Greetings, and welcome to the Xponential Fitness First Quarter 2024 Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Avery Wannemacher from Investor Relations. Thank you. You may begin.

Thank you, Operator. Good afternoon, and thank you all for joining our conference call to discuss Xponential Fitness first quarter 2024 financial results. I am joined by Anthony Geisler, Chief Executive Officer; Sarah Luna, President; and John Meloun, Chief Financial Officer. A recording of this call will be posted on the Investors' section of our website at investor.xponential.com. We remind you that during this conference call, we will make certain forward-looking statements, including discussions of our business outlook and financial projections. These are forward-looking statements 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 on today's call. In addition, we will be discussing certain non-GAAP financial measures in this conference call. We use non-GAAP measures because we believe they provide useful information about our operating performance that should be considered by investors in conjunction with the GAAP measures that we provide. A reconciliation of these non-GAAP measures to comparable GAAP measures is included in the earnings release that was issued earlier today prior to this call. Please also note that all numbers reported in today's prepared remarks refer to global figures unless otherwise noted. I will now turn the call over to Anthony Geisler, Chief Executive Officer of Xponential Fitness.

Thanks, Avery, and thank you all for joining us this afternoon. After closing 2023 with solid momentum, we've had a strong start to 2024 with adjusted EBITDA margins expanding to 38% of revenue, fueled by continued growth in our studio footprint and leaner operating expenses. As of the end of Q1, we had 3,156 studios operating globally with 6,365 licenses sold across our portfolio. In the first quarter, we have completed the acquisition of Lindora and are on plan with the integration activities. As Sarah will speak to shortly, we are very encouraged with the initial demand for Lindora franchises. We have already sold almost 40 licenses since we started selling Lindora in March, and we are particularly encouraged to see the strong demand coming from both existing and new franchisee groups. During the quarter, total members in North America grew 17% year-over-year to 783,000, while our total visits increased 18% to a total of 14.9 million in studio visits for Q1. This drove North American system-wide sales to over $400 million in the quarter, an increase of 25% over the first quarter of 2023. North American run rate average unit volumes of $596,000 in the first quarter increased 9% from $547,000 in the prior year period, while same-store sales increased 9% for Q1. Same-store sales for studios older than 36 months came in at 10%, primarily due to continued growth in our scaled brands. During the first quarter, net revenues totaled $79.5 million, an increase of 12% year-over-year. Adjusted EBITDA totaled $29.8 million or 38% of revenue, up 30% from $22.9 million or 32% of revenue in the first quarter of 2023. As we discussed previously, optimizing growth in existing studios drives profitability in our asset-light, highly leverageable franchising model. In addition, along with our transition studio strategy shift complete, we remain firmly on track to reach our targeted 40% adjusted EBITDA margins this year and growing to 45% by 2026. Let's now discuss another key growth driver, the increase of our franchise studio base. We ended the quarter with 3,156 global open studios, opening 111 gross new studios during Q1, with 85 in North America and 26 in international markets. As mentioned on our last call and in line with typical seasonality cadence, we expect openings to be more back-end weighted with a gradual increase in each quarter of 2024. We currently have over 400 North American leases and LOIs signed for studios not yet open, which resulted in new studios in the coming quarters. We sold 173 licenses globally in the first quarter, and our pipeline remains robust with almost 2,000 licenses sold and contractually obligated to open in North America, plus an additional over 1,000 master franchise agreements. We also continue to expand our overall Total Addressable Market (TAM). Along with the growing addressable market for our brands, the acquisition of Lindora has increased our access to the broader health and wellness market. Buxton's latest analysis illustrates our current TAM in the United States alone is approximately 8,400 studios. Buxton estimates room for an additional over 800 Club Pilates locations in the United States, and Lindora is now included at over 1,000 potential locations. As Xponential continues to grow, we continue to focus on optimization of our portfolio of brands and remain open to opportunities to both acquire and divest brands that align with the desired long-term growth trajectories of our business. At this time, we are not including any further locations for AKT or Row House in the 8,400 location TAM estimate, and STRIDE has been removed from TAM also following its divestiture in the first quarter. Turning to our international expansion efforts, at the end of the first quarter, we have over 1,000 studios obligated to open under master franchise agreements. In April, we opened our 400th international studio. We are starting to build a significant presence in select international markets, which will help drive consumer awareness and economies of scale. For example, we have over 220 studios in Australia. In Japan, we now have 50 Club Pilates studios open. The same master franchisee who has overseen the development of those 50 locations has an additional 115 Club Pilates locations to be developed in Japan, 130 locations to be developed across our CycleBar, Rumble, and AKT brands in Japan, as well as development rights in Singapore. Our recently hired international President and team have been focusing on supporting our existing master franchise relationships while continuing to seek out new markets for our brand's expansion. In the first quarter alone, our master franchisees sold 53 new sub-franchise licenses. Our international business made up 31% of license sales and 23% of new openings in the first quarter. I'd also like to mention how pleased we are to have recently completed our first Board meeting with our newest director, Jeffrey Lawrence. Jeff brings decades of leadership experience at some of the most well-known consumer brands. In addition to his deep financial acumen and track record of value creation, he brings expertise in executing franchise expansions on a global scale. Jeff previously served as Executive Vice President and Chief Financial Officer at Domino's Pizza, where he supported the brand through its technological transformation and global expansion, and he currently serves on the board of Shake Shack. We expect he will be a great asset to Xponential as we continue expanding globally, and I look forward to working with him on our strategic initiatives moving forward. In summary, Xponential had another strong quarter as we execute against our four key growth drivers: selling franchises, opening studios, increasing average unit volumes (AUVs), and optimizing selling, general and administrative expenses (SG&A). And with that, I'll pass the call on to Sarah.

