Joining those on the webcast, we're very happy to have David Berg and David Willis from European Wax Center here for a fireside chat. We appreciate your interest and thanks, guys, for coming.
Thanks for having us, Lauren.
Happy to have you in Miami.
Glad to be here.
It's snowing in New York today. We are all thrilled to be here. Wanted to just kick it off with a bigger picture question about your target customer. Who is she? How often does she come in? What are the attributes that you see in your core customer?
Yep. Well, your pronoun was right. Today, our guest profile skews about 95% female. From a demographic standpoint, think kind of 35-40-year-old, higher household income, about 110% of household income, and skews a bit more suburban. That said, we think there's a significant opportunity for us with the male customer, and we're going after the male customer with a little bit more vengeance.
From a guest, kind of who visits us, we have something that's called a Wax Pass, which many of the listeners I'm sure are aware of. This is kind of our membership light model, where you buy a Wax Pass for body part specific, and you pay for nine services and get either 11 or 12, depending upon if it's during our promotion. That Wax Pass customer, generally comes on average about seven and a half times a year.
We helicopter up to our best guests, so our top quintile comes nine and a half times a year. The great news about those Wax Pass holders, that makes up over two-thirds of our service revenue. We've kind of ring-fenced that guest is doing great, coming as often, you know, pre-economic downturn as post-economic downturn and spending as much, if not more money with us. That's kind of our core guest today.
Okay. Then what are the most popular services? Maybe give us an idea of the price points.
We have services that start at $12 and run up into, depending upon the geography, probably top end around $80. We skew 80%+ as body services and the other 15%+, 20% in face services. The most popular service is the Brazilian bikini service, followed by eyebrows as our second most popular service.
Okay. What's the size of the market? What share do you have? Maybe talk a little bit about the other modalities and the share that they have as well.
Sure. When we talk about market size and total addressable market, we talk in terms of the U.S., about an $18 billion total addressable market in the U.S. for hair removal. In our modality, out of home waxing, it's growing at about a 8.5%-9% CAGR. Kind of 2.5x the CAGR of some of the other modalities like sugaring or laser. Our competitive set, there are a couple regional players, but the vast majority of our competitive set are the mom-and-pop salons. 10,000+, very, very fragmented market. Even at our, you know, our nearly $900 million of system-wide revenue is still a very small percentage in terms of overall market share. We think it's our opportunity to continue to take, grow with market share, but also take market share within the addressable market that we have.
I think the number one question I always get is around laser.
Mm-hmm.
You know, if you've seen any developments in laser that make it more effective across a broader group of people or cheaper. You know, that to me seems like the biggest competitive threat. Just curious for an update on.
My shorter answer would be no, not cheaper and not more effective. We've done a fair amount of work around laser. It gets a lot of publicity or probably more publicity than some of the other hair removal modalities, particularly on the coast. We certainly have seen private equity making investments into laser concepts. There's a couple of call-outs. One would be that we think it's a different customer based upon our consumer surveys. It's a more expensive service. Probably 40%-ish of the guests that we talk to would not consider it because of the expense.
It doesn't work on all body types and all hair types, so there are some needs to augment your laser with a different modality of hair removal like shaving or waxing. We keep an eye when laser comes into a DMA where we are and what kind of impact that has on our business. We haven't seen a degradation in terms of our transactions or our tickets when laser comes in. We keep an eye on it. Candidly, there's a part of us that we like to hear more people talking about hair removal. All ships rise as laser gets more publicity.
Shifting back to the consumer, how are they holding up, given inflationary pressures and all the shocks we've seen?
Yeah. DW, you wanna maybe just talk to.
You bet. David touched on this a little bit. The majority of our revenues, we feel we can really ring-fence and not worry about it. Those Wax Pass holders are our top quintile guests. They're coming with the exact same visit frequency that they've been coming over the last several years. In fact, they're spending a little bit more money with us as well. We've seen since really exiting 2Q last year, ticket trends to be quite stable. We still think there's opportunity. We know that there's a very small part of our guest segment file that probably was coming five times a year on average, is now coming four times a year. We know who she is, and we're doing some outreach and messaging to try to get her back on her regular visit frequency. All in, we're feeling pretty good about the overall guest profile.
