Earnings Call: Q2 2021

Aug 24, 2021

Greetings. Welcome to the Exponential Fitness Inc. 2nd Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. 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 Malone, Chief Financial Officer. Sarah Luna, President, We'll 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. Exponential.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 obligations 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 This 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 Accidental Fitness. Thanks, Kimberly, and good afternoon, everyone. We appreciate you joining our Q2 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, Xfonential Fitness is the largest boutique fitness franchisor in the United States. And as of today, we have over 18 150 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 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 Teek Fitness accessible to everyone. I'd like to thank the entire Xponential Fitness team, our employees, management and especially our franchisees Your commitment, passion and execution have been the driving forces behind our And positions us to continue to execute our strategy and mission for years to come. Xponential had a very strong second quarter, And 179 percent increase in system wide sales year over year for a total of 171,600,000 We recorded net revenues of $35,800,000 up 67% year over year And adjusted EBITDA of $8,300,000 versus a loss of $3,100,000 in the prior year period. As is evident from these results, our business is rapidly rebounding to pre COVID-nineteen levels and we remain confident in our ability to reach pre pandemic Run rate AUVs by early 2022. When comparing the end of Q2 of 2021 to January 31, 2020, Without even taking into account our newest brand Rumble, our business has recovered to 103% of actively paying members, 98% of total visits in nearly 90% run rate AUVs. Speaking of AUVs, on a year to date basis, our 20 21 franchise cohort is on average outperforming our as designed studio revenue curves, Indicating strong consumer demand for our boutique offerings, driving studio recovery and making us feel confident about our ongoing performance. For our newest brand, Rumble, I'm particularly pleased to note that we recently completed our first master franchise agreement in Australia, which calls for a minimum of 50 studios to be developed over the initial 10 year term of the agreement. This accomplishment truly speaks to the International recognition of Xponential and our Rumble brand. Franchisees are excited to open new Rumble Studios even as Australia abides by one of the While we are certainly not in the clear when it comes to COVID-nineteen, as of the date of this call, we've experienced minimal effects across our studio base as a result of the Delta variant. After a record performance in July in which we posted our highest System wide sales in company history. Our August results to date have remained solid with strong system wide sales, Franchise license sales and membership metrics. So far in August compared to the end of Q2, We've seen an increase in our total memberships and are actively paying members, both overall and at a per studio level. As part of our standard operating procedures, we track core KPIs, such as our membership levels, very closely. And we are leveraging our strong technology capabilities and data analytical tools to stay well ahead of the curve. Should we begin to see any shift in trends, we have the tools in place to respond immediately and assure that our franchisees drive continued member engagement, whether through in person classes or through our digital platform Go, which allows our members to engage in the exponential experience whenever and wherever they'd like. Our experienced management team and the power of our exponential playbook set us apart from our peers and are the keys to our successful business model. These two factors Have enabled us to provide robust and ongoing support to franchisees even in the midst of a global pandemic. As I just mentioned, our membership base continues to grow in the Q3, which I believe is due in large part to the exponential playbook And our very selective franchisee process. From the initial phases of studio planning to leveraging technology to uncover data driven insights across our system once the studio is open. The exponential playbook ensures that our franchisees can maximize their studio performance And enhance the return on investment. John Malone, our CFO, will discuss our 2021 outlook in more detail shortly. But suffice to say, we remain very confident in our growth trajectory. Through our franchise model that combines multiple brands, Strong unit economics and extensive franchisee support, we have gained a leading market position in the United States boutique fitness industry. So how will we continue to grow this market position? Our growth initiatives center around 4 simple goals. First, we plan to grow our franchise studio base across all brands in North America. Throughout our company's 3, including during the COVID-nineteen pandemic, we have never had a single permanent studio closure. In fact, from January of 2020 through July of 2021, we have successfully opened 354 new studios across our 9 brands in North America And sold an additional 554 new licenses, including 338 licenses sold year to date in 2021. Today, we have over 1500 licenses contractually obligated to open in North America. If we were to never sell an additional license, we'd still be able to nearly double our North American studio count over the next several years growing pipeline of interested franchisees and anticipate continued strong license sales. Our second goal is to drive system wide sales, same store sales and grow our AUVs. We will achieve this by acquiring new customers Through sales and marketing strategies at the brand and franchisee level and by increasing penetration with our existing members. We're particularly excited about our new XPass offering, which provides access to all of our 9 brands under a single monthly membership. We began our XPass rollout in December of 2020 and currently have over 1,000 studios across 40 states launched on the platform. Early data has shown that XPath is not only enabling us to attract and retain current consumers, but it is also helping introduce consumers to new brands and verticals within our platform. We are very pleased