Greetings. And welcome to the Xponential Fitness, Inc. Fourth Quarter and Full Year 2024 Earnings Call. At this time, all participants are in a listen-only mode. Keypad. And we ask you please ask one question and one follow-up. As a reminder, this conference is being recorded. Now my pleasure to turn the call over to your host, Avery Wannemacher, Investor Relations. Avery, please go ahead.

Good afternoon, and thank you all for joining our conference call to discuss Xponential Fitness, Inc. fourth quarter and full year 2024 financial results. I am joined by Mark King, Chief Executive Officer, and John Meloun, Chief Financial Officer. A recording of this call will be posted on the Investors section of our website at investors.xponential.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 on today's call. In addition, we will be discussing certain non-GAAP financial measures in this conference call. We use non-GAAP measures because we believe they provide useful information about our operating performance that should be considered by investors in conjunction with the GAAP measures that we provide. A reconciliation of these non-GAAP measures to comparable GAAP measures is included in the earnings release that 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. 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 pro forma basis. Meaning for the full KPI history presented, we only include brands that are under our ownership as of the current reporting period. For the period ended December 31, 2024, this includes AKT, BFT, Club Pilates, CycleBar, Lindora, PureBar, Rumble, StretchLab, and Yoga Six. I will now turn the call over to Mark King, CEO of Xponential Fitness, Inc.

Thanks, Avery, and good afternoon to everyone. Let me start by talking about what's going well. As I expected when I joined last June, many of the fundamentals of the business are strong. North America system-wide sales of $465 million were up 21% year over year. North America quarterly run rate average unit volumes of $668,000 were up 9% year over year. 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. 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. Let me first delve into what we're doing since we last spoke, and then I'll talk about some of the things we've discovered operationally that will require some pretty big changes. Let me start with some thoughts on where my team has been focused and the progress we've 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. 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. 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. And I am confident in their abilities to transform all the parts of the business necessary to become the franchisor of choice in health and wellness. With a great team in place, we've also…

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 2022 and 2024 financials. This was done in order to correct accounting errors primarily related to accrued inventory 401k compliance, purchase accounting, and vendor rebates. There are additional other corrections that will be detailed in our form 10-K financial statement footnotes. Collectively, these corrections would be too large to take as an out-of-period adjustment in the current period so we are making revisions in the prior periods. These corrections, which are known as a big R restatement, represent our belief 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 health. 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. 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%. This was driven by an operating decision to let studios open on a more organic timeline. Adjusted EBITDA missed 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. The lower EBITDA was primarily driven by $2.3 million in lower equipment margins, which included the effects for the higher freight costs in the period, $0.6 million in overall lower merchandise margins, which include a $1.2 million write-off of slow-moving inventory, $1.2 million in combined expenses…

Thank you. We'll now be conducting a question and answer session. If Our first question today is coming from Chris O'Cull from Stifel. Your line is now live.

Thanks. Good afternoon, guys. First, John, can you help us understand the comp performance that is embedded the 2025 system sales guidance?

Think it's calling for 13% growth. Yeah. The assumption that we have is is what I stated in in the guide is, you know, we're looking for about mid single digits as a expectation around comp. The split obviously changes amongst brands with Club Pilates. Has been over indexing to a higher percents 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.

And then Mark, I know you've been focusing on revamping the franchise recruiting process. Can you provide an update on what you believe needs to change and how quickly we you believe you can rebuild that pipeline with franchisees that are kinda more in line with the type of operators you hope to target.

Well, first of all, hi, Chris. How are you? I would say this, we've hired a new Chief Development Officer who has a lot of experience in the franchise world. Very excited about having him on board. The first thing that we've done is we've put, all of the functions 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. That's when it and they're up and running today. So that's number one. Secondly, we've definitely taken a different approach, or we will, when we put buy one, two, three. You can buy whatever you want, so we're not going to be overly aggressive in selling the number of franchise or the the number of licenses. And then the third is, we we really wanna make sure that the the people that we're selecting, one, are committed to being an on entrepreneur and a franchisee that have the capability to run a small business and are 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.

Okay. Thanks. Oh, one last one, John. Did you say how many gross openings you're expecting for 2025?

Yeah. We we we just to know, we did change from gross to net this year in our guide. The 375 is kind of the the midpoint for the gross openings, and we expect about 165 closures in that that number. So it should get it's a 210, which is the midpoint.