I think one of the common misperceptions that I always hear is that, waxing is like a spa, like a treat. What you've seen with the Wax Pass is people view it as more of their personal care routine or necessity. Is what you're seeing with the Wax Pass or more loyal guests, as steady as that?
It really, in my opinion, it really is. This is part of our guests' non-discretionary personal care. This isn't sort of, okay, I'm gonna go to a dance or a date or a special event. That's not it. This is our best guests are coming in, you know, eight, nine, 10 times a year on a regular rhythm, as part of their regular hygiene. Candidly, as hair growth goes, so does the need to take it off. It's not, it is a non-discretionary service, and that's... it's great from our franchisees' predictability that they know that guest is coming in, so they know that revenue stream. It's also we reward that guest with the economical bundle of the Wax Pass, to reward and incent them to come in on that regular basis.
You talked about that frequency going from five to four. What are you doing specifically to try to re-engage that guest?
We're using, we're building our CRM muscle. We are segmenting them with different not just messages, but, I should say, not so much just different promotions, but really messaging. If she was coming on a regular basis, we don't think we need to offer a heavy discount to get her back in there. More, the messaging, the profile that we're doing with each one of these segments is slightly different, but it's mainly outreach, trying to get her back in-center.
Mm-hmm. What about promotions? You've added some new promotions, some additional weeks of promotions. Can you talk a little bit about that and then how the economics flow to you versus the franchise?
As the leading really the category killer in out-of-home waxing, we don't believe we need to be a discount kind of a business, and we're not. I think we promotion maybe is a word that we perhaps misconstrue, but let me be really crystal clear. We have two promotional periods around our Wax Pass sale. If you buy a Wax Pass normally, as I said, you buy nine and get two free. During our promotional periods, which are May and June and November and December, you pay for nine and get 12, so 9+ 3. That's really our only promotion.
We certainly have limited time offer retail product that we do intentionally to run out of supply to build demand and get excitement to have attachment for our guests in addition to our regular 30 SKUs that we carry in the center. We are not an overly discounting brand nor do I think we need to be. One promotion we did run in 2022 was something we called a 3+1 Wax Pass. As it implies, same 25% discount as a 9+3, you bought three Wax Passes, and you got the benefit of four visits.
We've always offered that to students, but we offered it more broad, broadly, late Q3, Q4 of last year to really help that guest that was probably feeling some of the inflationary impacts to say, "Okay, maybe you can't afford a $500 or $600 full Wax Pass. Let's get you on a Wax Pass to get you back into the brand." We saw a really nice lift in terms of the 3+1 Wax Passes that we were able to sell. As importantly, we've retargeted those guests that bought a 3+1 Wax Pass and introduced them to the 9+3 , and we saw a very nice lift in terms of people converting into 9+3, which we think was incremental to our business.
We don't have any of those promotions planned for 2023, other than our traditional May/June, November/December timeframe around the 9+3 Wax Pass promo.
There were some limitations on the 3+1 as well, right?
Yeah, great call. Our typical Wax Pass, the nine plus two or 9+3, does not have an expiration date. We did put an expiration date on the 3+1 Wax Pass holders.
On a similar note, maybe we can talk a little bit about pricing. Historically, you've been successful raising prices in the past. How are you thinking about that this year? How are you stratifying price by maybe geography or service?
Throughout the country, we have about seven different price zones. As the franchisor, each year, we recommend to the network pricing that we think they should take. That's informed from consumer research, price elasticity studies. Over the history of the brand, we found ourselves in a pattern of taking price every other year. In each of the last two years, we took price in the first quarter of each of the last two fiscal years on all service SKUs in 2021. We targeted the body service SKUs in 2022.
