Q4 2024 Xponential Fitness Inc Earnings Call
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Speaker Change: Greetings and welcome to the Xponential Fitness Inc. 4th quarter in full year 2024 earnings call. At this time, all participants are to listen only mood.
Bargain Boy: and Pennywood should require operator assistance, please press star zero on your telephone keypad.
A question and answer session will follow the formal presentation.
Bargain Boy: You would be placed in the question queued any time by pressing star one on your telephone keypad, and we ask you please ask one question and one follow-up that returned to the queue.
Bargain Boy: It's time for my pleasure to turn over to your host, Avery Wanamaker, Investor Relations. Avery, please go ahead.
Avery Wanamaker: Thank you, Operator, good afternoon, and thank you all for joining our conference call to discuss Xponential Fitness, Fourth Quarter, and Full Year 2024 financial results.
Avery Wanamaker: We remind you that during this conference call we will make certain forward-looking statements including discussions of our business outlook and financial projections.
Avery Wanamaker: These four 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.
Avery Wanamaker: or a more detailed description of these risks and uncertainties. Please refer to our recent and subsequent filings with the SEC.
Avery Wanamaker: We assume no obligations to update the information provided on today's call.
Avery Wanamaker: 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 and conjunction with the GAAP measures that we provide.
Avery Wanamaker: A reconciliation of these non-GAAP measures to comparable GAAP measures is included in the earnings and release that was issued earlier today prior to this call.
Avery Wanamaker: Please also note that all numbers reported in today's prepared remarks refer to global figures unless otherwise noted.
Avery Wanamaker: As a reminder, in order to ensure period over-period comparability and consistent with our reporting method since IPO, we present all KPIs on a fully-proformer basis.
Avery Wanamaker: Meaning for the full KPI history presented, we only include brands that are under art ownership as of the current reporting period.
Avery Wanamaker: for the period ended December 31, 2024. This includes AKT, BFT, Club Pilates, Cycle Bar, Lendora, Pure Bar, Rumble, Stretch Lab, and Yoga Six.
Avery Wanamaker: I will now turn the call over to Mark King, CEO of Xponential Fitness.
Mark King: Thanks Avery and good afternoon to everyone. Let me start by talking about what's going well.
Mark King: As I expected when I joined last June , many of the fundamentals of the business are strong. North America's system-wide sales of 465 million were up 21% year-over-year.
Mark King: North America quarterly run rate average unit volumes of 668,000 were up 9% year over year.
Mark King: Total members stood at 813,000 at quarter-end, up 15% year-over-year. We sold 400 franchise licenses and opened 464 gross new studios during 2024.
Mark King: So there are parts of the business that are performing well. However, as is also clear from the press release you may have seen earlier this afternoon, there are also parts of the business, both brands and corporate operations that simply aren't where we need them to be.
Mark King: Let me first delve into what we're doing since with last spoke and then I'll talk about some of the things we've discovered operationally that will require some pretty big changes.
Mark King: Let me start with some thoughts on where my team has been focused and the progress we have been making. I should note that all the things we have been executing on are prerequisites to achieving the five strategic pillars I spoke about last quarter.
Mark King: Perhaps most importantly, we're continuing to build out a senior management team comprised of leaders who know how to profitably scale companies and who know what great looks like.
Mark King: Our new hires, including our President of North America, our Chief Operating Officer, our Chief Development Officer, and our Chief Technology Officer, are best in class.
Mark King: and I am confident in their ability to transform all the parts of the business necessary to become the franchise or of choice in health and wellness.
Mark King: With a great team in place, we've also completed a comprehensive organizational assessment that showed gaps in structure, capabilities in process.
Mark King: Let me give you some of the detail of what we found and how we're addressing things.
Mark King: First, we're in the process of forming field operations teams that will be physically present in studios across North America, working alongside our franchise partners to drive industry leading studio operations.
Mark King: Having this level of field support is critical for any successful franchise operation to achieve not only successful profitable studio operations, but also to create a culture of continuous innovation and relentless focus on delivering world-class member experience.
Mark King: Second, until recently, franchise sales teams operated autonomously from real estate and construction.
Mark King: By bringing in an experienced chief development officer and uniting real estate, franchise sales, and construction all under one leadership vertical franchise development.
Mark King: I believe we will be able to be more strategic and more efficient in the development of our brand footprint.
Mark King: In addition, we have departed from our historical, broker-network, franchise license sales strategy, and instead brought the full process in-house further ensuring we have maximum control over strategic development.
Mark King: Third, we are rethinking the layout of our studios both to maximize productivity per square foot and to ensure our box formats become more market customized, both in terms of size and placement. We believe this will drive studio profitability and customer traffic flow, ultimately benefiting both our franchisees and members.
Mark King: Fourth, and continuing on the customer experience front. Our COO will be overseeing learning and education at Xponential, which is an important new role.
Speaker Change: His primary goal is to create a thoughtful member journey from the ground up, which in my experience is one of the most important drivers when it comes to long-term customer retention.
Fifth, our CTO is focused on two key areas.
Speaker Change: Enhancing enterprise applications and platforms as well as a relentless focus on data and analytics.
Speaker Change: We planned to introduce technology solutions for our studios that will benefit both franchisees and members focusing on areas such as enterprise resource planning, operational platforms, and our point of sale system.
Speaker Change: From a data perspective, Xponential is fully driving towards becoming a data-centric company. We will do all of this against a backdrop of strengthening our IT systems and overall cyber resiliency.
Speaker Change: Though John will speak more specifically about what we expect financially in 2025.
Speaker Change: Against a broader overall focus on franchisee performance, overall excellence and culture. I'd like to highlight a few key tactical areas that will be focused on moving forward.
Speaker Change: As I said last quarter, I see no reason why Xponential shouldn't have as many studios operating outside the US as it does domestically.
Speaker Change: Though we'll share a long-term vision for this during our investor day later this year, we are most focused on expanding our solid international footprint for club Pilates.
