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

Thank you, operator. Good afternoon, and thanks to all of you for joining our conference call to discuss Xponential Fitness Second Quarter 2021 Financial Results. I am joined by Anthony Geisler, Chief Executive Officer; and John Meloun, Chief Financial Officer. Sarah Luna, President, will also be available during the question-and-answer portion of this call. A recording of this call will be posted on the Investors section of our website at investor.xfinancial.com. We remind you that during this conference call, we will make certain forward-looking statements, including discussions of our business outlook and financial projections. These forward-looking statements are based on management's current expectations and involve risks and uncertainties that could cause our actual results to differ materially from such expectations. For a more detailed description of these risks and uncertainties, please refer to our recent and subsequent filings with the SEC. We assume no obligation to update the information provided in today's call. In addition, we will be discussing certain non-GAAP financial measures in this conference call. We use non-GAAP measures because we believe they provide useful information about our operating performance that should be considered by investors in conjunction with the GAAP measures that we provide. A reconciliation of these non-GAAP measures to comparable GAAP measures is included in the earnings release that was issued earlier today prior to this call. I will now turn the call over to Anthony Geisler, Chief Executive Officer of Xponential Fitness.

Thanks, Kimberly, and good afternoon, everyone. We appreciate you joining our second quarter 2021 earnings conference call. I'm thrilled to be able to speak with you all today for our first call as a public company. By way of background, Xponential Fitness is the largest boutique fitness franchisor in the United States. And as of today, we have over 1,850 studios operating across 9 leading brands globally. Our brands offer consumers energetic, accessible and personalized workout experiences led by highly qualified instructors. Most importantly, each brand emphasizes a community-oriented culture. Our customers truly feel like they are a part of something unique. And it keeps them coming back, which is an accomplishment we take particular pride in as we successfully weather the pandemic. As a curator of leading brands across fitness modalities, our mission is to make boutique fitness accessible to everyone. I'd like to thank the entire Xponential Fitness team, our employees, management and especially our franchisees for your hard work and dedication that has enabled us to bring this mission to life. Your commitment, passion and execution have been the driving forces behind our successful operations and growth since our founding in 2017. Becoming a public company last month was a significant milestone and positions us to continue to execute our strategy and mission for years to come. Xponential had a very strong second quarter, highlighted by our North American performance with 197 franchise licenses sold, 59 studio openings and a 179% increase in system-wide sales year-over-year for a total of $171.6 million. We recorded net revenues of $35.8 million, up 67% year-over-year and adjusted EBITDA of $8.3 million versus a loss of $3.1 million in the prior year period. As is evident from these results, our business is rapidly rebounding to pre-COVID-19 levels, and we remain confident in our ability to reach pre-pandemic run rate AUVs by early 2022. When comparing the end of the second quarter 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 and nearly 90% run rate AUVs. Speaking of AUVs, on a year-to-date basis, our 2021 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 strictest lockdowns in the world. While we are certainly not in the clear when it comes to COVID-19, 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 our 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 ensure 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 Xponential experience whenever and wherever they'd like. Our experienced management team and the power of our Xponential 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 third quarter, which I believe is due in large part to the Xponential 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 a studio is open, the Xponential playbook ensures that our franchisees can maximize their studio performance and enhance their return on investment. John Meloun, 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 four simple goals. First, we plan to grow our franchise studio base across all brands in North America. Throughout our company's history, including during the COVID-19 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 nine brands in North America and sold an additional 554 new licenses, including 338 licenses sold year-to-date in 2021. Today, we have over 1,500 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 on these 1,500-plus license obligations alone. That said, we have an extremely healthy and rapidly 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 nine 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 XPASS 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 by the end of this year. Further, as I noted previously, we will continue to stay engaged with our customers outside the four walls of our studios 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 the benefits of in-studio boutique fitness, but it will certainly offer customers flexibility when it comes to maintaining their workout regimens and ensure ongoing engagement with our Xponential brands. Our third 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 licenses to open over 730 studios across nine 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 opened 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 Xponential platform. This ultimately brings me to our fourth 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 in real time regarding any changes that may result from the COVID-19 pandemic. As we grow, our long-term operating margin potential will also be supported by our ability to leverage our SG&A across the entire platform. Our corporate shared services are fully built out and ready to support our 1,500-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 four 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&A, it's clear to see that we have a proven history of seamlessly acquiring and integrating brands. Today, we are in the early stages of looking into expanding our portfolio of offerings to include HIIT, 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 Xponential'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 Meloun, our CFO, to discuss our second quarter 