Thank you, Anthony. Our studios are a critical part of our members' routines, and their continued interest in our brands is demonstrated by our first quarter total visits and total actively paying members in North America. We saw strong growth in both metrics, both overall and at a per studio level. Total actively paying members and total visits both grew by 18% year-over-year. Average active members per studio and average studio visits per member also increased, while membership freezes remained low, declining year-over-year. Running a portfolio of consumer-facing brands, it is imperative that we keep the consumer's interest front of mind and ensure offerings and class formats remain relevant to what members are looking for. Changing a class format to one that better aligns with our members' interests is one way we can produce a meaningful positive change in AUV. We introduced a new strength-focused class format at CycleBar in January, which has been received very positively. On average, CycleBars that adopted this class format witnessed a strong increase in AUVs during Q1. Similarly, Pure Barre Studios that have adopted the new strength training class format, Define, have exhibited strong increases. We're also excited about the growth prospects of our newest brand, Lindora. Xponential is now approved to sell Lindora in 44 states, and we have launched the brand across major broker networks. As Anthony mentioned, since beginning to sell the brand in March of this year, we've already sold almost 40 licenses. In Q1, we put a Lindora-specific team in place that is ready to lead the charge for growth. In addition to growing the number of Lindora locations, we also have several initiatives underway to improve service and product offerings, as well as the overall customer experience to ultimately drive higher AUVs and unit-level profitability. Our existing Lindora locations have seen month-over-month gross revenue increases every month since our January acquisition. We are currently expanding Hormone Replacement Therapy, or HRT, and Testosterone Replacement Therapy, or TRT, across the Lindora studio base. HRT is a medical treatment used to balance and supplement hormone levels in the body, which can involve replacing hormones that the body is no longer producing adequately or adding hormones to address specific health concerns. TRT is used primarily to address symptoms of low testosterone levels in men. Lindora offers HRT and TRT services through recurring memberships, subject to a prescription provided by a licensed medical professional. Finally, we are in the process of constructing a mobile app and upgrading Lindora's website to improve our members' experience, enhance marketing, and accelerate lead generation. I'll now turn the call over to John to discuss our quarterly financial results in more detail.

