Greetings. Welcome to the Xponential Fitness, Inc. Second Quarter 2021 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Kimberly Esterkin, Investor Relations. Thank you. You may begin.

Thank you, operator. Good afternoon, and thanks to all of you for joining our conference call to discuss Xponential Fitness Second Quarter 2021 Financial Results. I am joined by Anthony Geisler, Chief Executive Officer; and John Meloun, Chief Financial Officer. Sarah Luna, President, will also be available during the question-and-answer portion of this call. A recording of this call will be posted on the Investors section of our website at investor.xfinancial.com. 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 obligation to update the information provided in today's call. In addition, we will be discussing certain non-GAAP financial measures in this conference call. We use non-GAAP measures because we believe they provide useful information about our operating performance that should be considered by investors in conjunction with the GAAP measures that we provide. A reconciliation of these non-GAAP measures to comparable GAAP measures is included in the earnings release that was issued earlier today prior to this call. I will now turn the call over to Anthony Geisler, Chief Executive Officer of Xponential Fitness.

Thanks, Kimberly, and good afternoon, everyone. We appreciate you joining our second quarter 2021 earnings conference call. I'm thrilled to be able to speak with you all today for our first call as a public company. By way of background, Xponential Fitness is the largest boutique fitness franchisor in the United States. And as of today, we have over 1,850 studios operating across 9 leading brands globally. Our brands offer consumers energetic, accessible and personalized workout experiences led by highly qualified instructors. Most importantly, each brand emphasizes a community-oriented culture. Our customers truly feel like they are a part of something unique. And it keeps them coming back, which is an accomplishment we take particular pride in as we successfully weather the pandemic. As a curator of leading brands across fitness modalities, our mission is to make boutique fitness accessible to everyone. I'd like to thank the entire Xponential Fitness team, our employees, management and especially our franchisees for your hard work and dedication that has enabled us to bring this mission to life. Your commitment, passion and execution have been the driving forces behind our successful operations and growth since our founding in 2017. Becoming a public company last month was a significant milestone and positions us to continue to execute our strategy and mission for years to come. Xponential had a very strong second quarter, highlighted by our North American performance with 197 franchise licenses sold, 59 studio openings and 179% increase in system-wide sales year-over-year for a total of $171.6 million. We recorded net revenues of $35.8 million, up 67% year-over-year and adjusted EBITDA of $8.3 million versus a loss of $3.1 million in the prior year period. As is evident from these results, our business is rapidly rebounding to pre-COVID-19 levels, and we remain confident in…

Thanks, Anthony, and good afternoon, everyone. It's great to speak with you today. As Anthony mentioned, we had a very strong second quarter with 197 licenses sold and 59 studios opened compared to 46 licenses sold and 56 studios opened in North America during the prior year period. The significant improvement in licenses sold during the quarter bodes well for our growth in open studios in the future. During July alone, we set a record month for systemwide sales. We sold 43 licenses and opened 21 new studios in North America. Second quarter system-wide sales of $171.6 million were up 179% from $61.5 million in the second quarter of 2020. Importantly, this was our fourth consecutive quarter of sequential system-wide sales improvement and Xponential's highest system-wide sales ever. As Anthony highlighted, we are pleased this momentum has continued into the third quarter with July system-wide sales of $64 million, now setting an all-time monthly record. Second quarter same-store sales increased 129% from the prior year period, reflecting improved membership as pandemic restrictions have lessened. Our month of June run rate AUV, which is calculated by annualizing the monthly sales for all studios that are 6 months and older, and includes the Rumble brand, was $410,000 and equated to an 89% recovery when compared to pre-COVID-19 levels at the end of January 2020. Based on trends we are experiencing today, we currently expect run rate AUVs to surpass pre-COVID-19 levels in early 2022. Our franchise business model provides us with highly predictable and reoccurring revenue streams, including 5 individual components. On a consolidated basis, revenue for the second quarter was $35.8 million, up 67% from $21.5 million in the prior year period. Breaking this figure down further, franchise revenue was $17.8 million for the quarter, up 98% from $9 million in…

[Operator Instructions] Our first question is from Alex Perry of Bank of America.

