create headwinds weren't optimizing margins. Therefore going forward, we no longer will take on company owned transition studios as of the date of this call we are off.
Operating 38 company owned transition studios and have nine corporate La fitness studios under our club Pilates and stretch lab brands. We plan to continue operating these nine studios in order to prove out the la fitness non traditional studio concept the.
The company owned transition studios currently generate an immaterial amount of net operating loss we.
We plan to Refranchising studios down to zero, and we will no longer take on any company owned transition studios going forward. We are confident this shift in strategy will drive additional leverage to SG&A expenses, while also benefiting <unk> in the long run.
Importantly, as John will speak to shortly we are raising guidance on several of the guided metrics for the year. We remain on track to achieve adjusted EBITDA margins in the 35% to 39% range by year end and adjusted EBITDA margins of 40% in 2024.
We look forward to providing an overview of the business and financial performance lay out company strategy and discuss longer term growth metrics at our analyst and Investor Day on September six at the New York Stock Exchange.
With that I'll pass the call on to Sarah to discuss our fourth and final growth driver, increasing our same store sales and a <unk>.
Thank you Anthony we drove strong NCD or performance in the second quarter and further built out our ecosystem of B to B partnerships strengthened our omnichannel fitness offering and continued refining our ex pass at X plus services.
The second quarter, North American visitation rates grew 32% year over year, and our North America actively paying membership base grew to over 628000 members with our product continuing to be very sticky and playing an integral role in our members' lifestyle exponential continues to retain its membership base.
Exponential aimed to ensure that members have access to a boutique fitness experience that matches their individual needs and interests.
Let's now discuss how our omnichannel offerings helped drive customer engagement, resulting in higher same store sales and a these.
Our ex pass offering is one way, we enhanced customer engagement by having frictionless access to all 10 of our brands on a single recurring monthly membership platform and.
Inception to date, there have been over 60000 bookings made on X pass ex pass is beneficial for both consumers and franchisees. It provides consumers with flexibility to snack across fitness modalities, while driving new regeneration for MTO memberships.
This quarter, we will be introducing an advertising channel into the ex pass app to give exponential studio customers access to third party exclusive offers launching in categories, such as mental health apparel and healthy Foods. This initiative will drive further benefit to our members while serving as another means for driving incremental lead flow to the studios.
X plus is the second critical element of our omni channel approach.
X plus allows our customers to access digital classes at all 10 of our brands from the comfort of their own home and as a supplement to in person classes at our studios.
Many of our subscribers also hold NCD memberships, including those who have subscriptions through their brick and mortar memberships.
We're constantly developing new content for our X plus platform and we're excited to see this digital channel continued to translate into increased consumer stickiness and brand affinity.
Also during the quarter, we solidified and X plus licensing deal with our master franchise or for B F T, which enables us to offer on demand classes to members across 250 International B F T locations.
We are excited to introduce our omnichannel experience to global consumers and expect to pursue similar licensing deals with other mfa's.
B to B partnerships like our relationship with Princess cruises are the third key element of exponential the Omnichannel strategy.
These partnerships provide a means of reaching new audiences generating revenue and creating lead flow with little or sometimes negative acquisition costs.
As of the end of Q2 pure Barre Yoga sex and stretch lab have been launched across the entire fleet of Princess cruise ships.
In addition in September we will have our first one of a kind see going to retreat for club pilates wishes to set sail in Alaska.
Ladies classes will be offered by top notch instructors and that's Alaskan glaciers and mountains and in conjunction with Royal Princesses culinary entertainment and activity options.
This experience is already selling itineraries and we intend to launch future retreats across our other brands.
The renewal, we announced with Lulu Lemon in June is another Great example of a BTB partnership that is helping to grow exponential member.
Members of Lulu Lemon CTO constraints, a diverse range of workouts, featuring pier bar Rumble, AK T and yoga classes.
As well as take advantage of discounted classes at the brick and mortar locations of these brands across North America.
The cross promotional offering is an efficient and effective way of introducing new customers to our brands and building an enduring interest in exponential fitness as modalities.
In the second half of 2023, we will continue to explore additional <unk> partnerships to enhance our X plus X pass offerings to further build out our omni channel fitness capabilities.
Through these offerings, we look forward to expanding the breadth and depth of tools available to our franchisees to bring people into the exponential ecosystem drives a higher customer retention and create a world class fitness experience.
As a portfolio company, we have the ability to leverage our scale, our vendor relationships, our omnichannel offerings and partnerships across all of our brands to ultimately achieve the goal of driving more members into the franchisees studios.
Accordingly, our performance data validates this as CTO level Kpis continue to grow each quarter.
Thank you again for your time I'll now turn the call over to John to discuss our second quarter results in 2020 three outlook.
Thanks, Matt.
Great to speak with everyone today before diving into our results for the quarter I'd like to discuss our calculations for average unit volumes and same store sales both of which have been consistently defined and calculated throughout our history.
I will also provide clarity on a historical and go forward treatment of studio closures under Katie I reporting and how they would be categorized as well as provide an overview on how to think about brand level economics.
Starting with North American quarterly run rate average unit volumes.
We define this as the average quarterly sales activity for all studios that are at least six months old at the beginning of the respective quarter multiplied by four to get an annualized number.
So deals with zero sales in the period as well as our 19 L. A fitness locations.
We are and have always been excluded from this calculation.