Thanks, Sarah, and thank you to everyone for joining the call. First quarter North America system-wide sales of $401.1 million were up 25% year-over-year. The growth in North American system-wide sales was driven by the 9% same-store sales within our existing base of open studios that continue to acquire new members, as well as new studio openings. Further, 96% of the system-wide sales growth came from volume or new members, which has remained consistent with historical performance, and 4% coming from price. We are still anticipating same-store sales will normalize to mid to high single-digit percentages in 2024. On a consolidated basis, revenue for the quarter was $79.5 million, up 12% year-over-year. 73% of revenue for the quarter was recurring, which we define as including all revenue streams except for franchise territory fee revenues and equipment revenues given these materially occur upfront before a studio opens. All five of the components that make up our revenue grew during the quarter. Franchise revenue was $41.8 million, up 27% year-over-year. This growth was primarily driven by an increase in royalty revenue as system-wide sales reached all-time highs. In addition, an increase in franchise territory fee revenue was due to accelerated revenue recognition on terminated licenses, including those from the STRIDE brand. Equipment revenue was $13.9 million, up 6% year-over-year. This increase in equipment revenue is the result of a higher mix of equipment-intensive brands, which have a higher price point compared to the same period prior year. Merchandise revenue was $8.2 million, up 14% year-over-year. The increase during the quarter was primarily driven by a higher number of operating studios and inventory purchases by existing studios to address the demand for retail as consumer foot traffic has grown compared to the prior year. Franchise marketing fund revenue of $7.8 million was up 26% year-over-year, primarily due to continued growth in system-wide sales from a higher number of operating studios in North America. Lastly, other service revenue, which includes sales generated from company-owned transition studios, rebates from processing studio system-wide sales, B2B partnerships, XPASS, and XPLUS, amongst other items, was $7.9 million, down 30% from the prior year period. The decline in the period was primarily due to our strategic move away from company-owned transition studios last year, resulting in lower other service revenues. Importantly, the savings related to the studio operating expenses exceeded the decline in revenue, resulting in improved EBITDA margins. Turning to our operating expenses, cost of product revenue was $14.4 million, up 3% year-over-year. The increase was primarily driven by a higher volume of equipment installations for new studio openings and a higher mix of equipment-intensive brands in the period as well as increased cost of goods sold on higher merchandise revenues. Costs of franchise and service revenue were $5.1 million, up 27% year-over-year. The increase was driven by higher franchise sales commissions that were accelerated from terminated licenses, including those from the STRIDE brand. Selling, general and administrative expenses of $37.2 million were up 7% year-over-year. The increase in SG&A was primarily associated with restructuring costs from settling leases on company-owned transition studios where we have ceased operations. As previously discussed, we have shifted our strategy on company-owned transition studios, which will decrease run rate SG&A expenses and improve EBITDA margins. The number of company-owned transition studios have declined from 86 at the end of the first quarter of 2023 to only 1 studio remaining as of the end of the first quarter of 2024. With some of these studios having been refranchised to new owners and some having been closed permanently, the net operating losses associated with the company-owned transition studios have been materially eliminated. For the non-operating lease liabilities that are being treated as one-time restructuring, we are planning to enter settlement agreements with landlords by the end of the year. The investments we are making to streamline operations back to a pure franchise model will optimize forward-looking SG&A expenses, resulting in enhanced margin levels. Depreciation and amortization expenses were $4.4 million, an increase of 6% from the prior year period. Marketing fund expenses were $6.5 million, up 30% year-over-year, driven by increased spending because of higher franchise marketing fund revenue. As a reminder, each of our franchise locations contributes 2% of sales to our marketing fund. Therefore, as the number of studios and system-wide sales grow, our marketing fund increases. Since we are obligated to spend marketing funds, an increase in marketing fund revenue will always translate into an increase in marketing fund expenses over time. Acquisition and transaction expenses were $4.5 million, down 71% from the first quarter of 2023. As I have noted on prior earnings calls, this includes the contingent consideration activity, which is related to the Rumble acquisition earnout, and is driven by the share price at quarter end. We mark-to-market the earnout each quarter and accrue for the earnout. We recorded a net loss of $4.4 million in the first quarter, or a loss of $0.30 per basic share, compared to a net loss of $15 million, or a loss of $1.38 per basic share in the prior year period. The improved net loss was a result of $5.6 million of higher overall profitability, an $11.2 million decrease