Congrats on a strong first quarter as a public company. I guess just first, it doesn't seem like you've seen any slowdown in the recovery trajectory in terms of run rate AUVs from the variant. Can you maybe talk through the health of the franchisees and their willingness to continue the club growth in this environment? Are you seeing any hesitation from the franchisees in terms of studio openings?

Yes, I'll take that question. When you look at kind of where we generated new openings in the first half of the year, we opened about 117 new studios. Looking forward into the full year, we're guiding to about 215 to 235 globally. So we'll see about an equal distribution of openings in the second half as we saw in the first half. In regards to hesitation, looking at our run rate AUVs and our LTM AUVs, they continue to recover and grow up into the right. So we're seeing really strong trends as far as system-wide sales, same-store studio sales, AUV growth, memberships, growing. Visitation continues to remain on trend and growing up into the right. So as far as hesitation is concerned, we haven't seen anything through the second quarter, talking through where we are in Q3. As of today, those trends are continuing. We haven't seen a slowdown even in markets where there is heightened levels of maybe Delta in the media or in the market. So overall, directionally, the Delta variant hasn't really created much headwind across the system and we are seeing continued recovery back to pre-COVID levels.

That's really helpful. And then just my second question. The licenses sold number for the quarter came in very strong. Can you talk about where the upside was sort of maybe versus your expectations? If there's any brand callouts in there? Like was Rumble a significant contributor in the quarter?

Of course. I mean, Rumble is a new brand, and so it will be a significant contributor going forward. We haven't launched the brand until kind of mid-Q2 as we had to do the filings across the country. We are still awaiting filings in New York, Illinois and California. So the brand is not fully launched nationwide, but just the -- these and new sales coming back into the system. And as you said, it was a very strong Q2 and franchise sales, especially comped over the Q2 of last year and over Q1. And so we're very happy with that number, but it just shows the strength of the brand and the other brands that we had even outside of Rumble coming back and to want to buy and reinvest dollars and open new stores under the Xponential flag.

Our next question is from John Heinbockel of Guggenheim Partners.

Let me start with you've got a very large pipeline, right, that continues to get larger every quarter. What, if any, are the bottlenecks to getting back to the rate of openings that you had in '19, the $400 a year? Is there anything, and if there is, what would that be? The franchise -- I assume the franchisees will be capable of doing something like that.

Yes, great question. There -- what tends to happen is that we sell a lot faster than anyone else, and so you end up having a larger backlog as well than some of other competitors or other systems. If there is a bottleneck or a backlog for franchise openings, it really is some lease signings, construction and getting those done, permitting. And then financing of some studios. And so we have decided to use some of our capital internally to finance franchisees to get open so that we can continue to increase not only our franchise sales that we've had that you've seen in Q2, but then push to get those stores open in the future.

Okay. And maybe a second question, totally different. What's the thought on a cross-brand GO? Is there demand for that? And would that complicate or cannibalize the individual brands offering so would it not be particularly interesting for you?

Yes. We are in our early stages of launching the XPASS. We have over 1,000 studios that have launched. We actually launched the XPASS, which is our single subscription, to all of our 8 brands. We'll be incorporating Rumble over the next couple of months. But over the 8 brands, and we have over 1,000 studios that have launched and we're on track to launch the rest of our studios by the end of the year. So, so far, things are looking really good. It is actually attracting a new customer base that's new to the ecosystem of Xponential. And that's something that we're currently tracking to ensure that there is no cannibalization. If anything, we see it the other direction where we're attracting a new customer base and introducing them to the brand. And they become very sticky within a brand within their local area and sign up for an additional brick-and-mortar membership.

Our next question is from Randy Konik of Jefferies.

I have 2 questions. So I guess the first one would be, a lot of investors will understand the domestic unit growth potential across the entire -- all across all the 8 modalities. If you were to just kind of rank order, orient investors in terms of these upside factors long term around GO, XPASS and then international, how would you orient investors to think about those 3 different strategies having the most near-term impact on the financials going forward? So maybe just give us some perspective there because that will help give investors some perspective on where -- which of those strategies first would impact the most and so on and so forth. And then my second question is, you gave perspective that AUVs are at 90% of pre-COVID levels, which is very good. Any -- is Cali impacting that number? Just give us some perspective there on that particular market, that would be very helpful.