As David mentioned, with 60% of our services on a Wax Pass, it takes about a full-year to get the benefit of a price increase because obviously, if we sold a Wax Pass before the price increase, that guest will continue using that over the course of the next year. We're continuing to do some homework on the guests and some price elasticity work. The guidance that we gave for fiscal year 2023 does not assume that we'll take price this year, but we're doing some more homework on that. To the extent that analysis suggests that we should take more price, we'll obviously do that and update our outlook based on that.
Okay. Shifting back to Wax Pass, can you talk about how Wax Pass sales have gone the past couple of quarters, and then how that informs your ability to predict your business over the next several quarters?
We really talk about the Wax Pass as the harbinger or the leading indicator of the health of our business. Those two-month promotional periods, Lauren, that I spoke to, we saw in both of those two-month periods 16% lift in Wax Pass sales from the prior year in both our May/June promotion and our November/December promotion. We feel great about that lift in the number of folks that are committing to come into the center, you know, 10+ times a year. Similarly, as we've gotten into 2023, even though it's not promotional, we continue to be very pleased with the Wax Pass sale. It is a great indicator. It's staying strong, and as we've said many times, our 60%+ of our revenues are coming from those folks on Wax Passes.
Can you talk about some of the initiatives in place to drive rebookings and maybe increase the purchase frequency?
Yes. Rebooking is a really important metric for us. We know if you rebook, you are much more likely to actually come to that visit 25 or 30 days after you've made your rebooking appointment. We took some of our corporate dollars and ran a contest. We know that contests with our field, the field associates that work for our employees and our franchisees are very effective in driving the kind of behavior that we wanna see. We ran a rebooking contest in late 2022 and saw a significant lift, about a 600-700 basis point lift in rebooking from 45% to 52% rebooking.
Right now, if you decouple how our rebookings are made, about 50%, a little over 50% are in-center, about 30% online, and then the rest of it on the app. That just continues. It's another one of those great harbingers to say the health of the business. As folks rebook, they'll come back. We've extended that contest into 2023 to continue to drive that behavior. Similarly, as we revamp our rewards program, we specifically reward our guests for rebooking.
What does a contest mean? Is that an incentive for the receptionist?
Yes.
The esthetician?
Contest is money. Yes.
Okay.
This is basically incenting, $500 or $1,000 to those folks that are the top 25 or top 50 folks that excel on rebooking. It's that simple.
Makes a lot of sense. Moving on to product. Retail product sales are very important to the franchisees. Can you just talk us through the evolution of your product offering, where you stand today, and then any plans to drive that as a higher percentage of the mix?
Sure. You wanna go?
Sure. I'll start with kind of the overall portfolio is about 30 different retail product SKUs. If I look at our average franchise four-wall P&L, retail products represent on average about 7%. 93% of their revenues are really coming from offering the waxing services themselves. Attachment rates have kind of been in the low teens. These are products really designed to enhance the efficacy of the service and treat the skin in between waxing appointments. Our lineup of retail products we introduced in 2021, we saw a nice lift in attachment. The best retailers in the network are converting about 20% of their tickets will include the sale of a retail product. We really want our guests to look at our waxers as that consultative expert and more recommend.
We don't want our guests to feel like we're doing a hardcore sales pitch while we're in the wax suite. We found that really the highest conversion rates from our best retailers are those more experienced waxers that can talk about the benefits that these products will provide our guests and treat the skin in between. They're meaningful revenue generators for us, though. About 60% of our revenues come in the form of product. About half of that are the wholesale products, the wax that's used in every single service administered to a guest, and the other half in terms of retail products. We think we have decent conversion rates, but we feel like there's opportunity to improve those as well.
What's the incentive structure for the waxer to sell a product?
Most of our franchisees will provide incentive compensation as a percentage of retail attachment. There's three ways our waxers on average get paid. 1 is a base hourly rate. Obviously, our customers provide tips. What we have is incentive compensation. Most of our franchisees will incentivize based on retail attachment, a percentage of service revenues, and what we call services per ticket. We think about trying to maximize revenue per wax suite hour, our waxers make more money and our franchisees make more money if they can provide two or three services in that same 15-minute appointment. A lot of our folks will incentivize their waxers on services per ticket.