Great. Guys. Thank you.

Next question is coming from John Heinbockel from Morgan and Partners. Your line is now live.

Hey, Mark. What's your assessment of StretchLab? Right, in terms of the the negative comps? And then if you if you look at four wall economics, right, for the franchisees, particularly with some of the brands that are comping negatively, How would you look at that And I know you talked about being holistic with the the brands You know, is 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 should either be smaller or you know, should should be owned by somebody else I mean, tackle all of that.

Alright, John. Well, thank you for the multi question question. The first thing I'd say is since I've gotten here, StretchLab has been slowing, so it's not something that's brand new for us. So we're all hands on deck looking at everything at StretchLab. 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 labor to be able to take in more people to to be stretched. So that's number one. The second thing is we're 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 to to offer it to to their membership. So, honestly, John, we're looking at the whole model to see if there's things that we can add there. We're also looking at and we've we've experimented this 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 have much better we need much better communication with our franchisees, the ones that are out there and are experiencing this. So we're trying to build a platform for them to be able to contribute, you know, all the things they know. As it relates to the the other brands, we are looking at everything, and I said that at the last earnings call that we're gonna take 2025 to look at the non scaled brands to see is 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.

Okay. Thank you. And and then maybe my follow-up I I know you wanna grow internationally. I I assume that you talked about boots on the ground. Right? So you're gonna have I guess, some people in London, some people in Asia. What what sort of the the extent of that And is is the idea here you 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 I think so, John. Plus, BFT is also very strong internationally. So it's both one. The main reason for boots on the ground is as we start to sign up these MFAs 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 the franchisees from around the world come here. But we've gotta be closer to to them in their markets to understand how to help them with marketing, site selection, and those types of things. So if we're gonna really grow to you know, we have thousands of of studios outside the US, we're gonna certainly need people around the world. But that'll be a slow build over the next few years. It's not something that will you know, happen this year, but but we are starting with a couple individuals in London to help with the expansion in the UK and Spain. And then some of the other European countries.

Thank you. Next question is coming from Randy Konik from Jefferies. Your line is now live.

Thanks. I guess, Mark and and John, can you just clarify the thoughts around the closures Yeah. I I I just wanna repeat those comments. And just kinda where are we with kind of that Are we getting towards the end of the line of cleansing the cleansing process around the real estate estate, I just wanna get some thoughts just how you guys think think about that as we go over the next couple of years? Thanks.

Thanks, Randy. Hey. One of the things we're doing is just we're taking really close look at all the underperforming studios, and we're we're really being more I would say, conservative how we're dealing with those because we really need to get to where if the struggling, underperforming studios probably need to close, and we need to end up with a healthier system And that would help not only the brands, but the franchisees that survive. So we're we're taking a much different look at existing franchisees and really trying to air on the side of facilitating a healthier system.

And hey, Randy. We're following up on on the lead settlement around the real estate. We're we're getting there. We've we've settled or gotten into settlements in around $30.3 million worth of the leases. We paid cash around $28 million of it. So there's some of the leases that we've got into payment plans on and kinda getting to the end of those in the in the first half of this year. There's about, I would say, just under $15 million. We said $15 million in the in the in the talk, but it's about $15 million of leases that are outstanding that we need to settle up with landlords. I think these are the the the more tougher ones where the landlords are holding out. So we're expectation is, you know, we're actively trying to get through those as much as possible and get them settled. But the expectation is that, you know, the first half of the year is where we'll address you know, I would say, the majority of that $15 million that's outstanding. You know, we've we've actually done know, quite a bit already in the first quarter. And expect to continue into the in Q2 to try and get it wrapped up. So hopefully, in the second half, it'll be some of an immaterial number. That will be left outstanding.

Got it. And then, Mark, you know, I think the theme that you've kinda come up with is this idea of less is more. You know? We don't need hyper growth. We need profitable solid stable growth. When you kinda get the when you talk about Club Pilates or you look at Club Pilates, know, obviously, it's a very stable, very good business. And it seems there's these other businesses that are less so. So know, are you are there kind of specific hurdle rates you're thinking about when assessing these other brands as it pertains to looking out over the the course of 2025 to think through you know, what do we really keep here? What do we not keep? Like, how how are you thinking about that decision making process? Because you know, I think the market really believes in Club Pilates less so on the other stuff. So just kinda just wanna try and get your thoughts on this idea of less is more and and how you're going about thinking about these other concepts. Thanks.