Speaker Change: followed by strategically adding more exponential brands in key international markets with the mature club Pilates presence.
Speaker Change: Xponential will have on the ground leadership in Europe and Asia starting in the coming months and quarters as part of our commitment to support our international studio operations.
Speaker Change: Leadership will be based out of London initially with presence in Asia expected later this year. Second, we will drive innovation in all aspects of our business. We've all become accustomed to rapid innovation in various aspects of our daily routines.
Speaker Change: In 2025, we're not only going to focus on what's working, but we're also going to help our franchisees more regularly exceed their customers' expectations.
Speaker Change: At Taco Bell, innovation was a huge part of our success. We constantly monitored consumer sentiment.
I'm excited to build an innovation department here at Xponential.
Speaker Change: Number three, data. Data is becoming more central to every industry and health and wellness is no exception.
Speaker Change: At Xponential, we have access to a vast amount of data, but the real opportunity lies in building the right foundation to harness it effectively.
Speaker Change: Before I turn the call over to John , I'd like to speak frankly about the EBITDA myths and the overall health of the portfolio.
Speaker Change: Though John's going to speak in detail about her financial results.
Speaker Change: I would like to be clear about what they mean from my perspective.
Every successful transformation is rooted in transparency.
Speaker Change: Here as I've done everywhere else, I've impressed upon my team the need to examine everything we do from ground up and I've instituted this culture of transparency.
Speaker Change: Inevitably, as part of this exercise, we have found and may continue to find legacy operational issues that need to be addressed.
Speaker Change: Some of these are and might continue to be reflected in our financial results.
Speaker Change: Our hope is that they won't be material, but to the extent we do uncover issues that need to be addressed, we will address them.
Speaker Change: You may have seen from the press release that the company restated 2023 financial statements and that the company also corrected what it believes are immaterial errors in 2022 and 2024 financials.
Speaker Change: This was done in order to correct accounting errors primarily related to a crude inventory, 401k compliance, purchase accounting and vendor rebates.
John will provide more detailed thoughts.
Speaker Change: On the one hand, it's not surprising to me that we are encountering some of these issues. They represent a combination of rapid scaling and lack of organizational maturity.
Speaker Change: Most companies that grow quickly go through some version of this given that the very same things that make companies grow quickly, initially, can often be impediments to long-term sustainable scale.
Speaker Change: On the other hand, we need to be clear that the goal here is to, from ground up, build a culture and infrastructure with corresponding structure and processes that will ensure exponential scales in a long term sustainable manner.
Speaker Change: Practically, this means that 2025 largely is going to be a year of foundation building, allowing for growth to re-accelerate in the out years.
Speaker Change: We will discuss all of this in more detail during our investor day in May in New York.
Speaker Change: I understand that this will be a disappointment to some of our stakeholders, but the last thing I want to do is to over promise and under deliver.
Speaker Change: John is also going to share with you some brand level economics as we typically do during our Q4 calls.
Speaker Change: On brand strategy broadly, I'll say that we're in the process of thoroughly reviewing whether and to what extent our portfolio needs to change so that shareholder capital is best allocated.
Speaker Change: Those of you who know me know that I've led through situations like this before, and I've learned a lot from those experiences.
I've learned that perspective and context are important.
Speaker Change: I've also learned that an experienced team can build enormous value when they focus relentlessly on constructing a scalable foundation under their most valuable assets. That's what we're here to do.
John , over to you.
Speaker Change: Thanks, Mark, and thank you to everyone for joining the call. I'd like to start by noting that today in our earnings press release. We announced that the company restated 2023 financial statements and the company also issued what it believes are immaterial correction to 2022 and 2024 financials.
Speaker Change: This was done in order to correct accounting errors primarily related to accrued inventory, 401k compliance, purchase accounting and vendor rebate.
Speaker Change: There are additional other corrections that will be detailed in our Form 10K financial statement footnotes.
Speaker Change: Collectively, these corrections would be too large to take as an out of period adjustment in the current period, so are making revisions in the prior periods.
Speaker Change: These corrections, which are known as a big R restatement, represent our release that the errors were material to the company's previously reported 2023 financial results. However, we do not believe that these corrections affect the company's overall financial
Speaker Change: Furthermore, the company has also come in below the range of where it had guided to on the Q3 2024 earnings call for gross new studio openings and adjusted EBITDA.
Speaker Change: Gross new studio openings missed by 36 studios coming in at 464, versus the expected 500 gross new openings at the midpoint of the range, a miss of 7%.
Speaker Change: This was driven by an operating decision to let videos open on a more organic timeline.
Speaker Change: Adjusted even a miss by 5.8 million or 5% coming in at 116.2 million for the year, instead of the expected 122 million at the midpoint of the range.
Speaker Change: The lower evada was primarily driven by 2.3 million in lower equipment margins, which included the effects for the higher freight costs in the period.
Speaker Change: 0.6 million and overall lower merchandise margins, which include a 1.2 million write-off of slow-moving inventory, 1.2 million in combined expenses for bad debt and low liabilities, and 0.5 million
Let's now turn to an overview of our fourth quarter results.
Speaker Change: We ended the quarter with 3,233 global open videos opening a 120 gross new studios during Q4 with 83 in North America and 37 internationally.
Speaker Change: There were 65 global studio closures in the fourth quarter, and 225 total in 2024, representing approximately 7% of our global open studios versus the 3 to 5% previously communicated.
Speaker Change: The elevated closures in the period were attributed to stretch lab, cycle bar, and yoga thick.
Speaker Change: We sold 56 licenses globally during Q4 and 400 licenses in 2024. The volume of licenses sold was lower in the period compared to prior quarters due to a pause in sales while we closely reviewed and updated each brand's franchise disclosure documents.
Speaker Change: We anticipate franchise disclosure documents for the year 2025 to be filed in the coming week as part of the normal renewal process.