They'll be in suite, they'll be recommending a separate body polish service.
Absolutely.
Okay.
That's exactly right.
What about what's the incentive structure for the waxers as they become better and better? More effective at getting two appointments into a 30-minute timeframe, things like that.
That's exactly right. First they will typically have a higher base rate, so just their flat hourly rate will be a little bit higher than the less experienced waxers. They're ultimately trying to drive more revenue per wax suite hour for that 15-minute appointment. If they can do two or three services in that same 15-minute appointment, it's a larger dollar value ticket. They typically will get a percentage of that in the form of tips. It really benefits both the waxer and the franchise owner.
How's competition for estheticians and then your compensation as it compares to others?
Our franchise owners can really commit to new candidates that we have. As the market leader in the space, we can candidly commit a much higher level of volume, which translates to more income for those waxers. Our best franchisees really incentivize our waxers to be their own entrepreneurials. We can guarantee a certain level of tickets out of the gate, which I think makes us a very attractive employer of choice. Those waxers can build their own books. They have, you know, our Red Level waxers, which are our most proficient waxers, they have a very loyal book of guests that like to visit them time in and time out. That's how we really drive higher retention as well.
Mm-hmm. you've been able to now, at this point, get as many waxers as you need.
We have. I think our average franchisee would say both the quantity and quality of the candidate pool has improved dramatically over the last several quarters. You know, coming out of COVID, there was a few markets that had permitting bottlenecks and licensing bottlenecks. We talked a lot about, in 2021, staffing and the need to recruit more waxers. Our network feels like they've got the right level, right number of waxers, and we spend a lot more time working with franchisees on utilization, scheduling efficiencies, and retention strategies to get the waxers from kind of beginner level up to expert level where they can make more money.
Great. Moving over to new centers, this is a key to the European Wax story. Can you talk us through the new center economics, the cost to open a center, breakeven maturity, and then the consistency of how these centers ramp?
Yeah, I think that the good news is that it's incredibly consistent. If we look at cohorts that are even six, eight, nine, 10 years old, the ramping has been very similar across all cohorts. In fact, in the last year, we've actually seen better first and second year volumes than we have in years past, but incredibly consistent ramp. The basic economics are $350,000 to open a European Wax Center. Think of this as a typical kind of 1,300 sq ft-1,400 sq ft box in a retail strip center, six or seven wax suites, breakeven at month 14, and at maturity by year five, earning 60% cash-on-cash returns.
Average unit volume, average unit volume at year five, about $1.1 million, low 20% EBITDA margins at that point. Really, Lauren, what that does is that 60% cash-on-cash return allows our franchisees to reinvest and be incented to reinvest in the business. When we talk about new center growth, and we mentioned this in our earnings call last week, that, you know, 99% of the 91 new centers we opened last year were done by our current franchisees. They love this brand, they love to reinvest in it, and the faster we can get them to ramp, the more, the more quickly they'll reinvest, and that flywheel just accelerates.
It seems that some new centers are opening at a higher level than when we had initially started talking about it a few years ago. What's different about those, and is that something that you can scale across more of the new openings?
Yeah. DW, why don't you talk to some of the initiatives we're in?
Yeah. The last couple years of cohorts are ramping a bit faster. Their opening year of AUVs is 10%+ higher than our historical maturation curve. They're maintaining that momentum in year two as well. There's a couple things that I would say we are seeing that are themes there. One is these franchisees are investing the marketing funds to build awareness, build their guest file before they open. The other common theme that we see is franchisees are opening with more waxers on the payroll. Historically, folks may open, if they didn't have a full book of business, they may open with two or three waxers. We're seeing folks that staff up earlier so they can properly support the consumer demand that's there. One of the key initiatives that we plan to focus on in 2023 is institutionalizing these best practices.
They're not really doing anything that's unique or picked a lucky trade area, and that's why they're opening faster. We're seeing this pattern across different geographies. We want to put a bit more discipline and rigor, to institutionalize these best practices across the network.