Yeah. I Randy, I think it all starts with franchisee profit the different sized boxes and, you know, does Yoga Six need to be hot yoga? Can it be different? So we're looking at all those. For me, it starts with franchisee profitability. So what does that need? To be, it needs to be 20, 25% EBITDA margin at at a studio level. If we can do that, franchisees are gonna wanna grow. They're gonna gonna wanna open up new ones. So for me, it's all around can we get these brands profitable at the franchisee level. And the challenge when you round a a 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, sales training, new innovation at the 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, you know, what what brands have the biggest opportunity and can and and we have the right capital allocation. That's how we're looking it. But to me, it all starts with profitability at at the four wall economics.

Thank you. Next question is coming from Jonathan Komp from Baird. Your line is now live.

Yeah. Hi. Good afternoon. Mark, I wanna follow-up. You talked a bit about the development process changes. But when you look at the other strategic initiatives, could you give a little better sense of the you know, either the the road road map or the timeline to get some of the key pieces in in place. And then just just to follow-up on the legacy issues that you mentioned, could you just give a little more context around your comments what may still be out there or know, errors that you're thinking are are not fully cert at this stage?

Jonathan, I you those were two very different questions. Can you repeat the first one the first part of that question?

Sorry to jam a couple in here. The the first question Oh, yeah. You guys are all clever trying to do that. And I have a follow-up. No. Just just wanna understand. Yeah. The major the major initiatives that you have just more on the road map and the timeline.

Okay. Yeah. Okay. So I I the last time we were together, I talked about the our five strategic pillars, and one is franchisor of choice. And 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. 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 midyear. 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 we we feel over this coming years, we can scale that pretty significantly, but we're gonna 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 franchisees can be successful. So that that's a a big one for us. The second one is member experience. And that's really all about innovation and curating these member experiences. That that's not very expensive. That's just looking at how we deploy our current marketing dollars. Data is is a big one for us, and we've hired a new CTO. We've got a big data warehouse project going on to look at BI and consumer insights. So that is really moving ahead right now. And then the international, and 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. And then you had a you had his follow-up question.

Yes. Yeah. Second unrelated question. The the the operational issues that you mentioned that they're could be some more and you're hopeful that they're not material. But can you just give a little more context for those comments? And, what what areas may still be out there where there's some uncertainty?

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. We believe that, you know, 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 a cultural shift around here, around transparency, and franchisee mindset first, 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 were really in my opinion, a a result of a lack of the right structure, capabilities, and process. So I think we're on the way to to really, managing this in a much more effective way.

Okay. Great. And my last follow-up, I I know you mentioned the the portion of the licenses that were inactive for the last 12 months. Is there any way as we think about the the base of studios open you know, what percentage in total today is maybe below the threshold, you know, if it's 20 to 25% EBITDA margin or some other threshold that know, would be potential, you know, closure risks know, as we look over the next few years. Yeah.

Hey, Jonathan. I'll take that one. Yeah. I mean, when we look at you know, we look at a monthly basis. We evaluate the portfolio. You know, we focus mainly on AUVs because it to me, it's the it's the easiest kind of KPI that, you know, assesses franchisee health. Know, all portfolios have a bottom 10%. Right? But it's we we we understand kind of if you go all the way back to our prior investor analyst day, you know, that we did a you know, a while back. You know, there's a there's about a $30,000 a month breakeven 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 the the the line in the sand of anybody below that 360 mark is where the focus needs to be on on profitability and and figuring out why they're performing below that. It's still, I would say, you know, in that as we guided to the number of closures, 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, kinda AUV level. But as as we mentioned, you can't stay down there very long because at the end of the day, you have to generate, you know, as Mark mentioned just previously, you know, in that 20% operating margin to, you know, kinda have long term success there. Otherwise, if you're operating in that zero to 10%, it's there's just too much volatility, the breakeven point. You're you're operating too close to the breakeven point. So I would say there is the bottom 10% as we guided about 5 to 7% closures. In 2025 kind of addresses that. So I don't know if that answers your question, but it it is about 10% of the portfolio that we're 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 they'll likely end up closing.

Okay. Yeah. That's helpful, and thanks for all the color on this call.

Thank you. Next question is coming from Joe Altobello from Raymond James. Your line is now live.