Speaker Change: Our base of licenses sold and contractually obligated to open is over 1,600 studios in North America and over 1,000 master franchise obligations internationally.
Speaker Change: These licenses will provide a foundation for the future new studio opening. I'll be at note that as of December 31st, 2024, we estimate that approximately 30% of our licenses can actually be obligated to open are over 12 months behind the applicable development schedule and are currently inactive.
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Speaker Change: Fourth-quarter North America system-wide sales of $465 million, we're up approximately 21 percent year-over-year with growth driven primarily by the 5 percent same-store sales increase within our existing base of open studios.
coupled with the growth from new studio openings. [inaudible]
Speaker Change: In 2024, Systemwide Sales increased approximately 23% to 1.7 billion from 1.4 billion in 2023, at full year Saints to Our Sales, we're 7%.
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Speaker Change: North America run rate average unit volumes of 668,000 in the fourth quarter increased 9% from 612,000 in the prior year period.
Speaker Change: The increase in AUVs were largely driven by a higher number of actively paying members.
Speaker Change: Higher pricing for new members and the continued favourable trend of proportionate studio openings coming from our scale brands which make up 95% of the system wide sales and 94% of our open studios in North America.
Speaker Change: On a consolidated basis, revenue for the quarter was 83.2 million, down 7% from 89.3 million in the prior year period, which included 5.1 million in revenue from the company owned studios.
Speaker Change: In 2024, Xponential generated 320.3 million in revenue, a 1% increase from the prior year.
Speaker Change: 78% of the revenue for the quarter was recurring, which we define as including all revenue streams except for franchise territory revenues and equipment revenues given these materially occur upfront before studio opens.
Speaker Change: Turning to the components that make up revenue, franchise revenue for the quarter was $45.3 million of 17% year-over-year.
Speaker Change: This growth was primarily driven by an increase in royalty revenue, as system-wide sales were supported by year-over-year memberships and visits increasing 15 and 19 percent respectively.
Equipment Revenue was $12.7 million, declining by 22% year over year.
Speaker Change: This decrease was primarily the result of a lower volume of installations in the period compared to the same period prior year.
Speaker Change: Merchandise revenue of 6.1 million was down 34% year-over-year. The decrease year-over-year was due to lower sales volumes and price discounts as the company focused on reducing inventory levels.
Speaker Change: Going forward, the company will continue to explore alternatives for our retail operation that will result in greater profitability for Xponential, improved service levels for our franchisees and merchandise that more closely aligns with our members' interests.
Speaker Change: franchise marketing fund revenue of 9.2 million was up 23% year-over-year, primarily due to continued growth in system-wide sales from a higher number of operating studios in North America.
Speaker Change: Lastly, other service revenue, which includes sales generated from company-owned studios, rebates from processing video system white sales.
Speaker Change: B2B Partnerships, XPATH and XPLUS, amongst other items, was $9.9 million down 43% from the prior year period.
Speaker Change: The decline in the period was primarily due to our strategic move away from company-owned transition studios in 2023, resulting in lower-package and membership revenues.
Speaker Change: Turning to our operating expenses for the quarter, cost of product revenues or 13.7 million down 23% year-over-year. The decrease was primarily driven by the lower volume of equivalent installations and merchandise sales during the period, as well as year-to-date recalasy of expenses from our cost of product revenue to cost of franchise and service revenue.
Speaker Change: Merchandise inventory levels at year-end are now roughly 50% lower than the prior year-end, creating a more manageable position to turn inventory over more frequently, requiring less discounting
Speaker Change: Costs of Franchise and Service Revenue were 6.1 million, up 29% year-over-year. The increase in franchise sales commissions was driven primarily by the previously mentioned year-to-date reclass of expenses from cost of product revenue to cost of franchise and service revenue in the period.
Speaker Change: Selling General and Administrative Expenses of 57.1 million were up 8% year over year.
Speaker Change: The increase in SGNA was primarily driven by 18.1 million in legal fees during the quarter to address regulatory inquiries and accruals for various potential franchise legal settlement, with partial offsetting cost savings related to no longer operating company owned studios.
Speaker Change: We do anticipate that a portion of our legal costs in 2025 will be offset by coverage from our insurance policy.
Speaker Change: Imperiments of Goodwill and other assets of 46 million were up 849% year-over-year. The increase was primarily associated with the one-time impairment of Goodwill and the tangible assets of 41 million related to BFT, cycle bar, and rumble.
Speaker Change: In addition, there was 2.7 million in write down in the right of use assets for permanently closed studio leases in connection with our restructuring plan and 2.2 million for impairment of our expath software assets.
Speaker Change: At present, we have entered into least settlement agreements of approximately 30.3 million and have paid approximately 28.1 million through the fourth quarter.
Speaker Change: As of December 31, 2024, we have approximately 15 million of lease liabilities yet to be settled. We expect the majority of the remaining liabilities will be settled in the first half of this year.
Speaker Change: Moving on to depreciation and amortization, expense was 4.5 million up 8% compared to the prior year period.
Speaker Change: Marketing fund expenses were 5.9 million, down 8% year-over-year driven by lower spend in the quarter, primarily for club quality.
Speaker Change: To avoid competing with presidential election media coverage, in holiday advertisements in Q4, this lower spend has been committed to the first quarter of 2025.
Speaker Change: As the number of studios and system wide sales grows, it is expected that our marketing fund increases.
Speaker Change: Since we are obligated to spend marketing funds, an increase in marketing fund revenue will always translate into an increase in marketing fund expenses over time.
Speaker Change: Acquisition and Transaction Expenses were 1.9 million compared to a credit of 1 million in the prior year period.
Speaker Change: As I have noted on prior earnings calls, this includes the contingent consideration activity which 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 a crew for their earn out.
Speaker Change: We recorded a net loss of $62.5 million in the fourth quarter or a loss of $1.36 per basic share compared to a net loss of $12.3 million or earnings of $3.00 per basic share in the prior year period.