in non-cash contingent consideration, primarily related to the Rumble acquisition, and a $2.1 million decrease in non-cash equity-based compensation expense, offset by an $8.1 million increase in restructuring costs from our company-owned transition studio, and a $0.3 million increase in loss on brand divestiture. We continue to believe that adjusted net income is a more useful way to measure the performance of our business. A reconciliation of net income to adjusted net income is provided in our earnings press release. Adjusted net income for the first quarter was $9.1 million, which excludes the $4.5 million in acquisition and transaction expenses, primarily related to the non-cash contingent consideration for the Rumble acquisition, $0.6 million related to the first quarter remeasurement of the company's tax receivable agreement, $0.3 million related to the loss on divestiture of STRIDE, and the $8.1 million restructuring and related charges. This results in adjusted net earnings of $0.15 per basic share on a share count of 31.1 million shares of Class A common stock, after adjusting for income attributable to non-controlling interest and dividends on preferred shares. Adjusted EBITDA was $29.8 million in the first quarter, up 30% compared to $22.9 million in the prior year period. Adjusted EBITDA margin grew to approximately 38% in the first quarter compared to 32% in the prior year period. As Anthony mentioned, we have positioned the company for higher margins and increased operating leverage going forward, and we continue to expect margins to reach 40% this year. An attractive element of our franchise business model is the ability to generate substantial free cash flow. During Q1, our unlevered free cash flow conversion exceeded 90% of adjusted EBITDA, as we require minimal capital expenditures to grow the business. It is worth mentioning that the company has approximately $160 million in federal and state net tax loss carry-forwards that will result in a minimal cash tax burden for the coming years. Our anticipated interest expense in 2024 will be approximately $45 million, assuming no additional debt paydown, and we assume negligible working capital impacts on cash flow. For the full year, we would expect levered adjusted EBITDA cash flow conversion of over 60%, excluding any effects for preferred dividends and one-time restructuring, and will convert to over 70% in the coming years. We will continue to prioritize cash usage on settling leases from our transition studios. As we make progress on settling these leases, we will assess when the appropriate time will be to begin executing on our stock repurchase program. Turning to the balance sheet. As of March 31, 2024, cash, cash equivalents, and restricted cash were $27.2 million, down from $28.1 million as of March 31, 2023. Material cash usage in the period included the $8.5 million acquisition of Lindora and the previously discussed $4.5 million restructuring lease settlements. Total long-term debt was $331.4 million as of March 31, 2024, compared to $266.7 million as of March 31, 2023. The increase in total long-term debt is primarily due to the repurchase and immediate retirement of approximately 2.6 million shares under our accelerated share repurchase program in Q3 and Q4 of 2023. Let's now discuss our outlook for 2024. Based on current business conditions and our expectations as of the date of this call, we are reiterating guidance for the current year as follows. We expect 2024 global new studio openings to be in the range of 540 to 560. This range is in line with prior year studio openings. We project North America system-wide sales to range from $1.705 billion to $1.715 billion, or a 22% increase at the midpoint from the prior year and the highest North America system-wide sales in our history. Total 2024 revenue is expected to be between $340 million and $350 million, an 8% year-over-year increase at the midpoint of our guided range. Adjusted EBITDA is expected to range from $136 million to $140 million, a 31% year-over-year increase at the midpoint of our guided range. This range translates into roughly 40% adjusted EBITDA margin at the midpoint. We anticipate revenue, adjusted EBITDA, and new studio openings will gradually increase throughout the year, similar to the ramps in 2023, and we continue to anticipate same-store sales will normalize to a high single-digit by the fourth quarter. We expect total SG&A to range from $135 to $140 million range, or $110 to $115 million range when excluding the one-time lease restructuring charges, and under $100 million when further excluding stock-based costs. In terms of capital expenditure, we anticipate approximately $9 million to $11 million for the year, or approximately 3% of revenue at the midpoint. Going forward, capital expenditure will be primarily focused on the integration of Lindora and maintenance on other technology investments to support our digital offerings. For the full year, our tax rate is expected to be mid to high single digits, share count for purposes of earnings per share calculation to be 31.5 million, and $1.9 million in quarterly dividends to be paid related to our convertible preferred stock. A full explanation of our share count calculation and associated pro forma EPS and adjusted EPS calculation can be found in the tables at the back of our earnings press release, as well as our corporate structure and capitalization FAQ on our Investor website. This concludes today's prepared remarks. Thank you all for your time today. We will now open the call for any questions.