With that said inclusion of zero sales studios in nontraditional locations would not result in a material difference to au vs.
For Q2 2023, our calculation for run rate of U V. A 561000 included 99% of our entire North American video base older than six months.
When including 100% of studios run rate would have been just 1% lower.
Similarly, when calculating our north American same store sales, we have followed the industry standard practice of including only studios that have 13 months of continuous sales activity as disclosed in our SEC filings.
Our Q2 2023 same store sales are 15% included 97% of our North American video base older than 13 months.
For Q2 2022 same store sales of 25% included 98% of these studios.
Turning to the go forward treatment of studio closures under our Kpis are reporting.
Any studio that does not have sales for nine consecutive months, we'll now be deemed closed for K P. I reporting purposes.
We have provided a full reconciliation of video counts under this new method in the 10-Q.
It is important to note that applying this new method to historical figures results in minimal differences.
Turning to brand level data exponential has always taken a portfolio approach to its brands, where there was a diversification of modality and varying levels of revenue performance, depending on the maturity of the brand we will be providing more detail on the unit level economics that underpin our portfolio of brands.
Which we'll discuss at our upcoming analyst and Investor day.
It is important to point out that our well established brands in North America at scale, meaning brands that have over 150 Open studios in North America, which include club Pilates stress lab pure Barre cycle bar and yoga six represent more than 90% of our total studio base at quarter end.
And generate weighted average <unk> of approximately 578000. These brands have existed for several years that have had time to develop a strong following among members typically driving higher and movies.
Our five growth brands, which include Rowhouse Rumble B F T stride and AK T account for less than 10% of our studio based in North America at quarter end.
These brands have had the benefit of exponential support system for shorter time periods, you continue to mature and the brand awareness and membership base.
Our established brands generated 16% Q2, 2023 same store sales and make up 94% of North American system wide sales.
As the brands mature the studio a vs and corresponding franchisee profitability will improve as the largely uniform operating expenses are leveraged, noting some slight variations driven by labor and other expense items.
Our brands have roughly the same monthly operating expenses.
These expenses can vary across designated market areas for example, rent and labor costs in New York City would typically be higher compared to Louisville, Kentucky.
The exception to the operating expenses occurs more frequently in our stretch lab and pure Barre brands stress lab has a higher labor costs, given the mostly a one on one model, but also generates higher au vs.
Peer of ours has more of an owner operator model that allows the owner to internalize some of the expenditures they would otherwise have for labor in some instances franchisees of lower AED concepts have transitioned from semi absentee owner operator in order to reduce labor costs and internalize more of their overall spend.
Now turning to our results for the second quarter, North America system wide sales of $341 3 million were up 37% year over year.
The growth in North American system wide sales was driven primarily by the 15% same store sales in the existing base of open studios that continue to acquire new members, coupled with 115, New North American studios that opened in the second quarter.
On a consolidated basis revenue for the quarter was $77 3 million up 30% year over year.
Reoccurring revenue for the quarter was 74%, which we have consistently defined to include all revenue streams, except for franchise license sales and equipment revenues given these materially occur upfront before studio opens.
That being said all five of the components that make up our revenue grew during the quarter.
Franchise revenue was $35 1 million up 27% year over year.
This growth was primarily driven by an increase in royalty revenue as member visits and system wide sales reached all time highs. In addition, we saw increased instructor trading revenues and higher monthly tech fees that will continue to increase as we open more studios domestically.
Equipment revenue was $14 4 million up 17% year over year. This increase in equipment revenue as a result of continued higher volumes of global equipment installations. In addition to a higher mix of equipment intensive brands like B F T rubble.
Merchandise revenue was $8 4 million up 24% year over year. The increase during the quarter was primarily driven by a higher number of operating studios and increased foot traffic compared to the prior year.
Franchise marketing fund revenue of $6 6 million was up 34% 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 for processing studio system wide sales b to B partnerships ex path and X plus amongst other items was $12 8 million up 62% from the prior year period. The increase in the period was primarily due to increased revenue from sales generated in our company owned trans.
<unk> studios increased rebates for the processing of studio level system wide sales and our higher revenues from our b to B partnerships.
Turning to our operating expenses cost of product revenue were $14 2 million up 5% year over year. The increase was primarily driven by a higher volume of equipment installations for new studio openings and a higher mix of equipment intensive brands in the period.
Cost of franchise and service revenue were $3 7 million down 18% year over year. The decrease was driven by fewer license terminations in Q2 of 2023.
Selling general and administrative expenses of $44 4 million were up 52% year over year.
As a percentage of revenue SG&A expenses were 57% of revenue in the second quarter up from 49% in the prior year period.
As Anthony spoke to earlier, we expect our shift in strategy regarding company owned transition studios will begin to have a positive impact in the second half on this line item and drive leverage in SG&A. We are already executing on the plans to ramp down These studios, who will share additional detail on the positive impact this will have.
The analyst and Investor day.
Depreciation and amortization expense was $4 3 million, an increase of 20% from the prior year period.
Marketing fund expenses were $5 5 million up 34% year over year, driven by the increased spend afforded by higher franchise marketing fund revenue.
Acquisition and transaction expenses were a credit of $31 3 million versus a credit of $31 6 million in the second quarter of 2022 as I noted on prior earnings calls the contingent consideration is related to the Rumble acquisition earn out and is driven by the share price at quarter end we.