with these results and expect XPass will be fully implemented across our entire North American studio base Further, as I noted previously, we will continue to stay engaged with our customers outside the four walls of Studio through our digital platform, which offers live and on demand programming from a library of more than 2,500 workouts, All of which were produced in our state of the art in house studio. Users on our Go platform help Xponential and franchisees reach new consumers and generate incremental revenues without increasing overhead costs. Providing this digital offering will not replace of in studio boutique fitness, but it will certainly offer customers flexibility when it comes to maintaining their workout regimen and ensure ongoing engagement with our Exponential brands. Our 3rd growth strategy is to grow our brand's International studio footprint. As of June 30, our master franchisees were contractually obligated to open or sell to open over 7 30 studios across 9 countries. We have decided to focus on expanding into a smaller number of countries first, Which have attractive demographics such as household income, level of education and fitness participation levels. This will enable us to learn from key trends and KPIs and then to tweak our model as needed. At the end of the second quarter, we had 15 international studios open across Australia, Dominican Republic, Japan, Saudi Arabia and South Korea. We also have agreements in place to open studios in Austria, Germany, Spain and Singapore. We're extremely confident in our runway both in North America and globally. And as we drive further growth, we will continue to unlock the power of our exponential platform. This ultimately brings me to our 4th strategic growth initiative, improving operating margins and driving free cash flow conversion. The asset light nature of our franchise model coupled with the many benefits we experienced because of our scale has supported our margins to date. Our platform and scale have resulted in higher franchisee lead flow, lower franchisee acquisition costs, as well as allowed our brands and franchisees greater access to real estate and favorable vendor relationships. As an integrated platform, we can also utilize technology and benefit from sharing knowledge and best practices across the portfolio. This is particularly important as we track our studio performance to respond to real time regarding any changes that may result from the COVID-nineteen pandemic. As we grow, our long term operating margin potential will also be supported by our ability to leverage our SG and A across the entire platform. Our corporate shared services are fully built out and ready to support our 1500 plus planned new studio openings. If we were to add another brand to our portfolio, we wouldn't need to hire any additional team members to support expansion beyond the brand's management team. Our ongoing capital requirements will therefore be limited and enable us to drive strong free cash flow conversions. As we execute against each of the 4 growth initiatives I just discussed, we will carefully allocate our capital, balancing our activities between investments in our business, Acquisitions and of course shareholder returns. When it comes to M and A, it's clear to see that we have a proven history of seamlessly acquiring Today, we are in the early stages of looking into expanding our portfolio of offerings to include HIT, Functional training and a high volume low cost fitness modality. We believe a functional fitness modality would fit well within our portfolio And complement our existing brand offerings. With that said, I'd like to thank you again for your time today. I could not be prouder of Exponential's journey, including our successful navigation through 2020, the pandemic and now our recent IPO. Looking ahead to Q3, We are keeping a watchful eye on the Delta variant and continue to abide by all state requirements and CDC mandates at our locations. That said, I'll emphasize again that we have seen minimal impact on our business to date and remain very confident in our positive growth trajectory. I'll now turn the call over to John Malone, our CFO, to discuss our Q2 results and 2021 guidance in more detail. John? 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 system wide sales. We sold 43 licenses and opened 21 new studios in North America. 2nd quarter system wide sales of $171,600,000 were up 179% from $61,500,000 in the Q2 of 2020. Importantly, this was our 4th consecutive quarter of sequential system wide sales improvement and Exponential's highest system wide sales ever. As Anthony highlighted, we are pleased this momentum has continued into the Q3 with July system wide sales of 64,000,000 Now setting an all time monthly record. 2nd quarter same store sales increased 129% from the prior year period reflecting improved memberships 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-nineteen levels at the end of January 2020. Based on trends we are experiencing today, We currently expect run rate AUVs to surpass pre COVID-nineteen 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 Q2 was 35,800,000 up 67% from $21,500,000 in the prior year period. Breaking this figure down further, Franchise revenue was $17,800,000 for the quarter, up 98% from $9,000,000 in the Q2 of 2020. Franchise revenue is generated from our franchise agreements and area development agreements. The significant year over year increase was largely driven by higher royalties as The restrictions related to the pandemic eased and system wide sales continue to improve. Equipment revenue was $4,800,000 in the quarter, down 8% from $5,200,000 in the prior year period. Equipment revenue is generated from the equipment purchases of new studios, Installation of equipment and replacement equipment for existing studios. Most equipment revenue is recognized in the period in which our new studio opens. We had a large number of equipment installations and studio openings in the Q2 of 2020, resulting in higher equipment revenue than in Q2 of 2021. Merchandise revenue was $4,500,000 in the Q2 of 2021, up 27% from $3,600,000 in the prior year period. Merchandise revenue is generated from the sale of branded and non branded merchandise to franchisees. The improvement during the quarter was primarily driven by increased foot traffic in studios across our ecosystem. Franchise marketing fund