Great. The current pipeline is, I think, the deepest in your history with about 400 licenses. Can you talk to your center opening plans for this year? How many? What markets?
Our guidance last week, 95-100 new centers. We expect that to be split kind of radically throughout the year. Where we've seen the greatest concentration of openings over the last, candidly, two years are the states where we already have the greatest presence. You think about the concentration we have in California, Texas, Florida, New York, New Jersey. Those states probably represent 50% of that new license pipeline expected to come online over the next several years. Illinois is another state where we've had a lot of activity and a lot of interest from our multi-unit developers in those markets. We exited 2022 with the deepest pipeline. We feel incredibly confident about delivering our guidance for this year.
One of the questions we're asked quite frequently in this elevated interest rate environment, is that having a demand on development? We're really not seeing that. Most of our franchise owners are very well capitalized, not overly levered, so we're really not seeing these elevated interest rates have any negative impact on our franchisees wanting to expand their footprints.
What about types of franchisees, going with franchisees that you've already had experience with versus the one or two center franchises?
We'll. We have a nice mix, Lauren, of franchisees. We've got a group, we talk about a third, a third, a third. We've got a third of our franchisees that will own two to five centers. This is candidly was the backbone of what built EWC. They're great franchisees, close to their community, very involved in the business, and that group will continue. There's a third of our franchisees that are well capitalized on their own. And they're one of our growth partners that will have multiple units, you know, kind of call it 10 to 50 units. They don't need a third-party capital partner.
There's that, the last third, where that's a franchisee who has partnered with a capital partner or a family office that comes in and puts that capital to work to go develop centers. As we talk about our pipeline, our current footprint today, about 40% of our 970 centers are owned by those growth partners, but over 70% of our pipeline is committed by those growth partners. Again, why we have such a high degree of confidence in that guide towards high single digits in year-over-year growth.
Another competitive advantage is the proprietary wax that your waxers use. Maybe talk a little bit about why that's proprietary, why you think that's better, more effective, where it's sourced, and then the commodity price pressure that you've seen over the past couple of years.
I'll start with the pricing. That has maintained stability at least over the last four quarters. Our costs went up. We in turn passed on a modest price increase to our network. In terms of a differentiator, it's truly the best wax on the market. I think if you were to poll our guests, they would say it's much more comfortable than any other wax that any other concept is using. We really try to use our leadership position to drive down pricing for our network. What we are charging our franchisees for that wax is about 50% discount to what they could find comparable quality wax on the market. We buy this. We have three different manufacturers make the wax.
The bulk of this we buy in Europe and ocean freight it here to the United States, where we then put it in our 3PL partners' warehouses and distribute it on to our franchisees. We are developing a third supplier that is making great quality wax that we will bring into the supply chain later on this year.
Okay. The costs have now abated, and you think we're out of the woods from a cost perspective?
Well, what remains elevated are the ocean freight rates. We get asked a lot. We've heard from, I guess, other concepts that do a lot more shipping from China. Those rates have come down dramatically. I would say that the ocean freight rates from France and Spain, where we import from, they are down from their second quarter of last year peak levels, but they're not down to, you know, they're not back to pre-COVID levels. We will continue to monitor that. The guidance we provided the Street assumes we will maintain our margins. To the extent we get further savings there, we'll pass those on to the network. To the extent those rates go up, we will likely pass those on to the network as well.
Okay. You also made the decision to buy some of the other materials and products to sell to the franchisees. Can you talk a little bit about the reasoning behind that and how effective it's been?
Yes. These are the medical supplies I believe you're referring to.
Mm-hmm.
These are not proprietary to us. If you think about the wax bed paper, disposable masks, the applicator blades that our aestheticians use to apply the wax, these are not unique to EWC. We saw the cost that our franchisees were paying from third-party vendors continue to elevate. We found a great vendor partner that we negotiated bulk rates on behalf of the full network. We turned that arrangement on late first quarter of 2021. Not big dollars. On an annualized basis, you're talking $12 million or so, but we were able to pass on savings to our network. This arrangement is gross profit dollar accretive to EWC. We're taking a modest order admin fee off the top, so it is gross margin dilutive, about 220 basis points.