Speaker Change: The change in that loss with the result of 4.7 million of higher overall profitability, a 7.1 million decrease for financial transaction fees.
A 2.2 million decrease in restructuring related charges.
Speaker Change: Offset by 41.1 million increase in impairment of goodwill and other assets.
A 17.1 million increase in litigation expenses. [inaudible]
Speaker Change: A 3 million increase in acquisition and transaction expense, which includes a non-cash contingent consideration primarily related to the rumble acquisition.
Speaker Change: A 1.3 million increase in transformation initiative cost, a 1.2 million increase in contract settlement cost, and a 0.5 million increase on the loss of brand ambassador.
Speaker Change: We continue to believe that adjusting that income is a more useful way to measure the performance of our business.
Speaker Change: A reconciliation of net income and loss to adjust the net income and loss is provided in our earnings press release.
Speaker Change: Adjust the net loss for the quarter, what $7.1 million, which excludes $1.9 million in acquisition and transaction expenses, $1.1 million expense related to the remeasurement of the company's tax-receivable agreement.
Speaker Change: 46 million related to the impairment of Goodwill and other assets, 0.5 million loss on brand of usagers, and 6.9 million related to restructuring and related charges.
Speaker Change: This results in a Joseph Net loss of 19 cents per basic share on a share count of 32.9 million shares of Class A common stock.
Speaker Change: Adjusted EBITDA was 30.8 million in the fourth quarter, up 13% compared to 27.2 million in the prior year period. The adjusted EBITDA margin was 37% in the fourth quarter, down from 38th from the previous quarter and increasing from 30% in the prior year.
Speaker Change: For 2024, our Joseph EBITDA was 116.2 million, up 16% compared to 100.3 million in the prior year period.
Speaker Change: I'd now like to provide a comprehensive summary of our annual results that include more granular brand level metrics and data.
Speaker Change: It's important to note that this additional data will only be provided during our Q4 calls.
Speaker Change: At times, I will discuss our scale brands in our portfolio, where those brands with greater than 150 studios operating in North America, which currently includes club hallades, cycle bar, pure bar, stretch lab, and yoga six.
Speaker Change: In 2024, the strongest license sales occurred at Club Pilates with 215, Lendora with 84 and BST with 46. These three brands represented 86% of the 400 licenses sold this year.
Speaker Change: Most license sales occurred in North America with 63% and the balance of 37% internationally.
Speaker Change: For gross openings, Klopolotti's led with 236 followed by Stress Lab with 84 and BFT with 59, representing 82% of the 464 new studio openings this year.
Speaker Change: New studio openings largely occurred in North America with 76% and the balance of 24% internationally. Over time, international operations are anticipated to become a greater percentage of the total new studio hoping.
Speaker Change: System White Sales are driven directly by the number of studios operating in the maturity of those studios. It is expected that the brands with the growing number of studios will continue to generate higher proportions of our system white sales as AUDs increase.
Speaker Change: Our scaled brands represented 94% of North American studios operating at year end and contributed 95% of the system wide sales in 2024.
Speaker Change: Club Pilates with 175 studios operating at year end in North America, contributed 56% of our total system-wide sales for the year.
Speaker Change: Peer of R with 625 and stress lab with 502 studios operating, contributed approximately 13% and 15% respectively.
Speaker Change: Run rate, Average Unit Volume, increased 9% and reached 660,000 at year-end.
Speaker Change: Amongst the scale brands, four of the five brands had AUV increases year-over-year, Stretch Lab's AUV decreased 8% year-over-year to 550,000.
Speaker Change: We continue to view Runway AUD as one of the key measurements of franchisee health and will remain an area focused to enhance performance through the initiative's Mark spoke to earlier.
Speaker Change: Same-source sales across the portfolio have normalized to the mid-to-high single digits for the year as expected, with Club Pilates at 12% continuing to over-influence performance due to its scale.
Speaker Change: Within the other scale brands, Yoga 6 and Pure Bar had same-store sales of 6% and 3% respectively for the full year, while Psychobar and Stretch Live had negative 3% and negative 5% respectively.
Speaker Change: Turning to the balance sheet as of December 31, 2024, cash, cash equivalents, and restricted cash were $32.7 million, down from $37.1 million as of December 31, 2023.
In 2024, the company's cash position decreased by 4.4 million.
Speaker Change: For the year, net cash provided by operating activities was 11.7 million, which includes 24.5 million in lease settlements.
Speaker Change: NetCast used in investing activities was $14.1 million with material cast usage of $8.5 million for the acquisition of Lendora and $6.5 million for the purchase of property and equipment and intangible assets.
Speaker Change: The cash used in financing activities was 1.9 million, which included a 25 million borrowing on long-term debt.
11.2 million on tax receivable agreement and tax distributions.
Speaker Change: to Pre-IPO LLC members, 5.8 million on preferred stock dividends, and a 3.5 million payment on a promissory note liability.
Thank you.
Speaker Change: Total long-term debt was $352.4 million as of December 31, 2024.
compared to $328.5 million as of December 31, 2023.
Speaker Change: The increase in total long-term debt is primarily due to the company drawing $25 million in additional debt in the third quarter of 2024 to address the least termination payments on previously owned studios and for general working capital purposes.
Speaker Change: We are in the process of finalizing an amendment to our credit agreement with our existing lenders. Our interest rate and repayment terms will be similar to our existing agreement. We will continue to seek more inexpensive capital with more favorable terms and ultimately seek to complete a whole business securitization.
Speaker Change: Let's now discuss our outlook for 2025 based on current business conditions and our expectations as of data this call. We are issuing the following guidance for system-wide sales, global news video openings, total revenue and adjusted EBITDA for the current year as follows.
Speaker Change: We project North America's system-wide sales to range from 1.935 billion to 1.955 billion, representing a 13% increase at the midpoint from the prior year.
Speaker Change: We expect 2025 Global Net News video openings which is net of closures to be in the range of 200 to 220 representing a 12% decrease at the midpoint from the prior year.