Okay. Let me unpack that a little bit. So in regards to where I would kind of point where we can have the largest impact in relation to kind of the 3 growth areas, you said international, you said XPASS and then you said video on-demand. I think first and foremost, international, we have a large upside. We've already sold 700 rights to open up studios globally at this point. We continue to add additional brands into additional countries with the most recent Rumble into Australia. The revenue recognition is a lot different on the international front compared to U.S. GAAP. When we sell a license, we amortize that over the 10 years or the length of the license. And in the international, because the master franchisor is actually servicing the franchisee, the payment or the proceeds that we get from each license sale or each equipment package, we get to recognize that revenue immediately. So as we start to see an accelerated ramp on the international front, the impact from a revenue and margin standpoint hits the P&L immediately. So that will be probably the largest component of revenue and margin growth in the coming quarters as we see international grow. Next thing, XPASS. We rolled that out across a number of markets in the U.S. We have a lot of opportunity. That's a pure margin play for us from the standpoint of we get our portion of the sales related to XPASS. There's no real costs associated with selling XPASS at a large scale. So as that continues to scale over time, much like your royalties, it will become a larger portion of our revenue. And then lastly, our VOD. We are primarily a brick-and-mortar business. We have VOD, it's kind of an ante to play in today's…

Our next question is from Brian Harbour of Morgan Stanley.

Maybe just a question on kind of the sales recovery that you've seen. Aside from kind of just recovering from COVID and kind of end of restrictions and stuff like that over the course of the summer, is there anything else that the franchisees have done that you think has been particularly effective in kind of bringing members back in, whether it's new things on marketing? Have they been doing more promotions or discounting or anything that you've supported that has been particularly effective in that?

Yes, the franchisees have done a phenomenal job of maintaining your community, both through the pandemic and as we're reopening our doors within the 4 walls. What we are seeing is that word of mouth continues to be incredibly strong. So as we bring our current members back, word of mouth equates for about 30% of new members that are coming in. And we're actually seeing that we're attracting a healthy amount of customers that are trying fitness for the very first time. We did a recent member survey and majority had either canceled their big box gym membership or their on-demand membership in exchange for an Xpo membership. So that was exciting to see. And furthermore, seeing that digital marketing continues to be very strong in terms of acquiring those new customers. So, so far, things are looking really good, and people are just ready to get back into their brick-and-mortar fitness experience and return to either their pre-COVID experience or start fitness for the very first time.

Okay. Great. Maybe just another one. You made a couple of comments on kind of M&A and some categories that you're looking at. And certainly, I think HIIT kind of makes sense just given what some of your competitors have done. But you also mentioned like an HVLP. Obviously, that's very different than what you do today. How do you kind of think about how you prioritize those things or what you'd actually want to be involved in?

Yes, it's a good question. I mean, our current priority is a HIIT type product and a functional training type product. Obviously, there is a play for high volume. It's not something that we do exactly today, but it's something that we can do. Obviously, we know how to sell franchises and we know how to open stores. And we know how to charge for memberships and keep members. That's kind of first and foremost, the part of the Xponential playbook. But our directive now is looking at all 3 of those, but primarily looking at functional training and looking at a HIIT product. And so those will probably be the first 2 in line.

Our next question is from Jonathan Komp of Baird.

Maybe just a follow-up first. John or Anthony, can you maybe talk a little bit more when you think about AUVs getting back to pre-COVID levels by early '22? Just if you could share more, what's going into that assumption or what needs to happen in your mind for you to hit that goal?