Your first question comes from John Heinbockel from Guggenheim Partners.

Hey, John, I wanted to start with, I know you talked about the free cash flow conversion rate, but maybe talk about the dollar amount, right? So I think the idea might have been $60 million or $65 million of free cash flow dollars in '24. Is that about the right number? And then sort of suggested your commentary that that will be focused on debt reduction with no buyback this year, right, or minimal buyback. And then what's your latest thought on timing of possibly a financing? Is that do you think that's very late this year or not likely at all?

A couple of questions there. So, the first part about the cash production, yes, the cash generation this year is going to be around that $65 million range. The use of cash, and again, this is pre-restructuring, the intent of how we deploy the cash is going to be to address the lease liabilities, first and foremost, on the transition studios. As far as the stock repurchase, there is the opportunity for us to do some of the repurchasing in the second half of the year, as we talked about in the last earnings call, but we want to prioritize getting rid of the lease liabilities first. In regards to a refinancing, we did get an extension done earlier this year, throughout 2026. We are continuing to monitor and look at interest rates and look at opportunities for us to get a refinancing done that would allow us to take advantage of lower interest rates as they start to set in. Obviously, with some of the more recent announcements, it seems like they're kind of holding flat, but we are looking at opportunities and where we could potentially draw down on the interest rate and get out more of a long-term fixed financing in place at a much cheaper cost.

And then maybe secondly for Anthony, if you think about the 1,000 locations that Buxton has for Lindora, I mean how do you – I'm sort of curious, how do you think that stage is? I know you've sold 40 and you've got to sell them, right, they'll be front-loaded selling and then you'll open them later. But how do you think that plays out, right, over the next 2 or 3 years? And I guess, would you – does that cannibalize at all franchisees' interest in opening other brands? Or do you think, no, it just, because it expands the TAM, there's no cannibalization on selling other licenses?

No, there's definitely no cannibalization on selling other licenses, and the majority of our franchise sales come from about 500 plus franchise sales brokers we have independents across the country. And they're generating new lead flow of people that are not in the exponential system, people that could be looking at anything franchised across the country. So there's definitely no cannibalization in there. Buxton has a high level of integrity in what they do, and they do their TAM work. And so, we tend to see the numbers be very conservative with them. For instance, original Club Pilates was just a bit short of 1,000 in total. And today we've got about 50% more than that even pre-sold, right, with 1,000 already open. And so what we find is that we're very constrictive in the beginning on how many we sell, where we sell them. And as we get those stores out and get them open, we see AUVs be stable and increase, then we're willing to release more and more TAMs. So if you look at kind of Club Pilates now, several years later, Club Pilates TAM continues to increase by about a 100-ish or so new units every year on the TAM. So, we expect the Club Pilates TAM will get to 2,000. Buxton's comment to us when they ran the cohorts for Lindora based on the Lindora current membership, that they were synonymous with StretchLab and Club Pilates. So, we expect that we will see the TAM of Lindora head to those numbers, which will be somewhere in the 1,500 to 2,000 range over time, provided that we get out, we get the stores open, but the 40, close to 40 you're seeing today that are sold, you'll start to see those open, some of those open in Q4 most likely of this year. So that's probably what you would see.

The next question comes from Megan Alexander from Morgan Stanley.

I wanted to ask about the comp a little bit. You talked about a low double-digit type expectation when you guided in February, so were you running low double-digit then, and did the comp decelerate over the balance of the quarter? Or were you expecting the comp to accelerate and it didn't? I guess, can you just give us a little bit more color over the cadence of that comp during the quarter? And maybe what drove the downside versus your expectations?