Speaker Change: We expect a number of closures to be five to seven percent of the global system this year as a percentage of total open studios with a longer focus to reduce global closures to allow to meet single digits as a percentage of the total global system.
Speaker Change: Total 2025 revenue is expected to be between $315 million to $325 million, representing no change year over year at the midpoint of our Guided Range.
Speaker Change: Adjusted EBITDA is expected to range from 120 million to 125 million, representing a 5% year-over-year increase at the midpoint of our guided range. This range translates into roughly 38% adjusted EBITDA margin at the midpoint.
Speaker Change: We expect total SGNA to range from $130 to $140 million.
Speaker Change: When further excluding the one-time lease restructuring charges and regulatory legal defense expenses, we are expecting SGNA of 115 to 120 million and a range of 99 to 104 million when further excluding stock-based costs.
Speaker Change: In terms of capital expenditure, we anticipate approximately 10 million to 12 million for the year, or approximately 3% of revenue at the midpoint.
Speaker Change: Going forward, Capital Expenditure will primarily focus on our Data Transformation Initiative, Brand Application and Platform Enhancedence, and General Technology Investments that support our digital offerings.
Speaker Change: For the full year, our tax rate is expected to be mid to high single digits, share account for purposes of earnings per share calculation to be 34 million, and 1.9 million in quarterly cash dividends related to our convertible preferred stock.
Speaker Change: A full explanation of our share count calculation and associated pro-forming EPS and adjusted EPS calculations can be found in the tables at the end of our earnings press release, as well as our corporate structure and capitalization FAQ on our investor website.
Speaker Change: We anticipate our unlovered free cash flow conversion to be approximately 90% of adjusted to EBITDA as we require minimal capital expenditure to grow this business.
Speaker Change: We continue to expect that our anticipated interest expense in 2025 will be approximately 45 million.
Speaker Change: Tax expenses to be approximately $10 million, including the cash usage for tax receivable agreement and tax distribution to pre-IBO LLC members.
Speaker Change: and approximately 8 million in cash dividends related to our convertible preferred stock, resulting in leverage adjusted even a cashflow conversion of over 40 percent.
Speaker Change: This concludes today's prepared remarks. Thank you all for your time today. We'll not open the call for questions. Operator?
Speaker Change: Thank you. Now, I'm conducting a question and answer session. If you'd like to be placed in the question queue, please press star 1 on your telephone keypad. And as a reminder, please ask one question, one follow up, then return to the queue.
Speaker Change: Our first question today is coming from Chris O'Call from Steeple, your line is now live.
Thanks. Good afternoon, guys.
Speaker Change: First, John , can you help us understand the Komp performance that is embedded in the...
2020-25 system sales guidance, I think it's called...
for 13% Growth.
Speaker Change: Yeah, the assumption that we have is what I stated in the guide is, you know, we're looking for about mid-single digits as an expectation around Komp.
The split obviously changes amongst brands with Kompalates.
Speaker Change: You know, has been over indexing to a higher percent historically, but when you take it into context of the entire portfolio, you should expect to see about a mid-single digit comp for 2025.
Mark King: and then Mark, I know you've been focusing on revamping the franchise recruiting process.
Mark King: Can you provide an update on what you believe needs to change and how quickly you believe you can rebuild that pipeline with franchisees that are going to more in line with the type of operators you're hoping to target?
Well, first of all, hi Chris, how are you?
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Good.
Speaker Change: I would say this, we've hired a new Chief Development Officer.
who has a lot of experience in the franchise world.
I'm very excited about having him on board.
The first thing we've done is we've put...
Speaker Change: All of the functions of franchise sales, real estate and construction under his purview, so where we were very fragmented before, we have now one unit that works as one, and they're up and running today, so that's number one.
Speaker Change: Secondly, we've definitely taken a different approach or we will when we start selling, again after the FDDs are filed.
Speaker Change: that you can buy one, two, three, you can buy whatever you want so we're not going to be overly aggressive and selling the number of franchises or the number of licenses.
Speaker Change: and then the third is, we really want to make sure that...
Speaker Change: The people that we're selecting, one are committed to being an entrepreneur and a franchisee that have the capability to run a small business in our well capitalized. So those are new requirements that have higher standards, I would say, that I think gives us a better chance to have really successful franchisees going forward.
Speaker Change: Okay, thanks. One last one, John . Did you see how many gross openings you're expecting for 2025?
Speaker Change: We just know what we did change from gross to net this year in our guide. The 375 is kind of the midpoint for the gross openings and we expect about 165 closures in that net number so it should get you to 210 which is the midpoint.
Great. Thanks, guys.
Speaker Change: , , , , , , , , , , , , , ,
John Heimbachel: Thank you. The next question is coming from John Heinbockel. We're going to have partners. Your light is now light.
John Heimbachel: Mark, what's your assessment of stretch land in terms of the negative comms?
Speaker Change: and then if you look at four wall economics for the franchisees, particularly with some of the brands that are comping negatively.
Speaker Change: How would you look at that and I know you talked about being holistic with the brands, you know, it's sort of the idea here that, you know, some of the brands, I don't know if they don't work but, you know, should you need to be smaller or, you know, should be owned by somebody else?
and he can tackle all of that.
Speaker Change: Thank you for watching. I'm Mark King. I'll see you next time.
All right, John . Well, thank you for the multi-question question.
Speaker Change: The first thing I would say is, since I have gotten here, Stretch Lab had-
Speaker Change: then slowing so it's not something that's brand new for us.
Speaker Change: So we're all hands on deck looking at everything at stretch lab. Starting with, how do we qualify more flexologists in an easier way? It's very expensive, it's time consuming, which is one of the challenges is to have enough.
Speaker Change: Labor to be able to take in more people to be stretched. So that's number one. The second thing is we're looking at how we're deploying our marketing resources, looking at moving more of those to local marketing, to drive more efficiency, and be more involved in the community. We're looking at different programs, like corporate programs, recruiting corporations in that to offer it to their membership. So honestly, John , we're looking at the whole model to see if...