Mark to market the earn out each quarter and our crew for the earn out.
We recorded net income of $27 5 million in the second quarter compared to a net income of $31 5 million in the prior year period.
The slightly lower net income was the result of $5 3 million of higher overall profitability offset by <unk> 4 million increase in noncash contingent consideration primarily related to the rubble acquisition of.
A $1 6 million increase in noncash equity based compensation expense.
And a $7 2 million increase in right out of brand assets associated with taking on a number of rubble founder company owned transition studios in the period.
We continue to believe that adjusted net income is a more useful way to measure the performance of our business are.
A reconciliation of net income to adjusted net income is provided in our earnings press release.
Adjusted net income for the second quarter was $4 2 million, which excludes the 31.3 million gain in fair value of noncash contingent consideration a point 7 million liability increase related to the second quarter Remeasurement of the company's tax receivable agreement and the $7 2 million noncash.
Cash write down of brand assets.
This results in adjusted net earnings of five cents per basic share on a share count of 33 million shares of class a common stock.
After accounting for income attributable to Noncontrolling interest and dividends on preferred shares.
Adjusted EBITDA was $25 3 million in the second quarter up 43% compared to $17 6 billion in the prior year period adjusted.
Adjusted EBITDA margin grew to 33% in the second quarter compared to 30% in the prior year period as a reminder, our 2023 outlook anticipates adjusted EBITDA margins, reaching the 35% to 39% range and we expect this number to grow to 40% from 2024.
Turning to the balance sheet as of June 30 of 2023 cash cash equivalents and restricted cash were $40 2 million up from $29 3 million as of June 32022.
Total long term debt was $265 6 million as of June 32023, compared to $131 7 million as of June 30th 2022. The increase in total long term debt is primarily due to the repurchase of 85340 shares of convertible preferred stock.
The price of $22.07 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.
As mentioned on previous earnings calls the company remains focused on optimizing our capital structure, if market conditions prove favorable the company intends to pursue a whole business securitization of a repeating revenue streams, which should provide cheaper access to fixed rate financing in place of our existing fleet.
<unk> term loan debt.
Now turning to our outlook based on current business conditions and higher levels of performance in the second quarter. We are increasing our full year 2023 guidance for system wide sales revenue and adjusted EBITDA and we are reaffirming guidance for new studio openings as follows.
We expect 'twenty to 'twenty, three global new studio openings to remain unchanged in the range of $5 40 to $5 60.
This range represents the highest number of studio openings in our company's history, and an 8% increase at the midpoint over 2022.
We now expect North America system wide sales to range from 1.385 billion to 1.3 95 billion up from the previous 1.37 billion to 1.38 billion or a 35% increase at the midpoint from the prior year.
Total 2023 revenue is now expected to be between 295 million to $305 million up from the previous 290 million to 300 million a 22% year over year increase at the midpoint from the prior year.
Adjusted EBITDA is now expected to range from $102 5 million to $106 5 billion up from 102 million to 106 million, a 41% year over year increase at the midpoint from the prior year.
This range translates into a roughly 34, 8% adjusted EBITDA margin at the midpoint.
In terms of capital expenditures, we anticipate approximately 10 million to $12 million for the year or approximately 4% of revenue at the midpoint.
Going forward capital expenditures will be primarily focused on the BMT integration ex path 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 that would be.
$32 7 million at $1.9 million in quarterly dividends to be paid related to our convertible preferred stock.
A full explanation of our share count calculation 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 our corporate structure and capitalization F. Q on our Investor website.
Finally, before turning the call over for questions I want to communicate that our board of directors on August 1st has authorized a new up to $50 million share repurchase.
Our lender MST capital has already amended our term loan financing agreement and is funding the capital to complete the repurchase.
Pro forma adjusting for this incremental $50 million in term loan debt. That's helping you will have less than three times net debt to adjusted EBITDA for the full year 2023 based on the midpoint of our guided range.
Thank you for your time today and for your support of exponential we will now open the call for questions operator.
Thank you Sir.
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Our first question is from Randy Conic of Jefferies. Please go ahead.
Hey, guys. Thanks, a lot very thorough presentation lots of good data for us to to.
To dig in on so I guess, the one thing that really struck me on the AAV side was eight it's very strong and then you talked about strength in visitation growth during the quarter, but maybe could you give us some perspective, if you think about that <unk> strengths quarter quarter in the quarter year.
Per year give me give us some kind of.
Bounce it out with how much is like visitation growth some pricing maybe mix, but the mix change mix shift with a.
The higher AZ concepts just wanted to get your perspective on you know what's.
What's driving that overall number.
Yeah, I'll take that so the system wide sales growth that you saw from Q1 to Q2 again is consistent with prior quarters Youre getting 95% of system wide sales growth two different ways. One from obviously opening up new studios, but two it's it's volume it's not it's not price. That's so it's simply the 95, 5%.
Did that calculation reaffirm in Q2 is very similar that it's 95% volume.
And visitation when you think about visitation in the summer months, you typically see more families take vacation. So visitation was a flight to roughly to Q1, but you still have the benefit of us growing system wide sales and remember so you'll see that kind of in the early part of Q3 as well July as more of a summer travel months all kids are out of school.
Rents tend to take more vacation so visitation.
Months is relatively fast, but when you look at historical patterns and seasonality August and September you'll see when kids go back to school parents, usually have more time and they kind of returned back to their.