revenue of $3,300,000 was up 3.50 percent From $700,000 in the Q2 of 2020. Franchise marketing fund revenue is generated from a flat marketing fee that collected as a percentage of gross sales from all studios. The more than 3 times improvement in the quarter was primarily due to system wide sales rapidly improving above pre COVID-nineteen levels through additional new studio openings when compared to the prior year and AUV recoveries. In addition, we reduced the marketing fund fee to franchisees in 2020 in order to lower their operational breakeven levels during the pandemic. Lastly, other service revenue was $5,400,000 in the quarter, up 85% from $3,000,000 in the prior year period. Other service revenue includes revenue generated from our digital platform, rebates earned from franchisees use of preferred vendors And revenue generated from company owned and operated studios. The increase in other service revenue in the quarter was primarily driven by revenue generated from studios we took over because of the pandemic. While we may own and operate certain studios from time to time, our primary strategy is for all our studios to be licensed to franchisees. Turning to our operating expenses. Cost of product revenue were $6,300,000 during the quarter, down 7% from $6,800,000 in the prior year period. These calls primarily consist of cost of equipment and merchandise and related freight charges. The improvement during the quarter was driven by fewer equipment installed in the current period, combined with favorable margin mix on the units installed. Cost of franchise and service revenue were $3,100,000 in the quarter, up 55 percent from $2,000,000 in the prior year period. These costs primarily consist of commissions paid to the brokers and sales personnel, Expenses related to franchisee training and expenses related to our digital platform and technology expenses for supporting our franchisees. The increase during the Q2 was primarily driven by an increase in costs related to technology fee revenue because of the increased studio openings. Selling, general and administrative expenses of $21,200,000 were up 37% from $15,400,000 in the prior year period. This increase was largely due to costs related to company owned studios along with certain legal costs. As I mentioned previously, Our core strategy is for all our studios to be owned and operated by franchisees. We expect that by the end of this year, We will no longer own or operate these studios if they are generating losses. As a percentage of revenue, SG and A expenses were 58% in the 2nd quarter compared to 64% in the prior year period. Depreciation and amortization expenses was $2,400,000 in the 2nd quarter, an increase of 28% from $1,900,000 in the Q2 of 2020. Marketing fund expenses, which include all expenses related Corporate marketing were $2,900,000 in the quarter, up 2 48 percent from $800,000 in the prior year period. The increase was driven by costs associated with higher marketing fund revenues, and as I previously mentioned, because we limited marketing fund revenue in 2020 when studios were acquired to be closed due to the pandemic. Acquisition and transaction expenses benefited us in the quarter as we received a credit of $300,000 This compares to an expense of $5,000,000 in the Q2 of 2020, which were a result of a favorable change in the fair value of contingent liabilities related to a RowHouse earnout. We recorded a net loss of $8,000,000 in the 2nd quarter compared to a loss of $4,800,000 in the prior year period. Adjusted EBITDA was at $8,300,000 in the 2nd quarter, compared to a loss of $3,100,000 in the prior year period. A reconciliation of adjusted EBITDA to GAAP, Net income or loss can be found in our earnings release, which we issued earlier today. Turning to the balance sheet, as of June 30, 2021 cash and equivalents were $20,200,000 up from $11,300,000 as of December 31, 2020. Total long term debt was $206,800,000 as of June 30, 2021, compared with $181,800,000 as of December 31, 2020. In June, we were notified that we received full forgiveness, including for accrued interest On a Payment Protection Program loan received in April of 2020 as part of the Coronavirus Aid, Relief and Economic Security Act, This forgiveness resulted in a gain on debt extinguishment of $3,700,000 for the 6 months ended June 30, 2021. Following the Q2, in late July, we successfully completed our $120,000,000 IPO, in which a total of 10,000,000 shares of Class A common stock were sold. In addition, we raised $200,000,000 through the sale of convertible preferred stock to private investors. In total, dollars 320,000,000 was raised in connection with our IPO. Proceeds have been primarily used to repay a portion of our term loan And repurchase existing preferred shares. The remaining funds are being used to cover costs related to our IPO as well as to provide working capital. With the repayment of $116,100,000 on our term loan, which includes a prepayment penalty and interest totaling 1,100,000 We reduced our debt principal to $96,500,000 In addition, subsequent to the end of the second quarter, The company sold 904,000 shares of Class A common stock to the underwriters pursuant to the underwriters' option to purchase additional shares. After underwriters' discounts and commissions, net proceeds of approximately $10,100,000 will be received on August 24, 2021. Our post IPO capital structure, current liquidity position and expected cash flow generation Puts us in a solid position for supporting our long term growth targets. Moving to our outlook for the remainder of the year, With vaccines widely available throughout the U. S. And a record July numbers, we are confident in our growth trajectory for the remainder of the year. That said, Should further restrictions be enforced as a result of the pandemic, such as government mandated studio shutdowns, these restrictions could have a material impact on our business With that said, total 2021 new studio openings are expected to be in the range 215 to 235. System wide sales are expected to range from $690,000,000 to 700,000,000 which at the midpoint would represent a 57% increase from the prior year. Total 2021 revenue is expected to be between $135,500,000 to $137,000,000 an increase of 28% from 2020 at the midpoint. Adjusted EBITDA is expected to range from $22,000,000 to $23,000,000 a 129% year over year increase at the midpoint of