We will fully lap that in the first quarter of this year, and I think starting in second quarter, our investors can see our gross margin profile kind of apples to apples basis on a year-over-year comparison.
Good. Looking at some future revenue opportunities, men represent a very small percentage of the customer base. Can you talk about the market size and the opportunity that you see there?
Well, we talk about that sort of $18 billion addressable market in the U.S.. Men make up about $3.5 billion of that. They're kind of less than 5% of our consumer mix today, so we do think there's an opportunity to continue to penetrate that. We rolled out training all through 2022, so every aesthetician is now trained on any body part on a male body or a female body. That was obviously a condition precedent for us to have that done before we could go out, and you'll see more active campaigning, more direct campaigning towards getting that male customer.
I think the market share opportunity for us is to continue as the category leader, as the category killer, just to differentiate from our competitive set, things like technology investments. When you come into the Center and we know your history, and we can recommend those products, and we can recommend additional services that our competitors just can't do. Similarly, we talk about our marketing fee. We get a 3% marketing fee from our franchisees. We spend all that money. That's EBITDA neutral. That kind of marketing spend, again, isn't something that our competitor set can do. We think about how do we go target those dollars. David alluded to the new Enterprise Data Warehouse.
We have the CRM capabilities, our rewards program, really to send much more targeted and personalized messaging to drive guests back in. Our business, candidly, is a rate and frequency business. How much do you spend when you come in, and how do I raise that average ticket, and how often do you come in, and how do I get you to come in more frequently? We've got an attract more, buy more, visit more pillar as we think about driving system-wide sales and same-store sale comps, and that's really what we're focused on to help drive that.
Thinking about rolling out to men, it sounds like the training is behind you, but are there any other investments or changes you need to make?
Not from an infrastructure standpoint. It's much more around messaging. We announced in our earnings announcement last week that we've engaged a new ad agency called JOAN, J-O-A-N, who was the small ad agency of the year last year. One of their directives is: How do we go out and get this new guest? How do we refresh our creative? I think in the quarters to come, you're gonna see a much more direct, a bit more provocative, a bit more leadership styled advertising campaign from us. We're gonna be a bit more memorable than we have been.
Okay. Be on the lookout.
Was that enough of a teaser?
That is.
Coming from your right brain CEO, that was... Take that with a grain of salt, but...
I also wanted to ask about face services. That was something that really downtrended during the pandemic with masks and seems to maybe not have come back to pre-COVID levels. If you could just give us a state of the union on what's going on with facial services and where you see the opportunity.
Yeah. I think as we double-clicked on sort of service mix, it's been pretty consistent over the past few years. We did see a little bit of downturn in COVID. Generally speaking, body services make up 85% of our services, and that historically has been consistent. Where we've seen an opportunity specifically is in brows. We've always offered eyebrow waxing, which I think is our third SKU. It's a very popular SKU for us. We're testing right now in about 250 centers, brow tinting, because we knew that guests were going somewhere else. They might have waxed their brows at EWC, but they went somewhere else to get them tinted. We're very encouraged by our test results thus far.
We'll make a call here in the next 30 days, whether we roll that out to the rest of the rest of the network. We always, Lauren, start with what does the brand give us permission to do and what does the guest give us permission to do? Clearly, we saw that in brows, we had the authority there to extend our offering.
Great. Are there any questions from the audience? Christian? You can just say it, and I'll repeat it.
Sure. Last week, you guided to a 20.3 same-store sales comp in the mid-single digits, right? You talked about not having any incremental price in there. In this environment, I think there's a lot of fear. Consumer businesses have comps going lower or going negative for all sorts of businesses, right? Can you break down and add some color to that mid-single-digit comp.
Sure.
Guide and comp there and kind of the building blocks there?
Let me just repeat it for the webcast.
Yep.
The question was around the 2023 guidance for a mid-single-digit comp that included no incremental price. If you could walk through the building blocks of that comp.