Their workout regimens, but visitation is is still greater than Q1.
But it is flat when you look at it from like June to July .
Understood and then.
On the additional country I guess rents up to 19 countries now and maybe give us some flavor on what's been developed so far how that's been going what maybe differences youre seeing from your your Msas are in the different regions or countries and then kind of how you're thinking about the pace of new country are open.
<unk>, let's say over the next three to five years that'd be very helpful. Thank you.
Yeah, I can take that one and we've got a lot of development out there in terms of potential we mentioned that there's 50 countries that we've identified and times 10 brands. So 500 total msas that we can go out and develop them and pursue them in terms of the recent msas with that Switzerland, Ireland as well as France those are existing franchise.
Partners of our domestic studios that has decided to open abroad, which is really exciting to see them and they are in the early stages of going out and looking for leases and developing out the studios. So we should know soon how they perform but we feel very confident in the performance of our franchise partners given that their strong performance domestically.
And then follow that up R&D like looking into the future in regards to your question around what is the openings internationally look like compared to the domestic it's going to follow suit. We've been right now the total mix is around 90 10 with 90 per cent domestic 10% international but we've been selling in opening closer to $75 25. So you know assume.
You know long term metrics, you know north of 500 units a year you could probably assume about 25% of those will come internationally over the coming years.
Super helpful. Again, thanks for all the data guys I appreciate it.
Okay.
Thank you.
The next question is from Joe <unk> of Raymond James. Please go ahead.
Thanks, Hey, guys. Good afternoon, I guess, the first question I wanted to dig a little deeper into the studio economics, what percentage of your studios that are open more than a year longer than a year are profitable on a four wall basis.
Yeah. So when we talk about studio economics, you'll typically see in the first 12 months studios ramp to about 380000 ish, which is above the breakeven level.
We've provided that information before so the majority of our students apartment students majority of our our studios are arrive at that you know in the first year and then they typically come in the mid to high single digits. After that you know we saw 8% on average pre COVID-19. The model largely reflects that the studios get two studios.
Get to like I said 380000.
In their first year, and then they typically comp around 8% after that per year.
Okay helpful. And then maybe a second question you mentioned that.
You do expect to get this in.
Studios down to zero at some point, what what time frame are you thinking about.
Yeah, well, Joe as we as we said the you know the studios or the actual unit count of the studios are down about half from what they were in Q1 and recently in Q2.
So you know the remaining balance in the portfolio doesn't lose any material money. So we've we've never looked at the unit count of studios is an indication of franchisee health.
You know the the unit number itself. It's always you know what are the Nols and what is the headwind to SG&A that we're concerned with is we're not concerned with the actual number.
So these stores that we have now that 30 plus stores that are kind of our four wall brick and mortar stores, you know don't lose a lot of money for us and so there's not a lot of pressure to offload those right away.
But we will be doing that in balance of making sure that the winners and the losers that are left in that portfolio are giving us the least amount of headwind and that's what we're focused on right is SG&A and Nols. So in other words, we don't want to we don't want to sell the winners can be left with all the losers and that's been the strategy from the beginning.
And so if I had to throw a guess out there you know we're targeting by the end of the year.
Or you know kind of Q1 of next year, but we want to do good deals that are accretive to.
The company you know some of these stores. We've we bought for you know a lot less than what they are actually worth and so you know we'll be going out making sure that we do the best deals possible for the company, but given that there's there's not a lot of leakage.
We're not we're not trying to necessarily offload them real quickly and then the nine la fitness says, we're operating eight of which are club pilates and one of which is a stretch lab will continue to probably operate those a little bit longer as we are just proving out that concept because franchisees wanted to see it as a concept works.
We do have several franchisees that are operating at la fitness is doing very well with them.
So we want to be operating them here locally and in southern California.
Okay. Thanks, guys.
[laughter].
Thank you.
Next question is from Alex Perry with Bank of America. Please go ahead.
Hi, Thanks for taking my questions here I guess, just first to follow up on some of the earlier questions can you talk about sort of franchisee profitability and cash on cash returns sort of by concept versus pre COVID-19.
Is it fair to say sort of bike.
The clubs that have the concepts with the most 10 year like a called Pleiades are have better cash on cash returns and maybe like a grow house or some of the more nascent concepts just any more color you can give us on sort of that.
Economics by concept would be really helpful. Thanks.
Yeah, Alex So we will double click on that in the Investor day, we debated whether or not this was the right for him. So he had to divert into that and it's just it's too much data to try and.
Doing a five minutes kind of Q&A session, but.
To think about it that way.
Talked about 40% cash on cash returns at certain levels of <unk>, we are seeing a lot of our brands produce more than that from.
From an <unk> perspective, and we continue to keep climbing.
The scale brands for sure you know those as we talked on the call you know north of 575000, roughly on a weighted average <unk>. So their cash on cash returns are much higher than the as design model, which we've largely spoke about you have brands in the we'll call. It not at scale be FTE Rumble, you know those are already coming out opening at <unk>.
500000, plus avs so in year. One so you can actually expect to see the cash on cash returns that are there.
We do have brands.
And in the unskilled like stride.
You know Rowhouse 8-K T.
Model.
Talk to into the in the call in relation to you know how those studios can operate at lower <unk>, but yet generate similar margins if they go to more of an owner operator model versus.
You said that absent T model so.