Thanks. Hey, guys. Good afternoon. One to ask about the Studio Holdings I think, John, you mentioned you're expecting about 375 or so gross openings at the midpoint of 2025. Obviously, a little bit below what you've been doing in recent years. Is is that a number we should consider a good steady state number, or is that a or is that a temporary number?

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 FTDs 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 FPDs, you know, being active, we haven't been able to sell licenses, which kinda impacted the back end 2025. Typically, you see studios that or licenses that you sell you know, at the end of a year or at the beginning of a year, those typically get opened by Q4 of of what would be this year. So it did take a little bit of 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 FTDs active and we start selling licenses again, we'll be able to provide a better number beyond 2025.

Okay. And then in in terms of the health of your your member I'm trying to I'm trying to kinda get to that. You mentioned membership was 15%, but I don't know if you gave us visits And maybe any other sort of anecdotal data you can provide on your member. Are they cutting back on visits or reducing number of classes they're taking, etcetera?

No. We haven't seen a shift in like, the weakness of our members. Visitations obviously, visitation in the first quarter is usually higher just given the higher given, like, the New Year's resolution kind of effect. But visitation and members are up year over year and haven't seen any kind of weakening shift in trends there.

Okay. Great. Thank you.

Thank you. Next question is coming from Richard Magnusen from B. Riley Securities. Your line is now live.

Thank you for taking our call. You were talking about the field operations teams and then some of the international leadership. And this might take a while to build that out, but can you give us an idea of the impact of, you know, operating expenses from that? Because is it more of an incremental expense Will you have, you know, an extra team there in the beginning and then sort of meter off after a while. So I get a better picture of that.

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. So during this year, for sure, it would be cost neutral. 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 bra on the ground. So at this point, Richard, it's cost neutral on on both of those fronts.

Okay. No. That that sounds great. And then I have just one more. Regarding the Lindora Clinic, I don't think you talked about them much, but are there any changes we should know there? And what what is the u e yeah. AUV of that one right now, if you could tell us that? And then you know, 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, you know, maybe some of that color?

Yeah. I'll I'll take that one. I think I I think I caught all of them. The main one was was the AV that you were looking for. So in the fourth quarter, the AUV for Lindora was just under a million dollars. It was $984,000. When you think about the overall sales profile within Lindora, there hasn't been a a big mix change as far as the services that are being offered. They continue to kinda 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 that varies from prior in the prior part of the year.

Okay. And then 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 a significant role in the business.

It has not. It has not shown an impact on the business as of now.

Alright. Thank you.

Thank you. Next question is coming from Owen Ricard from Northland Capital Markets. Your line is now live.

Hey, guys. Thanks for taking my question. Can you talk a bit about the third pillar of becoming a data driven company? I think I did hear I did hear you have the new CTO, and I believe I heard a data warehouse initiative, if I'm correct. Just can can you give us some more color there on the seller as a whole and how this will help going forward?

Yeah. I'll 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 the lack of investment in technology. So about a year ago, the company put forth a what is I I believe it's called a data lakehouse now, but we'll call it a data warehouse. In which all information is being dumped into a central 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 as you 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, 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 last yesterday or last week or last month, They can look at information by a studio location. The field ops people that Mark talked to. These are people that will need access to information being somewhat disconnected if they're sitting in in Texas or Florida, being able to get onto their phone or their laptops, pull up a dash and pull anything they want almost real time in regards to franchisee performance or the health of the system. So it's been it it'll be a a game changer. We've got early user acceptance testing coming to an end here. You know, so for our perspective, you know, you know, probably another by probably next earnings call, we'll start moving into live dashboards and actually being able to use it.

Great. Thank you.

Thank you. Next question is coming from Korinne Wolfmeyer from Piper Sandler. Your line is now live.

Hi. This is Sarah on for Korinne. 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 guidance baked builds in there?

What was the first part of the question?

Just how we should be thinking about brand and membership and best

We have ex we have quite a bit of money in the marketing fund, for example, on Club Pilates. 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 our some of our own dollars against, let's say, StretchLab to match some of the funds that they are to help drive business short term. So I 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, how do we best use them, and how do we drive members back into the into the studio. So that's something that we do every day.

Got it. Thank you.

Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over for any further closing comments.

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 and we intend to elaborate on all of our strategies and specifically our growth trajectory. We'll more details as the event gets closer. So again, thanks for tuning in today.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.