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. Second quarter system-wide sales of $171.6 million were up 179% from $61.5 million in the second quarter of 2020. Importantly, this was our fourth consecutive quarter of sequential system-wide sales improvement and Xponential's highest system-wide sales ever. As Anthony highlighted, we are pleased this momentum has continued into the third quarter with July system-wide sales of $64 million, now setting an all-time monthly record. Second quarter same-store sales increased 129% from the prior year period, reflecting improved membership as pandemic restrictions have lessened. Our month of June run rate AUV, which is calculated by annualizing the monthly sales for all studios that are six months and older, and includes the Rumble brand, was $410,000 and equated to an 89% recovery when compared to pre-COVID-19 levels at the end of January 2020. Based on trends we are experiencing today, we currently expect run rate AUVs to surpass pre-COVID-19 levels in early 2022. Our franchise business model provides us with highly predictable and reoccurring revenue streams, including five individual components. On a consolidated basis, revenue for the second quarter was $35.8 million, up 67% from $21.5 million in the prior year period. Breaking this figure down further, franchise revenue was $17.8 million for the quarter, up 98% from $9 million in the second quarter 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 restrictions related to the pandemic eased and system-wide sales continue to improve. Equipment revenue was $4.8 million in the quarter, down 8% from $5.2 million 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 a new studio opened. We had a large number of equipment installations and studio openings in the second quarter of 2020, resulting in higher equipment revenue than in Q2 of 2021. Merchandise revenue was $4.5 million in the second quarter of 2021, up 27% from $3.6 million 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 $3.3 million was up 350% from $0.7 million in the second quarter of 2020. Franchise marketing fund revenue is generated from a flat marketing fee that is collected as a percentage of gross sales from all studios. The more than threefold improvement in the quarter was primarily due to system-wide sales rapidly improving above pre-COVID-19 levels through additional new studio openings 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 $5.4 million in the quarter, up 85% from $3 million 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 $6.3 million during the quarter, down 7% from $6.8 million in the prior year period. These costs primarily consist of cost of equipment and merchandise and related freight charges. The improvement during the quarter was driven by fewer equipment installs in the current period, combined with favorable margin mix on the units installed. Cost of franchise and service revenue were $3.1 million in the second quarter, up 55% from $2 million 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 second quarter 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 $21.2 million were up 37% from $15.4 million 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&A expenses were 58% in the second quarter compared to 64% in the prior year period. Depreciation and amortization expenses was $2.4 million in the second quarter, an increase of 28% from $1.9 million in the second quarter of 2020. Marketing fund expenses, which include all expenses related to corporate marketing, were $2.9 million in the quarter, up 248% from $0.8 million 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 required to be closed due to the pandemic. Acquisition and transaction expenses benefited us in the quarter as we received a credit of $0.3 million. This compares to an expense of $5 million in the second quarter of 2020, which were a result of a favorable change in the fair value of contingent liabilities related to our rollout earnout. We recorded a net loss of $8 million in the second quarter compared to a loss of $4.8 million in the prior year period. Adjusted EBITDA was at $8.3 million in the second quarter compared to a loss of $3.1 million 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 $20.2 million, up from $11.3 million as of December 31, 2020. Total long-term debt was $206.8 million as of June 30, 2021, compared with $181.8 million 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 Release and Economic Security Act. This forgiveness resulted in a gain on debt extinguishment of $3.7 million for the six months ended June 30, 2021. Following the second quarter, in late July, we successfully completed our $120 million IPO, of which a total of 10 million shares of Class A common stock were sold. In addition, we raised $200 million through the sale of convertible preferred stock to private investors. In total, $320 million 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 $116.1 million on our term loan, which includes a prepayment penalty and interest totaling $1.1 million, we reduced our debt principal to $96.5 million. 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 $10.1 million 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 and financial performance. With that said, total 2021 new studio openings are expected to be in the range of 215 to 235. System-wide sales are expected to range from $690 million to $700 million, which at the midpoint, would represent a 57% increase from the prior year. Total 2021 revenue is expected to be between $135.5 million to $137 million, an increase of 28% from 2020 at the midpoint. Adjusted EBITDA is expected to range from $22 million to $23 million, a 129% year-over-year increase at the midpoint of our guidance range. We also anticipate that our capital expenditures budget will range between $1.5 million and $2 million 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 22.6 million and $3.25 million in quarterly dividends to be paid related to our $200 million convertible preferred note. A full explanation of our share count calculation and associated pro forma EPS calculation for the second quarter and first six 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 exponential.

Our first question is from Alex Perry of Bank of America.

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

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

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

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

Our next question is from John Heinbockel of Guggenheim Partners.

Let me start by saying that you have a very large pipeline that continues to grow each quarter. What are the obstacles, if any, to returning to the rate of openings that you had in 2019, which was $400 a year? Is there anything holding that back, and if so, what is it? I assume the franchisees will be able to handle this.