Yeah. Let me start with you'll have some nominal wraparound of last year's price increase that creeps into comps in the first part of this year. I think the easiest way to think about that, Christian, is we're assuming our mature centers are basically flat, and all of that comp is being driven from the centers that are in their ramping stage. Kinda years two through four. Those continue to have very nice year-over-year transaction comps, but they are the key driver of that mid-single-digit guide.
You're right. It did not assume any kind of a price increase this year. We continue to do these postmortems, Christian, on price increases that we've taken, have we seen any kind of degradation in tickets or transactions, and we'll just continue to be mindful of it. We thought it was more prudent to say, let's build this business case without having a price increase assumption. We're keeping a close eye on that.
What sort of price elasticity have you guys seen in the places where you have increased pricing?
Very little.
What price-
Oh, sorry, Lauren.
What price elasticity have you seen in the places where you've raised prices?
Very little. When we do these postmortems after each price increase, we really do an assessment of what ticket attrition do we see, what's the net revenue uplift. We candidly think our destination service SKUs have been very inelastic. When we did the postmortem over this past year, we saw almost no ticket attrition on that 5.5% that we took on the body services last year.
Mike.
You talked about your franchisees in good standing. I guess, say this rate environment continues to accelerate. Is there maybe a psychological rate level that you have in mind where you're hearing from your franchisees where maybe it gets incrementally difficult for them?
Is there a specific interest rate that they're hearing from their franchisees that gets more difficult for them to fund new center openings?
Not really. I mean, we keep a close eye with our franchisees. They have continued to make outsized development commitments with the brand. If you think about what these folks value, especially the larger guys, where we would have negotiated a multi-unit development agreement. If we can align on rate and pace, so let's say we wanna build out a certain part of a market, and we think that there can be 25 or 30 new units in that market over the next four or five years, one of our growth partners will step up and say, "Hey, I'll develop all of that for you over the next four or five years." In exchange for that, we will give them exclusivity to develop within that area.
Beyond the fact that I think they're very well capitalized and maintain a very low level of debt leverage, they're also economically motivated to be the only franchisor in that particular market that can further develop within our brand. I think it's, one, they're well capitalized and, two, commercially motivated to continue building out the market that they've already started developing for us.
Sorry, that's the 33%, right? 'Cause you split them into thirds, right?
Yeah. I'd actually put that as almost 66%. Yeah.
The growth partners.
That's right. One of the investments we've made this year that we talked a little bit last week, we're encouraged by the interest of our smaller franchisees wanting to add one, two, or three centers. We actually have brought on board a business development sales resource that can really focus on those smaller folks that wanna expand their footprint by one, two, or three. Those folks are still important to us as well.
Christian.
Last April, you issued your first special dividend of 11% of the market cap at that time. Can you talk through the capital structure and capital allocation? You know, is there potential for that to repeat in the next 12 months and how you see that rolling forward as a market driver?
The question is on capital allocation and the potential for another special dividend.
David Berg will wanna answer this question. You're right. We recapitalized the company last spring. Put in a whole business securitization. We were able to get, candidly, we held our nose at 5.5% fixed paper back then, but probably in hindsight was pretty good debt for us to have, five-year paper. It allowed us to have some excess cash. We as a board, sat down and looked at various options on how to return that value to shareholders. At that time, the best thing to do was issue a special dividend. It didn't really make sense given the flow of the company to buy shares back. We feel very confident about our debt levels.
We feel with the consistency of our EBITDA growth and what we've got this year, that we'll make another turn in terms of reducing our leverage ratios. I hope very much we're in a position at some point in the future to say, "Hey, do we relever the cash flows that we have? How do we redeploy those?" Really feel good about kind of where we are from that. The 90%+ free cash flow generation that we have is a real high quality opportunity for us as a board and as a management team to think about.
I think with that, we're out of time. David and David, thanks for joining us today.
Lauren, thank you for having us.
Thanks, Lauren.
Thank you, everybody. Appreciate it.