Speaker Change: There's things that we can add there. We're also looking at, and we've experimented with this in the past, but we're looking at it again. Is there a way we can do group stretch and not just one at a time? So I would say right now everything is on the table. We've got some of our best resources in-house looking at it and have quite a few workshops going on to drive that. And then the last thing is that we need much better communication with our franchisees, the ones that are out there and are experiencing this.
So we're trying to build...
Speaker Change: A platform for them to be able to contribute, you know, all the things they know.
Speaker Change: As it relates to the other brands, we are looking at everything and I said that at the last earnings call that we're going to take 2025 to look at.
Speaker Change: the non-scale brands to see, is there the opportunity and what's the capital requirement to drive those brands? That's ongoing. We're only in early March, but all of those decisions will be made sometime during the year.
Speaker Change: Okay, thank you, and then maybe my follow-up. I knew you want to grow internationally. I assumed that...
Speaker Change: You talked about boots on the ground, right? So you're going to have, I guess, some people in London, some people in Asia. What sort of the extent of that? And is the idea here? You talked about building around club Pilates, so there will be more of a focus on specific countries, right? Where club Pilates is strong? Yeah, I think so.
John Heinbockel, John Heinbockel, John Heinbockel,
Thank you.
John Heimbachel: Yeah, I think so, John , plus BFT is also very strong internationally, so it's both the main reason for boots on the ground is as...
John Heimbachel: We start to sign up these MFA's with different master franchisors in different countries. We need to be sure that we're there to help them get started to train their staffs to make sure they're doing the right things and today we do that all remotely and they all the franchisees and we're on the world come here but we've got to be closer to them in their markets to understand how to help them with marketing, site selection and those types of things so if we're going to really grow to you know we have [inaudible]
John Heimbachel: and thousands of studios outside the U.S. We're going to certainly need people around the world. But that will be a slow build over the next few years. It's not something that will happen this year. But we are starting with a couple of individuals in London to help with the expansion in the UK and Spain and then some of the other European countries. [inaudible]
Thank you.
and many more. Thank you. Thank you.
John Heimbachel: Thank you. Next question is coming from Randy Konik from Jeffrey Viewer Live. Is that live?
John Heimbachel: Thanks. I guess Mark and John , he just clarified the thoughts around the closures. Yeah, I just want to repeat those comments and just kind of where are we with kind of that.
Speaker Change: Are we getting towards the end of the line of cleansing, the cleansing process around the real estate? I just want to get some thoughts just how you guys think about that as we go over the next couple of years. Thanks.
Speaker Change: Thanks, Randy. One of the things we're doing is just we're taking a really close look.
Speaker Change: at all the underperforming studios and we're really being more, I would say conservative, how we're dealing with those because we really need to get to where the struggling underperforming studios probably need to close.
Speaker Change: and we need to end up with the healthier system and that would help not only the brands but the franchisees that survive so we're taking a much different look at existing franchisees and really trying to air on the side of facilitating a healthier system.
Randy Connick: and he ready for following up on the lead settlement around the real state.
Randy Connick: We're getting there. We've settled, we've got it into settlements in around 30.3 million worth of
Randy Connick: We've paid cash around 28 million of it, so there's some of the leases that we've got into Payment Plans odd and kind of getting to the end of those in the first half of this year. There's about, I would say, just under 15 million, we said 15 million in the talk, but it's...
Randy Connick: about 15 million of leases that are outstanding that we need to settle up with landlords. I think these are the more tougher ones where the landlords are.
Randy Connick: Holding out. So our expectation is, you know, we're actively trying to get through those as much as powerful and get them settled, but the expectation is that, you know, the first half of the year, if we will address, you know, I would say the majority of that 15 million that's outstanding.
Randy Connick: We've actually done quite a bit already in the first quarter and they expect to continue into the same Q2 to try and get it wrapped up, so...
Randy Connick: Hopefully in the second half it will be so of an immaterial number that will be left up standing.
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Thank you.
Speaker Change: and then Mark, I think the theme that you've come up with is...
Randy Connick: This idea of less is more, you know, we don't need hyper growth, we need profitable, solid, stable growth and when you kind of get that when you talk about club Pilates or you look at club Pilates.
You know, obviously it's a...
Randy Connick: Verstable, very good business, and it seems there's these other... [inaudible]
Randy Connick: Businesses that are like so. So, you know, are you, are there kind of specific hurdle rates you're thinking about when assessing these other brands?
Randy Connick: as it pertains to looking out over the course of 2025 to think through, you know, what do we really keep here? What do we not keep? Like how are you thinking about that decision making process because, you know, I think the market really believes in club bodies. [inaudible]
Randy Connick: Lesso on the other stuff. So just kind of just want to try and get your thoughts on this idea of lessons more and how you're going about thinking about these other concepts. Thanks.
and many more. Thank you. Thank you.
Yeah, I-
Randy, I think it all starts with Franchisee profitability.
Randy Connick: Any of these brands, if we can figure out, and we're looking at that now, the different size boxes and, you know, does yoga six need to be hot yoga, can it be different? So we're looking at all those, because for me, it starts with franchisee profitability. So what does that need to be, it needs to be 20, 25% EBITDA margin at a studio level, and if we can do that, franchisees are going to want to grow, they're going to want to open up new ones. So for me, it's all around, can we get these brands profitable at the franchisee?
Randy Connick: and the challenge when you run a portfolio is you can't invest in all of them and that's why for me less is more because it'll give us an opportunity to take whatever capital we do have and invest it in fewer brands to be able to help those grow and that investment would be marketing
Randy Connick: Sales training, new innovation at the modality level, so it's all those things, it's just really challenging to do. So we've gonna have to make some decisions on what brands have the biggest opportunity and we have the right capital allocation. That's how we're looking at it. But to me it all starts with profitability at the...
for Wall Economics.