Definitely we'll provide a lot more detail on that in the Investor day and give more clarity you guys. So you can see it more at brand level, how we think about the business and how they're performing.
So I would say stay tuned on that but we're excited to kind of delve into that in about a month.
Perfect and then I guess just my follow up question is is it a two part it.
How much visibility is there an antique unit growth outlook for this year is that sort of based on leases that have already been signed and so you have a high degree of confidence there and then maybe one more for you John just the $7 $2 million add back a write down of brand assets can you just give us a little more color.
You know what what that is that'd be really helpful. Thanks.
Yeah, I'll start with a seven point to are.
In Q2, the original route Rumble founder studios, those where as part of our agreement when we purchased that business. They would be exiting at a certain point that happened in Q2, we did assume those studios. So the ones and you know a lot of the major markets. We have those so we will be looking to get those re franchised over time so.
That was one of the.
That was what the seven point to really reflects in essence, when we bought the brand.
Intangibles were assigned to the franchise agreements Ah because that's what was outstanding now that we own the the studios the franchise agreements are no longer outstanding. Therefore, you would not hold them onto your balance sheet.
From.
And accounting perspective, and apologies what was the first question.
Just the visibility into the growth outlook for this year.
So it really strong I mean, we've always talked about the fact that lease signings as the greatest early indicator of how many studios youre going to have opened we consistently side and have been consistently signing lease agreements from the beginning of this year. We knew how many we signed kind of going into Q3 and Q4. So how many were coming into this year so for our.
Active the visibility into the openings is very strong we usually have about a good six to nine month view forward looking views. So we can almost tell you.
You know not only what's going to happen in Q3, and Q4, but we pretty much have a good idea in Q1 of next year already so the guidance around city openings, we set at the beginning of the year. It's been unchanged. We've moved guidance around in regards to revenue and adjusted EBITDA in system wide sales yeah. We've raised those as they've continued to perform in Q1 and Q2, but we haven't moved.
The studios because the visibility we have is pretty strong I mean, it's pretty structured in the sense that when somebody signs a franchise agreement if they go out they acquire elyse.
And is there is that six to eight months, where they're building up a studio in getting hoping so you're always kind of looking at things a couple of quarters ahead of time. So once we sign the lease we already know in about two quarters when that city. It was gonna open so it's pretty pretty static from that perspective, So short answer to your question.
Feel really strong and really good about the guidance that we put out there for new studio openings this year.
Perfect. That's really helpful best of luck going forward.
Thank you.
Thank you. The next question is from Brian <unk> of Morgan Stanley . Please go ahead.
Yeah. Thanks, good afternoon.
John could you just comment on SG&A expense, given you know where you're running year to date, and then any impact of the kind of the transition studio strategy.
Yeah, Great question. So SG&A in Q2 was higher than it was in Q1 that has to do with you know the number of transitions.
Transition studios that we had on the books looking forward into Q3 and Q4.
As we've made this shift in strategy as we start low lowering SG&A costs.
Because we don't have the operating cost of rent and labor in our SG&A Youll expect SG&A to start coming down over time so.
In the second half you'll see that.
A pair it pretty quickly so the way you can kind of think about it as you know we were you know I think it was close to the high 50% range and in Q2 I would expect to see you know as we ramped our studios that the SG&A as a percentage of total revenue will hit below 30%. So it is a function of how quickly we.
You know kind of ramped down these studios you know as Anthony mentioned.
The goal you know loose goal that we kind of talked about it was it would be great to have them all done by.
End of the year, but you will see it get into the low 30% range as we are.
As we kind of re franchisees studios back out.
Okay, Yeah that makes sense and in just with that are you.
How will it change going forward in the sense that are you just going to take a more active role in kind of brokering franchisee to franchisee deals do you think that there might be an occasional closures. If you know you can kind of find a suitable buyer or like how how might we see the impact of that.
Yeah, as we said in the earnings script.
We will be.
<unk> I guess studios differently in the sense that if we feel that we can in a reasonable amount of time get the city you either re franchised or turned around you know, we will invest resources and the time to do that if the studio you know there are situations where studios just no longer makes sense. If they were in a large grocery anchor.
That the angry moved or the center just kind of for whatever reason doesn't really have a lot of foot traffic.
It would be in the best interest of the franchisee to relocate that to a better location.
But in situations, where it's just not a viable still do anymore. You know I think you will start seeing the company and look to closures as a as a as a path.
But in the short term you know we're going to go ahead and focus on getting this the studios ramped down on our side and then we'll work with franchisees to assess what's the best option for them and operating their city all going forward, but yeah, we will be assisting obviously with tools and resources from a sales perspective make sure. They're following the model look at relocations, if it's more of a center.
Q.
To kind of address studios.
On a case by case basis.
Okay. Thank you.
Yeah.
Yeah.
Thank you. The next question is from Jonathan Pumpkins bed. Please go ahead.
Yeah, Hi, Thank you good afternoon, everyone. So I wanted to just ask about the same store sales trend that you're seeing.
You know first quarter, you're you're at 20% second quarter at 15% strong numbers, but obviously different ways you could interpret that.
The trend and trajectory. So can you give any more insight.
And in terms of the trend that you're seeing for same store sales and then any color you know what we should expect going into the back half.
Yeah.