Yes. I think first and foremost, obviously, studios getting open and all restrictions being lifted, actually helps as far as giving our members comfort and getting back into studios. As we continue -- when you look at the markets that opened earlier in 2021 or 2020 -- or late 2020, those markets have rebounded faster because the restrictions have lifted and has given our franchisees time to reach back out to their members and get them back in the studio. So I think first and foremost, it's just re-reaching out to the members that either are on frozen agreements or maybe have canceled during COVID and getting them back into studio. So same-store sales from that perspective is going to drive a lot of that. It's probably the most meaningful impact that we'll see as far as driving AUVs. Aside from that, we've deployed a lot of marketing activities as well to start driving more brand awareness in our studios. I think nothing short of even having the IPO kind of puts Xponential on the map as far as bringing brand awareness. Further building out things like our XPASS, using some of our auxiliary revenue streams to drive members back into studios and allow them to try different verticals and kind of taste the various brands we have, I think will also improve retention across the system as people who may be have been doing rowing for a long time or bar for a long time, it gives me the opportunity to try Club Pilates, keep them in our ecosystem by using XPASS as a tool for member retention. And then lastly and foremost, as our studios get back to higher levels of capacity, our franchisees have the ability to raise prices on new members, which allow older members who may have left the system, the new members that come on will be obviously brought in on a higher pricing tier, so the ability to take price to drive AUVs as well. So I think there's, obviously, the returning back to studios, I think using the tools of things like XPASS and then also being able to take price as videos reach back to higher levels of capacity are kind of the 3 levers to kind of drive AUV back to and above pre-COVID levels.

Yes, that's really helpful. And then maybe a broader question as you think beyond this year in the margin recovery, could you talk a little bit more about the embedded margin or profit potential, especially in '22 as you're fully back from a unit volume perspective? And then maybe longer term, just any framework to think about the EBITDA margin potential for this business?

Yes. I mean 2 really great questions, 2 really great points. I mean we have just purely based off of the volume of studios that we have open and operating, pre-COVID, just under 1,700 units. Looking at us now approaching -- starting to get close to that 2,000 level as far as number of open studios. When you look at where we were pre-COVID and the falloff in system-wide sales and the quick recovery as we continue to rebound from post-COVID and throughout this year, you'll see that the royalties that are generated from the system-wide sales, royalties being virtually 100% margin that falls right to the bottom line. So the margin expansion that we'll get by recovery of system-wide sales from the embedded base is huge and will drive a lot of the EBITDA expansion that you'll see in the remainder of this year into 2022 and beyond. So that was the first part of your question. What was the second one? I forgot.

Just longer term, any framework for thinking about the profitability, EBITDA margin potential overall on a more of a multiyear basis?

Yes. So long term, we see that the EBITDA margin growing to around 35% to 40% as we start getting into the outer years. And again, this is really driven by the fact that we have our entire SG&A infrastructure base already in play, right? So as we add whether it's 1 studio or another 100 studios, we don't need to add additional SG&A expenses to support the growth of the business. Therefore, the business leverages very well, which is very common for franchising. But we've made all those investments. So as we continue to add, whether it's 100 studios or 500 studios, we don't need to add incrementally any equivalent or substantial amounts of SG&A costs. So we see ourselves and the ability for this business to get to 35%, 40% adjusted EBITDA margins in the long term.

Our next question is from Joe Altobello of Raymond James.

Guys, congratulations. First, in terms of recovery that you're seeing on the membership side, on the AUV side, has that been pretty consistent across your brands? Or are you seeing particular brands really recovering faster than the others at this point?

Now the recovery has been system-wide across the brands. Obviously, in places like Florida and Texas where those states opened earlier than other states, of course, we saw the recovery again there earlier, so they recovered faster. But in other -- it's not on a modality base or anything other than a geography base as we continue to return our -- to pre-COVID numbers. So we don't find it as a modality issue or anything like that. We find it as a kind of state-by-state issue as the recovery began earlier in different parts of the country.

Got it. And in terms of the studio growth, just [ a similar ] question, I think your longer-term target was 250. You got 350 new studios annually. Is that something we could see next year or is that too optimistic?

No, I think it's possible. We don't know what's going to happen with the Delta variant going forward. But all things considered, it's definitely possible to do as we see the country begin to open back up, we see franchise sales at 197 in Q2. So definitely, as we increase the pipeline of stores that are sold and not get opened that allow us to continue to hit the numbers we need to hit on the open studios as well.

Our next question is from Peter Keith of Piper Sandler.

Congratulations guys on the IPO and first earnings call here. Anthony, I was wondering if you've seen any industry statistics around the number of boutique fitness studio closures? And in particular, if you think there's any over-indexing to closures by modality?