Thank you.
and Sarah Luna. Thank you. Thank you.
Speaker Change: Thank you. Next question is coming from Jonathan Komp from Bayer Goodbye. There's no line.
Jonathan Kopp: Yeah, hi, good afternoon. Mark, I want to follow up. You talked a bit about the development process changes.
Jonathan Kopp: But when you look at the other strategic initiatives, could you give a little better sense of the, either the road map or the timeline to get some of the key pieces in place, and then just to follow up on the legacy issues that you mentioned, could you just...
Jonathan Kopp: Give a little more context around your comments what may still be out there or areas that you're thinking are not fully certain at this stage.
Speaker Change: Jonathan, those were two very different questions. Can you repeat the first one, the first part of that question?
Speaker Change: Sorry to. Jim, a couple in here. The first question. Well, you guys are all clever trying to do that.
Speaker Change: and I don't have a follow-up. Yeah, I just just want to understand.
Speaker Change: Yeah, the major initiatives that you have just more on the road map and the timeline. Okay.
Speaker Change: Yeah, okay, so the last time we were together, I talked about our five strategic pillars and one is franchise or of choice and
Speaker Change: That really, I think Jonathan starts with mindset that what we do around here really needs to first we need to think about our franchisees and how do we help them.
Speaker Change: The second thing is our field ops team, so we actually have people out in the field that can help them. We're going to deploy a handful of people mid-year and we'll be running a pilot on where we put these people, what do they do, how do they most help? So that will be in place. We feel over the coming years, we can scale that pretty significantly, but we're going to start slow. And then the third thing on that one is the LMS system, the learning management system, which is really this playbook for how
Speaker Change: Franchisees can be successful. So that's a big one for us. The second one is member experience, and that's really all about innovation and curating these member experiences. That's not very expensive. That's just looking at how we deploy our current marketing dollars.
Speaker Change: Data is a big one for us and we've hired a new CTO. We've got a big data.
Speaker Change: Warehouse Project going on to look at BI and consumer insights.
Speaker Change: So that is really moving ahead right now, and then the international, and we're starting to deploy a few resources there. So they're all in motion. I would say, Jonathan, I think where they really start to pick up momentum is probably in 2026.
John Heinbockel, John Heinbockel, John Heinbockel,
and then you had a follow-up question.
John Heinbockel, John Heinbockel, John Heinbockel
Speaker Change: The second unrelated question, the operational issues that you mentioned that there could be some more and you're hopeful that they're not material. But can you just give a little more context to those comments and what areas may still be out there where there's some uncertainty? Okay.
Speaker Change: Well, here's what I would say. We've done a lot of work over the past 90 days to look at the organization as we look to transform it in building a really solid foundation.
Speaker Change: We believe that we've done a lot of really good work. That being said, you can never know what you don't know. But we do believe we've identified all of the issues that we know presently. And what I really believe.
is that we've had a...
Speaker Change: and a cultural shift around here, around transparency and franchisee mindset first.
Speaker Change: and we have a leadership team that I think is really committed to working together as a team to collaborate, to communicate, so some of these issues that we've run into, which are really in my opinion a result of a lack of the right structure, capabilities and process. So I think we're on the way to really managing this in a much more effective way. Thank you.
For more information, visit www.FEMA.gov
Speaker Change: Okay, great, and my last follow up, I know you mentioned the portion of the licenses that were inactive for the last 12 months. Is there any way as we think about the...
Speaker Change: The base of studios open, what percentage in total today is maybe below the threshold, if it's 20 to 25 percent EBITDA margin, or some other threshold that would be potential closure risks as we look over the next two years.
Yeah.
KPI that, you know, assesses franchisey health.
Speaker Change: You know, all portfolios have a bottom 10 percent, right? But we understand kind of...
Speaker Change: If you go all the way back to our prior investor analyst day, you know, while back, you know, there's about a $30,000 more break even point. And so we typically look at AUVs below 360,000 as kind of a general rule. And that's where we kind of assess the...
Speaker Change: and the line in the sand of anybody below that 360 mark is where the focus needs to be on profitability and figuring out why they're...
Speaker Change: performing below that. It's still, I would say, you know, in that as we got into the number of closures.
Speaker Change: It's that 10% rule. Some of the franchisees run the model a little bit differently, which allows them to operate below that $360,000 a year kind of AUV level. But as we mentioned, you can't stay down there very long because at the end of the day, you have to generate, you know, this is Mark.
mentioned.
just previously in that 20 percent. [inaudible]
Speaker Change: Operating Margin to kind of have long-term success there. Otherwise, you're operating in that zero to ten percent. There's just too much volatility, the break-even point. You're operating too close to the break-even point. So, I would say there is the bottom ten percent as we guided about five to seven percent closures in 2025 kind of addresses that. All right, so.
Speaker Change: I don't know if that answers your question, but it is about 10% of the portfolio that we're focused on, but there's probably about 5% to 7% that are in more of that critical range that if they don't grow their AUVs they'll likely end up closing.
Speaker Change: Okay, that's helpful and thanks for all the color on this call. Thank you.
Speaker Change: Thank you. Next question is coming from Jill Altobello, from Raymond James, you're lying as my life.
Speaker Change: Thanks, hey guys, good afternoon. I want to ask about the studio all things. I think Johnny mentioned you're expecting that 375 or so.
Speaker Change: Gross openings at the midpoint of 2025. Obviously a little bit below what you've been doing in recent years. Is that a number we should consider a good study state number or is that a temporary number?
Speaker Change: I would say it's the number right now. One of the issues that we had in kind of the back end of 2024 and early part of 2025 is not having our FDDs active, which we are in the process of getting those those filed so that'll help us with getting new license sales but without the FDDs.
Speaker Change: You know, being active, we haven't been able to sell licenses, which kind of impacted the back end of 2025. You know, typically you see studios that are licenses that you sell, you know, at the end of a year or the beginning of a year, those typically get opened by Q4 of...