Yeah, So first quarter, obviously, 20% as you mentioned, 15% in the second quarter I do see obviously system wide sales as they continue to grow I do expect to see same store sales normalize overtime I mentioned on previous calls that I do believe in 2023, or so you know benefiting from a pretty strong.
Growth perspective on city I was getting into.
They kind of grow into maturity as we continue to have more studios youre going to see elevated same store sales over the coming quarters mid to high single digits is still my long term.
You know kind of you know.
Guidance or expectation on how studios were performed but I do expect you know 2023 and to be in the mid teens. The 15, 16% range and same store sales you look in the second half of this year as I mentioned Q3 is typically a strong quarter. When you look at it quarter on quarter and you see strong growth so I do it.
Back to Q3, and Q4 to stay somewhat elevated as you benefit from people as I mentioned, the seasonality going back to Keith.
Kids going back to school parents start going back to their workouts from vacation and then also in Q4, we always have our you know.
Black Friday holiday promotions, and we typically see strong sales in that quarter. So I expect you know, 16% ish range for the full year, I think Q3 and Q4, you'll see.
Around that level as well.
And then as you kind of roll into 2024, as we kind of continue to monitor assess measure see how studios are opening up we'll get a better idea, but long term mid to high single digits as you start looking beyond 2023.
Got it that's helpful color and then.
I wanted to follow up to ask about the board's decision.
To initiate the buyback program and to do so with taking on incremental debt just any thoughts to the.
The process, there and weighing the different options relative to using internally generated cash or further simplifying the capital structure. I know you bought back some of the preferred shares in the past or the convertible debt excuse me. So just any additional thoughts on that.
The thought process and how the board may have settled down the path of it then.
Yeah, I mean, we finished the quarter with $40 million in cash, obviously, we announced a $50 million repurchase.
The long term goal was always to kind of put in place a more efficient capital structure with the securitization. So we had always talked about the preferred shares and wanting to repurchase those its all to me. It's all fungible, whether its class a class b preferred the ultimate goal is to have us as few shares out there.
Possible I guess from an anti dilutive perspective, so you know for us the way we looked at it as you know that that was available to us we have a great partner a M S D who.
Hum.
Offered to say, hey, listen we'll be willing to give you guys. The capital to do the shares because they also see this as shareholders from their perspective, but they also see it as the stock being undervalued at these levels. So it was easy access for us to get the cash.
Would we ideally would have loved to just done all the repurchase of shares on the preferred you know.
Under our securitize model, yeah that makes it easier, but given the timing and the and the share price.
We'll go ahead and take the debt in the short term, we were going to refinance that out anyway. So to me. It's just a timing issue of being able to do it now at a lower price and taking advantage of that.
Yeah, and not to mentioned our leverage is pretty low you know were just over two times, so even borrowing the $50 million, we're still at roughly just under three times levered. So.
It makes it easy for us to do it.
Got it I appreciate the color. Thanks again.
Thank you. The next question is from Ryan Meyers with Lake Street Capital. Please go ahead.
Hey, guys. Thanks for taking my questions first one for me just wondering if you can comment on if you've seen any changes in the willingness of potential franchisees to open up more studios.
Yeah.
Yeah. So have some data on that related to the number of licenses, we still I mean, the licenses we sold in Q2 about a third of them came from existing franchisees. When you look at the number of studios that opened in Q2, 50% of them came from existing franchisees, so you're continuing to see new franchisees.
Opening studios and buying licenses, but the existing franchisee and installed base we have.
Most of them by around three licenses that are continuing to open those license and again like I said half of them that opened in the quarter were existing franchisees and a third of our license sales that we sold this quarter came from existing franchisees, so they're continuing to come back to buy more.
Got it that's helpful color and then can you maybe talk about how multiunit franchisees performed relative to single franchisees is there any differences there just kind of as a follow up to my last question.
Yes, typically what you see is city franchisees that own multiple locations the benefit to them as they get to they get the economies of scale right. So there's the ability for them like a marketing perspective to market across all three of theirs versus just one specifically, so theres actually benefits to the franchisee.
Operating more even from a general manager perspective, you could manage that across three so you'll get the benefit of sharing our labor resources.
In case of instructor called out sick. So theres there was actually a lot of benefits for operating multiple not to mention if you open one you typically will open in the second one better than the third one better than that because you get the benefit of of kind of experience and learnings from the first one to the second one the third one so you typically see.
Franchisees opened their second one they actually perform better out of the gate because they have all of these these are less.
Lessons, they've learned and are actually opening the first one.
Got it that makes sense, thanks for taking my questions.
Thank you very much Chris.
Jim This is John Heimbach, who else Guggenheim. Please go ahead.
Hey, guys. This is Julie amortize on on for John Heimbach will see if.
If you guys could touch on you had mentioned you improve cost and our product and franchise revenue, but if you think about the profitability of our product equipment.
Could that improve with scale.
One reason, we can pull there and then the follow up.
Any thoughts on the weekly kpis any signs of changing our behavior.
It would be great. Thank you.
Yeah in regards to our retail equipment margins, we did kind of back in coming out of Covid. We spent some time with our equipment manufacturers and made sure that.
As there are supply chain issues that we have the sufficient equipment packages available to meet the demand of the number of studios. We're opening so we can in lieu of negotiating Oh, you know what I'm kind of past the gun.
Hum.
Price increases what we did is we did more firm commitments on volume to manage our price increases. So we've done a good job of stabilizing prices across our equipment roughly again, 30% margin when you look at retail.