our guidance range. We also anticipate that our capital expenditures budget will range between 1,500,000 And $2,000,000 for the remainder of 2021, primarily focused on our Go Digital platform, other technology investments to support our digital platforms and building out a Rumble studio. For the full year, we expect our tax rate to be approximately 5%, Share count for purposes of earnings per share calculation to be $22,600,000 $3,250,000 in quarterly dividends to be paid Related to our $200,000,000 convertible preferred note. A full explanation of our share count calculation and associated pro form a EPS calculation For the Q2 and 1st 6 months of 2021 can be found in the tables at the back of our earnings press release. In summary, we are very pleased with our strong second quarter results and the solid financial position of our business following our initial public offering. Based on our outlook today, we are confident in the growth trajectory of Xponential, and we look forward to updating you on our progress on our next quarterly earnings call. Thank you again for your time today and for your support of Xponential. We will now open the call for questions. Operator? At this time, we will be conducting a question and answer session. The confirmation tone will indicate your line is in the question Our first question is from Alex Perry of Bank of America. Please state your question. Hi. Thanks for taking my question and congrats on a strong Q1 as a public company. I guess just first, it doesn't seem like you've 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? Thank you. 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 As we saw in the first half. In regards to hesitation, looking back our run rate AUVs and our LTM AUVs, they continue to recover and grow up in 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 until the right. So as far as hesitation is concerned, We haven't seen anything through the Q2. 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? Thank you. Of course, I mean, Rumble is a new brand and so it will be a significant contributor going forward. We hadn't launched the brand So 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 And new sales coming back into the system. And as you said, it was a very strong Q2 in 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 have even outside of Rumble coming back in to want to buy and reinvest dollars and open new stores Under the Exponential flag. Perfect. That's really helpful. Best of luck going forward. Our next question is from John Heinbockel of Guggenheim Partners. Please state your question. Sure, guys. 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 'nineteen, the 400 a year, is there anything and if there is, what would that be? Are the franchise, I assume the franchisees will be capable of doing something like that. Yes, great question. 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 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 then maybe second question, totally different. What's the thought on a cross brand go? Is there a demand for that? And would that complicate or cannibalize the individual brands offering, Would it not be particularly interesting for you? Yes. We are in our early stages of launching the edX Pass. We have over 1,000 studios that have launched. We actually launched the XPath, which is our single subscription to all of our 8 brands. We'll be incorporating Rumble over the next couple of months. We've got over the 8 brands and we have over 1,000 studios that have launched and we're on track That's new to the ecosystem of Exponential and that's something that we are 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 Okay. Thank you, guys. Our next question is from Randy Konik of Jefferies. Please state your question. Yes. Thanks, guys. I have two questions. So I guess the first one would be, a lot of investors will understand the Thick unit growth potential across the entire across all the even modalities. If you were to just kind of rank order orient investors in terms of these upside factors long term around Go, XPath 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, what impacts 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 Okay. Let me unpack that a little bit. So in regards to where I would kind of Point where we could have the largest impact in relation to kind of the 3 growth areas. You said internationally, you said Ex pass and then you said video on demand. I think, 1st 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 franchisee, the payments 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 An accelerated ramp on the international front, the impact from a revenue and margin standpoint hits the P and 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 being XPath, 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 XPath. There's no real costs associated with You're selling XPath at a large scale. So as that continues the scale over time, much like your royalties, it will become a larger portion And then lastly, our VOD. We are primarily a brick and mortar business. We have VOD. It's kind of You know, an ante to play in today's modern age, but we will be investing in our on demand product and continuing to grow that Over time and increase our subscriber base. And I think with the addition of Additional studios and continue growing the brand recognition across all our modalities or brands, the subscription and overall VOD Revenue streams will continue to grow as we introduce more storefronts and make people more aware of Xponential and our VOD offering. I think your second question, if I remember, was along the lines of the California market and how it's performing In relation to some of the restrictions around the vaccines and COVID, we have been monitoring that. We have one of the things this company has is Really strong analytical capabilities on an ongoing basis. We look at it almost weekly, market by market. And we have not seen any slowing as far as restrictions causing members not to return back to market or back into studios. We continue to see Increase their members since Q2 are up Compared to Q3 versus Q2, so we are still seeing member growth in those markets. So overall, we are paying attention to the Delta variant. We are paying attention to vaccines. We are Taking attention to some of the restrictions around studio operations, but so far so good and we