Sure. I can jump in on that one. So, for studios that were over 36 months of maturity, we did see double-digit same-store sales comp. The majority at 9% or the system at 9%, it was a little bit lower than what we were aiming for. We mentioned in our Q4 call that we expected this number to normalize from the 2023 mid-teens growth rates to double-digit – or sorry, to the low double and high single growth rates in 2024. But really what we saw in Q1 was we had a great quarter from a KPI standpoint. So visitations and membership trends were high, freezes were low, but we did see a pull forward in packages sold in Q4, primarily in StretchLab as well as Pure Barre, who had really successful Black Friday promotions. So, we did see a little bit of pull forward that will start to normalize over the next quarter or so.

Okay. And then, John, I think you talked about normalizing still to that high single-digit type level by the end of the year. I mean, depending on your definition, 9% could be high single-digit. So has your expectation for Q2 to Q4 changed at all on the comp? And how should we think about maybe can you talk a little bit about the exit rate? And how should we think about Q2?

Yes. I think when you look at the – from Q1 to Q2, how to think about it, I think what the assumption that I'm using right now based off of the information is you'll probably see something similar to Q1 in Q2. It will stay flat in the – is the assumption I'm using. Again, it really comes down to the packages that were sold in Q4 between Pure Barre and StretchLab when those people either re-up or if they join as members, and then that will be kind of a – because of the size and scale, that will be an influencer in Q2. I do believe for the full year that you're still looking at mid to high single digits by Q4. But the overall year, I still believe it's going to be a high single-digit same-store sales comp.

Your next question comes from Ryan Meyers from Lake Street Capital Markets.

First one for me, Anthony, you talked about adding strength into CycleBar and Pure Barre that drove sort of the AUV during the quarter. I'm just wondering what kind of optionality you guys have to do that within other brands?

Well, I mean, some brands like BFT obviously already have it. And so we don't really need to drive that into Club Pilates today. So, we'd be putting it into those brands where it makes sense, where it wasn't, which kind of drives really all that we have today. We already have strength training in brands like Row House and things of that nature. So, that's where we are on that.

And then just wondering if you can talk about if you've seen any changes to the opening mix by brand as we progress throughout this year. And then maybe how you think about that into next year, especially as now that we have the Lindora acquisition.

Yes, I could take that. In Q1, one of the largest openers was Club Pilates. It actually was the highest number of openings domestically for Club Pilates in the last 5 quarters. So, it was a little bit over-indexed in CP in Q1. I think when you look at the overall mix in 2024, as we go through the quarters, you'll see about a third of the openings still being Club Pilates, which is very similar to last year. And then as you move forward, StretchLab will make up about 25% of the mix. And then YogaSix has shown really strong performance from an AUV perspective lately, but also from an openings perspective. I think that will be in the 5% to 10% range of the total openings. And then both Rumble and BFT, I think will be in the 5% to 10% range for this year. And then the balance is made up of the other brands. So, when you look at it, a third Club Pilates, maybe about 25% StretchLab. And then between YogaSix, Rumble, and BFT, about 5% to 10% of the total mix. So, you're seeing kind of a concentration of the openings among those brands.

The next question comes from Jonathan Komp from Baird.

John, if I could follow up just on the full year profit outlook. I know that the full year is for about 40% adjusted EBITDA margin. So, could you maybe just share any more insights or any other color to call out as we think about the progression from mid 37% in Q1 to 40% for the year?

Yes. There hasn't been much change since the last earnings call, specifically the Q4 call from last year. We projected a range of mid to high 35% to 40% for Q1. We anticipate nearing or exceeding 40% in Q2. The performance from Q2 to Q3 is expected to remain relatively stable. The summer months typically show a slight increase. Analyzing the performance in 2023, Q2 and Q3 are likely to mirror each other. In Q4, we expect a significant number of installations, which may slightly lower our margins as they usually fall within the 30% to 35% range. This will have a dilutive effect, especially with our national conferences in that quarter. We forecast 38% for Q1, and expect to see percentages in the low 40s for Q2 and Q3. However, Q4 might see a slight dip due to convention costs and equipment installations. Looking ahead to 2025, we aim to be in the mid to low 40% range and gradually improve over the next eight quarters, continuing our goal of reaching 45% by 2026. We anticipate a steady increase of 1% or 2% each quarter.