Speaker Change: What would be this year? So it did take a little bit of momentum out of the back end of this year. So I would call it the number for this year. I think as we kind of get FDDs active and we start selling licenses again, we'll be able to provide a better number beyond 2025.
Speaker Change: Okay, and then in terms of the health of your member, I'm trying to kind of get to that, you mentioned membership was 15%, but I don't know if you gave us visits.
Speaker Change: and any other sort of anecdotal data you can provide on your member. Are they cutting back on visits or reducing the number of classes they're taking, etc.?
Okay, great, thank you.
Speaker Change: Thank you. Next question is coming from Richard Magnusen, from Be Rally Securities, your line is that line.
Thank you for taking our call.
Speaker Change: You're talking about the field operations teams and then some of the international leadership.
Speaker Change: and this will take a while to build that out, but can you give us the idea of the impact of operating expenses from back? Is it more of an incremental expense? Will you have an extra team there in the beginning and then sort of meter off after a while? It's like a better picture of that.
Speaker Change: Yeah, Richard, thanks for the question. We're looking right now. We're actually in the process of interviewing internal people that would move from internal support jobs to external support jobs.
Speaker Change: So, during this year for sure, it would be cost-neutral . . .
Speaker Change: and then on the international side we're moving one key person that was inside, that we're moving them to the UK to be the first boots on the ground. So at this point, Richard, it's cost neutral on both of those fronts.
Okay, enough, that sounds great. And then um...
Richard Magnuson: I have this one more regarding the Lidnorp clinics. I don't think you talk about them much, but are there any changes that...
Speaker Change: We should know there, and what is the AUV of that one right now, as you can tell us that, and then some of the changes with some of the weight loss drugs recently, and some of those are no longer in short supply, has that had any effect on that business model, or maybe some of that color?
Thank you.
Speaker Change: Yeah, I'll take that one. I think I caught all of them. The main one was the AUV that you were looking for. So in the fourth quarter, the AUV for Lendora was just under a million dollars. It was 984. When you think about the overall sales profile within Lendora, there hasn't been a big mix change as far as...
Speaker Change: The services that are being offered, they continue to kind of be pretty stable even with the shift in a lot of people kind of entering the space. There hasn't been an overall movement or a trend that varies in the prior part of the year.
Speaker Change: Okay, and then the latest news in that part of the industry about the weight loss drugs no longer being a short supply that hasn't played any significant role in the business.
Speaker Change: It has not. It has not shown an impact on the business as of now.
All right. Thank you.
and John Mellon. Thank you. Thank you.
Owen Rickert: Thank you. Next question is coming from Owen Rickert from Northland Capital Market, Richard Wright is alive.
and many more. Thank you. Thank you.
Owen Rickert: Hey guys, thanks for taking my question. Can you talk a bit about the third pillar of becoming a data driven company?
Speaker Change: I think I did hear, well I did hear you have the new CTO and I believe I heard a data warehouse initiative if I'm correct. Can you give us more color there, this color is a whole and how this will help going forward?
Speaker Change: Yeah, I'll take that one just simply because it hits home for me. I mean, the business has been very, I would say spreadsheet driven given.
Speaker Change: and a lack of investment in technology. So, about a year ago…
Speaker Change: The company put forth a, I believe it's called a data lake house now, but we'll call the data warehouse in which all information is being dumped into a central
Speaker Change: Repository for which we could use data visualizer or something like a Power BI to create dashboards that are not only applicable by brand but by department.
as you…
Speaker Change: For me, it's extremely helpful for financial reporting. It'll include things like your budget versus actuals, so we'll be able to stay on track from that perspective, but as you move it out to operations.
Speaker Change: The intent here is for the data to be almost real time. In essence, anybody in the company who has access would be able to come in and see what the sales were the day before. How many studios we opened yesterday or last week or last month. They could look at information by a studio location. This is the location.
Speaker Change: The field ops people that Mark talk to, these are people that will need access to information being somewhat disconnected if they're sitting in Texas or Florida, being able to get onto their phone or their laptops pull up a dashboard and pull anything they want almost real time in regards to franchisee performance or the health of the system. So,
Speaker Change: It'll be a game changer. We've got early user acceptance testing coming to an end here.
Speaker Change: You know, so for our perspective, you know, probably another by probably next earnings call, we'll start moving into live dashboards and actually be able to use it.
Very, thank you.
and many more. Thank you. Thank you.
Speaker Change: Thank you. Next question is coming from Korinne Wolfmeyer, from Piper Sandler, your line is now live.
Speaker Change: Hi, this is Farron for Cream. Just one on how we should be thinking about brand and membership investments over the course of the year, and then the cadence over the quarters, and how much flexibility a guidance built in there.
What was the first part of the question?
Thank you.
Arb.
Speaker Change: We have quite a bit of money in the marketing fund, for example, on club Pilates.
Speaker Change: that we're going to, and we've committed John talked about it in his remarks. We're going to spend that in Q1 to make that stronger. We also are committing some of our own dollars against, let's say, stretch lab to match some of the funds that they are to help drive business short term. So I think as a consumer driven company, which that's what the franchisees are, it's all about their consumer, we've got it constantly looking at where do we put our resources to put it.
Speaker Change: How do we best use them and how do we drive members back into the studio? So that's something that we do every day.
Got it. Thank you.
Thank you.
Speaker Change: Thank you. We reached out to our question and answer session. I'd like to turn the floor back over for any further closing comments.
Thank you.
Speaker Change: Well, thanks everyone for joining today. We look forward to seeing many of you at some of the marketing events next month. I'm also excited to remind you that we plan to host an investor day in late May.
Speaker Change: and we intend to elaborate on all of our strategies and specifically our growth trajectory. We'll communicate more details as the event gets closer, so again, thanks for tuning in today.
Speaker Change: Thank you, that does conclude today's teleconference to webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.