We use a mix of both branded and non branded vendors the branded vendors like Aloe as an example, you.
You know franchisees could you know order directly from the vendor.
And in return, we get rebates for volume associated with the purchases and facilitating that relationship we have an entire warehouse here in Tustin, California, where we actually inventory you know both branded and unbranded as well that our franchisees have the ability to buy at a lower cost than they could.
If they went to certain vendors directly because we have you know pre negotiated cost with them and then they in return our franchisees could turn around and so.
The the wholesale inventory they purchase for us at a retail price and make margin typically you know, we recommend somewhere closer to you know 40% to 50% retail margins.
They follow the recommendations we provide so or margins you know equipment retail combined is 30%.
Largely believe that will remain unchanged and.
And that's really intended the margins we make are really intended to manage the supply chain, which is everything from vendor negotiations to the cost of warehouse to the cost of the staff doing the packing and shipping and all the a lot of inbound freight from getting it from our suppliers. So largely margins will remain unchanged into the future.
Okay.
Awesome. Thank you and just very quickly on the weekly.
Weekly Kpis and any changes that you're seeing.
Oh weekly K pad, yeah. Following up on that no as I mentioned visitation is is is I would say seasonally flat due to the summer months.
We haven't seen.
Any like increases in cancellations or you do typically see in the month of July more freezes on your memberships because people are out of town. So that you know rather than getting charged there their monthly membership they could avoid paying.
Paying it while they're on vacation you typically see August and September that ramps back up year on year. When you look at July of 2023 versus July of 2022 our freezes are actually less than they were prior year. So it does show that members are still saying somewhat engaged are more so than they were last year in the same month.
July but it is more of a seasonal impact, but nothing indicates any sort of shift or change in our member behavior. It's just more seasonal so August and September will be able to have a better indication of how people will come back and return it back to the studios, but classes systemwide sales same store sales continue to show really strong moment.
Into Q3.
Awesome. Thank you.
Thank you. The next question is from Warren Cheng of Evercore.
Hey, good evening John Anthony.
I was wondering what kind of constantly seem to finish is either sitting in there and they're constantly build what have you.
Your publicly traded competitors talked about a pretty significant increases in cost and do them. Obviously you reiterated your guidance.
Guidance, but im just curious what level your franchisees are seeing as they as they build new stores a year ago.
Yeah in percentage you know, we're all going to see the same kind of thing, but in real dollars for us it's not massive.
And the reason is is when you think of our box. It's you know 500 square feet not.
15000, or 25000 or 50000 or if it's a lifetime. It you know it can be bigger than that and so.
They build a lot of you know, there's a lot of showers and bathrooms and and things like that.
So it's it's a much bigger box. So there's a lot more walls. There's a lot more electricity is a lot more plumbing, which means a lot more engineering and planning and all that stuff and so on.
You know, it's the percentages will be the same but the build outs are a really cheap just given the size and the scale that they are if you think given their most complex builds you really have two <unk> or three walls, you're really building a box inside a box. So in some cases, you're you're building a wall just straight.
Across the back or you're building a wall that comes out of the Midland goes to the left and so there's just not a lot of walls that are dry walls. There's you know there's something like a stretch lab now called plot is pure Barre.
You'll get six or so theres not a lot of electric work that has to get done in a stretch lab for instance, which is a lot of our openings.
This year, the only thing that really plugs in as the front computer.
And then our little maps program as Ana and iPad that stands there, but that's the only kind of the two pieces of electric so and a lot of electric wiring you'll have a single bathroom are our men's and women's bathroom, depending on the size of the box so not not a lot of work to do so there's less dollar impact.
That makes sense. Thanks, Anthony My follow up question was just on Randy's question earlier on the higher visitation.
These numbers are these new members finding you see as you know developed a lot of new sources degeneration recently, just curious if there's.
Certain ones are the most fruitful driving visitation.
Driving new family members.
Yeah. Great question, we are leveraging all of our <unk> partners and of course, you know constantly improving S. C O N T.
Our marketing efforts, but really looking at the overall blended CAC and making sure that we've got grassroots initiatives, coupled with digital marketing initiatives that are coupled with our b to b partnerships. So all of that is now starting to.
Really kick and push leads and she has of course are ex Pats in X plus also and you know not near reads I'm, bringing to them.
Oh, and then recycling those leads them through those channels tend to bring them back to life. So that they're excited to come back into our studios again.
Thank you good luck.
Thank you. The next question is from Keith <unk> syndrome.
<unk> Securities. Please go ahead.
Hi, everyone just to clarify regarding the company on studio Count decline from Q1 to Q2 all of those studios were sold correct.
It was it was flat from Q1 to Q2 roughly around 85 studios, we had and at the end of Q1 and the same amount in Q2, the studios that we talked to in the earnings.
<unk> release earlier was the ones that we've already sold so we've already about half of those have already been sold off to a new operator.
So we're on the way are already kind of executing on that strategy to unload and re franchise. The studios that we have to be more detailed though they werent. They werent flows they were sold to existing franchisees yeah.
Okay. Okay I just wanted to clarify that thank you.
And then I know this is maybe something you don't want to say something else, but just lost anyway regarding your individual brands.
Can we say that all of your brands are comping positive with increasing E D.
And then I guess any insight you could share around.