Okay. And then just one separate question maybe for Anthony or Sarah. We noticed the FDDs this year included concept level monthly churn, which I believe was new. Just wanted to maybe follow up, but I don't know if you could share any color as we think about differences in churn by concept, maybe what drives with that. Or maybe it's a follow-up as you think about churn overall across the system, any comments on what you're seeing or any trends positive or negative from a churn perspective.

Yes, I'll take the lead on this one. When you look at the brands, I mean, on average, you're seeing somewhere between 5% to 7% churn across the brands. Some of the – and those are really in the core brands is where you see that. And then, but we typically look at churn from 12 months – or after 12 months because that's really when the core customer is kind of attached to the brand or their location. In that case, you see attrition rates in the low single percentage digits. We always look at between 2% to 4%. When you look at it within 12 months, I mean, you get your New Year's resolution type people that come in, you get your vacation type people that are trying to get ready for summer months, weddings, those kind of things. So, you do see in that, let's call it 5% to 7% churn on some of our more scaled brands. But when you look in the post 12 months kind of core consumer, it's the low single percentage digits on a monthly basis.

And has that held stable in the last few quarters and into 2024, any changes that you've noticed?

Yes. When we look at the trends, you really haven't seen, even since kind of post-COVID, the consumer kind of behaviors have been very stable. Even from a freeze perspective, an attrition perspective, it's been very consistent. So, we haven't seen overall trade downs in what the consumers are spending. So, if you look at a 4-pack, 8-pack unlimited, what we are seeing is up there, we're getting more price on a pack this – in Q1 of 2024 versus Q1 of 2023. But the consumers on what they're purchasing or their wallet spend has been up, as we've progressed through the quarter. So, in essence, we're able to take a little bit more price as new members come on, old members are traded out, because utilization and capacity is less. In the studios, we're getting more wallet share on the new consumers than we did a year ago. But very stable utilization and very stable kind of visit patterns from the consumer.

Your next question comes from Chris O'Cull from Stifel.

John, just as a follow-up to an earlier comment. Is the comp currently trending similar to the first quarter level? Or does it need to improve to get to that level?

Comp in Q2 is what you're asking for?

Yes.

Yes. I haven't provided any, like, forward-looking Q2 comments, but the assumption that we're looking for is that Q2 will be similar to Q1 from a comp perspective. And then I still see the full year around that high single-digit, but I do expect as we roll into Q4, it will taper down to the mid to high singles. When you look at what comps were pre-COVID, the 8 quarters pre-COVID is in a much more normal environment. They averaged 8%, the 8 quarters prior to COVID. So, that's kind of the assumption that I'm using going forward in my model is that they will, you know, even though they're at 9%, they were modeling 9% for Q2. I think getting back to that, let's call it, 5% to 8% by Q4, again, being somewhat conservative in the way I do my modeling, is the assumption I'm using.

Okay. Yes, I was thinking more of the current trend. Is the current trend currently around the level you saw in the first quarter? Or are you expecting it to accelerate from this to get to that high single-digit level?

Possible. We're looking at, obviously, the impacts of – we've got Lindora in the mix. STRIDE's no longer in the mix. We're opening a lot of StretchLabs and Club Pilates last year. So they're starting to enter the comp this year, as we go through the quarter. So, in order to make the model work, I understand what you're asking, yes, you'd have to probably see a slight uptick in Q2 to get to that full year 9%. So, it's probably a safe assumption. But for conservatism, I think, again, in my model, I'm looking at it Q1 to Q2, it's probably going to be in the same range in Q2 as it was in Q1, plus or minus 1%. So, yes.

Okay. We noticed the run rate average unit volume essentially held flat on a sequential basis relative to the fourth quarter. Can you talk about what drove that dynamic?