Yes, we have seen them. I mean it's pretty hard to generate the numbers a bit around the board, but about 15% to 20% of the numbers that we're seeing coming out of Versa and kind of other comps that are out there. So that's providing for us new membership growth because these displaced members are looking for whatever modality they were in or maybe switch modalities as well. So that's good for us. Obviously, the increase in available real estate is good for us. We took over a number of Flywheel locations when they went bankrupt in the city. We took over a number of YogaWorks locations when they filed as well and discharged the leases. So even on a regional basis, we've taken over some local yoga studios and split those in half and put a Rumble and a Club Pilates in there. So a lot of times, these locations that have closed will give us an opportunity to open maybe 2 new boxes in the existing real estate kind of depending on what size it is.

Okay. That's interesting. And secondly, and maybe this is a question for Sarah related to some of the survey work you guys have done. But as the health and wellness trends seem to be broadening out, I'm wondering now, with the member recovery, if you're seeing any change in customer demographics, kind of along this theme of making boutique fitness available for anyone. So thinking of that, maybe there's more males? Maybe some change in income demographic? Any insights would be helpful.

Yes, it's a good question. So we didn't take too much information on the demographic side, but it is something that we're looking at. Interesting enough, we are seeing that there are new audiences that are being attracted to a handful of the modalities where fitness -- is the very first time that they're getting into a fitness modality. So we're seeing that the attraction is happening in a couple of our new verticals. So that will be something that we'll keep eyes on. But early indications are that people are ready to get back into fitness. In fact, the survey said that about 43% or more are excited to jump back in and canceling their digital subscriptions. So we're happy to see that we're essentially taking market share from digital and putting them back into the studios. And as I mentioned earlier, 83% of members who had previously had a big box gym membership canceled those after they joined an Xpo studio. So excited that people feel safe and they feel empowered by what we're offering within our studios.

Our next question is from Shawn Collins of Citigroup.

Anthony, John and Sarah, my question is also on sales recovery to pre-pandemic levels. Can you possibly talk about any regional differences that you might be observing, whether it's suburbs rebounding faster than cities or maybe rural areas rebounding faster than metro areas? And maybe compare the Coast to the non-Coast?

Yes. I mean, overall, we do look at it by market. We look at a state level, we look at it in more regions, and there hasn't been any underlying indication that New York is recovering faster than Minnesota for that matter or if you go into some of the smaller markets. Overall, we're seeing as restrictions are lifting and as people kind of get back out of their houses and get back into their normal routines, we're seeing the recovery fairly consistent across markets, regions, states. So there's no underlying indication that there's any change or something that would be indicative of something in a much larger market than a smaller market.

Okay. Great. And John, are urban areas like cities, like New York City, would that be recovering in a similar rate as maybe in the rest of the country? Is that correct?

Yes. And it's actually the data that we looked at even as early as today, they've actually been recovering better than some of the markets that we've seen, believe it or not. The vaccines are actually having a positive impact on New York and some of the markets where they're required. So we actually are seeing a market like New York performing very well since the COVID has ended.

Got you. Great. That's helpful. A quick follow-up question, maybe slightly different but on supply chain around new equipment for new studios. As you equip the new studios with equipment naturally, have you experienced any delays in deliveries and things like that? Recently, there's obviously very well-publicized supply chain challenges and global shipping congestion. Are you experiencing any of that?

Yes. I'll take this question. We haven't seen anything yet. We're continuing to monitor it. We have multiple vendors that supply a lot of our equipment. And so at this point, we haven't seen anything. There's nothing that is keeping us from a supply chain standpoint from opening locations. We're continuing to supply all the stores on an as-needed basis. whether that be their consistent -- retail that they purchased from us on a kind of daily and weekly basis or the equipment packages for new store openings. And so we haven't seen any supply issues yet today.

There are no further questions at this time. We have reached the end of the question-and-answer session. I will now turn the call back over to Anthony Geisler, CEO, for closing remarks.

Thank you, operator, and thanks again for you all joining our call today. I'd like to thank the entire Xponential team and our franchisees once again for their hard work and dedication to our business. In a few weeks, we'll be participating virtually at the Raymond James Consumer Conference on September 14 and the Jefferies Fitness and Wellness Summit on September 15. We look forward to seeing many of you there. We thank you for your participation on today's call. Please stay safe and healthy.

This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.