Retention member metrics around any of the end of our individual brands that were maybe standouts favorably or not as favorably.
Yeah. So when you look at Q2, and let me explain something B F. T. As a brand actually had a negative comp, but that's because there's really only like a handful of studios and they were one of the original studios when we bought the brand which is in Santa Monica. It does like a million plus in a UV. So you start opening more younger brands that are pulling into ever more studios.
Or in the column and it naturally will just kind of average out. So when you look at Q have you take that out of the mix nine out of the excuse me eight of the nine remaining brands all had positive same store sales in the quarter with one with a negative and it was like minus 2% and it was it was a brand that has.
I would say, it's an unskilled brand that doesn't have a lot of studios open. So it's really just noise.
Okay. So we would think that as that one scale it should start to comp positive and so forth yeah as you get more and more I guess you could say data points. You're you know we've continued to see and it was just in that quarter that it was it was I would say flat to up 2% on a nominal number of studios, but kind of reinforcing that.
Our scaled brands.
They generate.
They're 90% of the studios that are open and 90% plus of the system wide sales are generated out of more of a concentration of five.
Brands.
Uh huh.
Well that's helpful sounds pretty healthy to me that's for sure.
Taking your questions.
Thank you very much thanks.
Thank you. The next question is from George Kelly of Roth Capital Partners. Please go ahead.
Hey, everyone. Thanks for taking my questions. So first one for you John in your prepared remarks, you talked about a lot of your studios being owner operated.
Just curious if you had sort of a ballpark estimate of.
Your total studio base what percent of them are operated that way.
And asked another way if that's too much detail, which brands are most our most.
Concentrated there.
Yeah to give you give me a call and said that's really directed more at Pier bar brand pre acquisition.
As I mentioned most of our the sales we do in it I suppose we recommend franchisees by three right because they get the economies of scale and the benefit of operating multiple locations Pier bar originally when we acquired the brand most of the franchisees that existed bought one it's more of it's not like a three to one.
Z for three studios as more one franchisee the one studio.
Model at which they and I wasn't I wasn't here back then but it appears the model that they did is they would be owner operator kind of model. So it's largely the pure Barre count that you could say <unk> fits that now when you look at post Expo acquisition.
The <unk> for the pure Barre franchisees that have opened up post our acquisition is much higher it largely reflects the overall expo average from that perspective. So it is just a difference in whether or not a franchisee has is running their studio more as a personal business versus kind.
Something that generates a lot more sales when they run it to try and build a you know I would say many enterprise of you know two to three units to generate more profit so a different different better for model different strategy now the one thing that's really interesting about our model and we prove this out during Covid is the model does have flexibility, where if a franchise he doesn't want to be more involved in the day to day.
Operations and work within the studio they have the ability to do that lower their opex cost, but largely we promote a saturday semi absentee kind of model from an operations perspective, and encourage franchisees to to operate more than just one studio.
Okay excellent and then second question for you is on X pass.
I think that.
You said theres been 60000 cumulative bookings through X pass so curious if I heard that right and part two is.
What is your plan to accelerate that business as you know.
Looking to 2024 or beyond like are we getting to the point, where you've seen enough, where you feel comfortable maybe boosting marketing spending or something else behind it.
And that's all I had thank you.
You did hear that correctly. So we've had 60000 bookings to date and we'll actually have more to talk about and dive into the at the analyst day coming up in September .
And we've got some new initiatives there with that cash.
Okay understood. Thanks.
Yeah.
Thank you. Our next question is from Green roof Myer Centre apart.
But that's only 5%, but please go ahead.
Hey, good afternoon, thanks for taking the question and congrats on the corner.
Quickly just one for me I wanted to touch on a little bit on the CAC and maybe more of an investor day question as well, but can you just talk about like is there a way to quantify the level of kind of like that negative cash you are getting from your D partnerships.
Obviously that other category has been growing nicely inside that is baked into that and then as you think about the longer term trajectory.
<unk> partnerships in that negative CAC, you're generating how are you thinking about the longer term opportunity and how big that really can get over.
Thanks.
That's really going to depend on each of the partnerships and the type of read plenty of ethane you know, we're bringing in and we've already got partnerships like class password Springs and.
Flow.
And then some of our other b to B is that we'll have you know new leads coming into the system are kicking off them to put it into perspective, we did see that year over year. There was a decline in CAC and CPL. So from an annual standpoint, you know, we're seeing things moving in the right direction, specifically given that our <unk> partnership and.
Our strategic business Division really just launched about a year or so ago. So now those deals are done they're launching and we're starting to see the benefit of that across the system.
Thank you.
Thank you very much.
And gentlemen, we have reached the end of a question and answer session.
I'd like to turn the floor back over to Anthony.
Got it.
Thanks again for joining today's earnings call and for your support as we alluded to earlier, we'll be hosting an analyst and Investor day on Wednesday September six the New York stock exchange at the event, we plan to give the investment community and in depth look at our business and drill down further on the company's long term strategic initiatives and growth opportunities we hope to.
I see many of you there and for those unable to attend in person a live video webcast will be available on our Investor Relations website in closing we remain very bullish on the direction of exponential fitness is heading and look forward to continuing to support our franchisees partners and customers every step of the journey. Thank you.
Okay.
Ladies.
Ladies and gentlemen, we have reached the end of this.
Conference and you May now disconnect your lines at this time, thank you for your participation.
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