continue to see Good promising results as far as member growth. That was very helpful. Thank you. Our next question is from Brian Harbour of Morgan Stanley. Please state your question. Yes. Hi, guys. So 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 their community, both through the pandemic and as we're reopening our doors within the four 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 30% of new members that are coming in, and we're actually seeing that we're attracting a healthy amount of customers are trying fitness for the very first time. We did a recent member survey and the majority had either canceled their Big Box membership or their on demand membership in exchange for an Expo 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 Shark Fitness for the very first time. Okay, great. Maybe just another one. You made a couple of comments on kind of M and A and some categories that you're looking at. Certainly, I think Hi. It 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 guys 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 hit 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 1st and foremost the part of the exponential playbook. But our directive now I was looking at all three of those, but primarily looking at functional training and looking at a hit product. And so those will probably be The first two in line. Okay. Thank you. Absolutely. Our next question is from Jonathan Komp of Baird. Please state your question. Yes. Thank you. Maybe just a follow-up first, John or Anthony, could you maybe talk a little bit more when you think about AUVs getting back to Pre COVID levels by early 2022, 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, 1st and foremost, obviously, studios getting open and while restrictions being lifted actually helps as far as Giving our members comfort in getting back into studios. As we continue when you look at the markets that opened earlier 2021 or 2020 or late 2020, those markets have rebounded faster because the restrictions are lifted and given our franchisees time Reach back out to their members and get them back into studio. So I think, 1st and foremost, it's just re reaching out to the members that either are on frozen agreements or Maybe I've 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 exponential 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 drive different verticals and kind of taste The various brands we have, I think, will also improve retention across the system as people who Maybe it's 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 XBAST 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 XPath and then also Being able to take price as videos reach back to higher levels of capacity are kind of the three 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 and the margin recovery, could you Could you talk a little bit more about the embedded margin or profit potential, especially in 'twenty two 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, it's just under 1700 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 fall off 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 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 question part of your question. What was the second one? I forgot. Just longer term, any framework for thinking about the profitability, your 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 and A infrastructure base already in play, So as we add whether it's 1 studio, another 100 studios, we don't need to add additional SG and 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 amount of SG and A costs. So we see ourselves And the ability for this business to get to 35%, 40% adjusted EBITDA margins in the long term. That's very helpful. Thank you. Our next question It's from Joe Altobello of Raymond James. Please state your question. Thanks. Thanks. Hey, guys. Good afternoon. Congratulations. So in terms of recovery that you're seeing on the membership side, on the AUV side, has that been pretty consistent across your brands? Are 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 Where those states opened earlier than other states, of course, we saw the recovery begin 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 And I'll 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 question. I think your longer term target was 250 to 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 yet open, It'll 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. Please state your question. Hi, good afternoon, everyone. 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% are 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 switching 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 And 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 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 It 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 Members who had previously had a Big Box gym membership, canceled those after they joined an Expo studio. So excited that people feel Safe and they feel empowered by what we're offering within our studios. Okay. Sounds good. Thanks so much and good luck for the back half of the year. Thank you. Our next question is from Sean Collins of Citigroup. Please state your question. Yes, great. Thank you. Good afternoon, Anthony, John and Sarah. Hey, 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? Thanks. Yes. I mean, overall, we do look at it by market. We look at it at 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, your 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. Great. And John, are urban areas like cities like New York City, would that be recovering in a similar rate Maybe 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 we've seen, believe it or not. The vaccines are actually having a positive impact 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. 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? Thanks. 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. And we're continuing to supply all the stores on an as needed basis, whether that be their consistent retail They purchase from us on a kind of daily and weekly basis or the equipment packages for new store openings. So we haven't seen any supply issues yet to date. I understand. That's helpful. Appreciate the insight. Thank you. 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 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.