Yes, that's a great question. What we typically see is that we sell at a faster rate than our competitors, which results in a larger backlog. Any bottlenecks or delays in opening franchises are mainly due to lease signings, construction, permitting, and financing for some studios. To address this, we have decided to allocate some of our capital to finance franchisees in order to facilitate their openings. This strategy will not only help us maintain the franchise sales growth we've achieved in Q2 but also enable us to open more stores in the future.

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

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

Our next question is from Randy Konik of Jefferies.

I have two questions. First, many investors are aware of the domestic unit growth potential across all eight modalities. If you could prioritize for investors the long-term upside factors related to GO, XPASS, and international, how would you guide them to understand which of these strategies will have the most immediate impact on the financials moving forward? Any insight on this would be helpful for investors. My second question is regarding the AUVs being at 90% of pre-COVID levels, which is positive. Is California affecting that figure? Any additional details about that market would be appreciated.

Okay. Let me break that down a bit. Regarding the areas where we can make the biggest impact—international, XPASS, and video on-demand—first, on the international front, we have significant potential. We have already sold 700 rights to open studios worldwide and are adding more brands to new countries, with the latest being Rumble in Australia. Revenue recognition internationally differs from U.S. GAAP; we amortize license sales over 10 years in the U.S., but because the master franchisor services the franchisee internationally, we can recognize revenue from each license sale or equipment package immediately. As the international segment accelerates, its impact on our revenue and margins will be immediate. This will likely be the largest contributor to our revenue and margin growth in the upcoming quarters. Next is XPASS. We've launched it in several U.S. markets and see a lot of opportunities. It's a profitable venture for us since we earn a portion of XPASS sales with minimal costs for selling it at a larger scale. As XPASS grows, it will increasingly contribute to our revenue, similar to our royalties. Finally, regarding video-on-demand, we are mainly a brick-and-mortar business. While VOD is essential for staying competitive today, we plan to invest in our on-demand product and expand our subscriber base. As we add more studios and enhance brand recognition across all our channels, we expect increases in VOD subscription and overall revenue. To address your second question about the California market and any impacts from vaccine restrictions and COVID, we are closely monitoring the situation. Our company has strong analytical capabilities and reviews market conditions nearly every week. So far, we haven't observed any slowdown caused by restrictions preventing members from returning to studios—in fact, we've seen an increase in member numbers since Q2 compared to Q3. Overall, while we are aware of the Delta variant and vaccine developments, we continue to see positive results in member growth.

Our next question is from Brian Harbour of Morgan Stanley.

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

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

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

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

Our next question is from Jonathan Komp of Baird.

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

Yes. First and foremost, the reopening of studios and the lifting of restrictions provide our members with the confidence to return. When we examine the markets that reopened earlier in 2021 or late 2020, we find that these markets have bounced back more quickly. The easing of restrictions has given our franchisees an opportunity to reconnect with members, particularly those on frozen agreements or who canceled during COVID, to encourage them to return to the studio. This focus on existing members will significantly influence same-store sales, driving average unit volumes. Additionally, we have implemented various marketing initiatives to enhance brand awareness for our studios, and having the IPO has further elevated Xponential's visibility. Expanding our XPASS program and utilizing auxiliary revenue streams will enable members to explore different fitness offerings, which should improve retention as members try out various brands. As our studios reach higher capacity levels, franchisees will also have the flexibility to increase membership prices. Consequently, new members will join at a higher price tier, contributing to the average unit volumes. In summary, the return to studios, the strategic use of XPASS, and the ability to adjust pricing as capacity improves are the key factors driving average unit volumes back to and above pre-COVID levels.

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

Yes. Those were two excellent questions and points. Historically, we had just under 1,700 units open and operating before COVID. Now, we are nearing the 2,000 mark in terms of open studios. We experienced a decline in system-wide sales pre-COVID, but we've seen a quick recovery as we rebound post-COVID, especially throughout this year. The royalties generated from system-wide sales carry almost a 100% margin, which significantly impacts our bottom line. As we recover system-wide sales from our existing base, this margin expansion will be substantial and will contribute significantly to our EBITDA growth for the rest of this year and into 2022 and beyond. That addressed your first question. What was the second question again? I forgot.

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

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

Our next question is from Joe Altobello of Raymond James.

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

The recovery has been widespread across all brands. In states like Florida and Texas, which opened earlier than others, the recovery took place sooner and was quicker. However, this is not related to the type of service offered, but rather depends on the geographical location as we continue to return to pre-COVID numbers. The recovery has been more of a state-by-state phenomenon, with different parts of the country starting to recover at different times.

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

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

Our next question is from Peter Keith of Piper Sandler.

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

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

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

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

Our next question is from Shawn Collins of Citigroup.

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

Yes. I mean, overall, we do look at it by market. We look at 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 the recovery fairly consistent across markets, regions, states. So there's no underlying indication that there's any change or something that would be indicative of something in a much larger market than a smaller market.

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

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

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

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

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

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

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