Yes, as Sarah mentioned, during the Black Friday deals in Q4, Pure Barre and StretchLab achieved impressive average unit volumes. Essentially, they attracted a significant amount of sales in Q4 that would typically have occurred in Q1. Consumers were responsive to those promotions, which is why the sales for Pure Barre and StretchLab, as larger brands, were not as strong in Q1 since they had already been realized in Q4. We observed high visitation, leading us to believe that while those promotions may have performed exceptionally well, it's advantageous because it brings in consumers earlier. The next step is to convert those visitors into memberships to generate recurring revenue from the Black Friday promotions. Consequently, there's a bit of flatness in Q1 compared to Q4, driven by those promotional strategies of the brands. In contrast, Club Pilates did not implement many promotions and experienced fairly standard activity levels. Other brands had increased promotions which likely boosted package volume, affecting Q1 by pulling some sales into Q4.

Okay. And then I think you mentioned Buxton added 800 Club Pilates locations to the TAM. And I'm just curious what the main enablers of that expansion was in terms of either demographics or psychographics that you're capturing now?

Yes. As I mentioned earlier on the call for another question, when we evaluate the original total addressable market, we maintain low cannibalization rates both from ourselves and our competitors. Over the past nine years, the average unit volume has increased from 250 to 1 million. This suggests that our initial estimates were possibly too conservative, as we kept cannibalization minimal and ensured a high concentration of our core customers in the surrounding area. Therefore, we will start to cautiously increase that by one or two percentage points and observe how the total addressable market responds, allowing for more store openings while ensuring proper management of this process. One factor to consider is that the system was designed for a specific average unit volume. The brand was initially set at 605 for average unit volume, but it currently stands at around 1 million. We can adjust the average unit volume, potential average unit volume of the store, cannibalization, and density. However, we want to avoid early overselling in an area, which could lead to flat or declining average unit volumes.

Your next question comes from Alex Perry from Bank of America.

I guess I wanted to follow up on the studio opening cadence for the year. Should we expect sort of the same percent of openings in each quarter versus last year? And then how many net studio openings this year? So, I think the gross number stayed the same. Has your expectation on net studio openings changed at all?

We have projected earnings of 540 to 560 for the full year, aligning with 2023 at the midpoint. The distribution will be 45% in the first half and 55% in the second half of the year. Q1 will be the lowest quarter, similar to Q1 of 2023, with a gradual increase in Q2 and a slight rise in Q3. In Q4, as seen last year, we expect a significant number of openings as people typically engage with new year resolutions, which is common in franchising. We anticipate this trend will continue into 2024. In terms of closures, we don't have much historical data, but Q1 closures are just over 0.5%. Overall, we believe that a 3% to 5% closure rate is normal, and we've factored 3% into our guidance. Q1 is performing better than expected, with lower closures than we anticipated. We will keep focusing on supporting our franchisees in opening studios and helping those that are struggling to improve their average unit volumes to avoid closures. The midpoint earnings estimate is $5.50, with 45% expected in the first half, 55% in the second half, and closures estimated around 3% for the full year.

And from a dollar's perspective, obviously, the cohort of, the AUV of cohorts that are closing is totally different than the cohort of AUVs that are opening. So, you can't really model them on a one-for-one KPI net unit basis in the model, or you'll be off.

That makes a lot of sense. And then, can you just remind us on sort of the financial implications of the wind-down of the transition studios? Like, what is the net savings expectation that you're expecting for the year? And is that sort of coming in line with how you're thinking about it 3 months ago?

Yes. If you consider the pro-forma for 2023 and assume there were no transition studios last year, your revenue would be approximately $25 million lower. The other service revenue line would also be about $25 million lower. Your SG&A on the standard 4-wall operating expenses would be around $37 million less. Therefore, the overall EBITDA impact from last year was about $12 million. If you start this year with an adjusted EBITDA of $117 million and then project it to reach the range of $136 million to $140 million that we communicated to the market.

Your next question comes from Jeff Van Sinderen from B. Riley Securities.

So, just to clarify on AUV, when you look at it comprehensively for the enterprise, does your guidance bake in an AUV increase in Q2 and the remainder of the year? Or maybe, what should we expect for AUV progression for the remainder of the year?

Yes. The model does assume that AUVs will continue to increase in 2024 on a quarterly basis. As we look at Q1 and how we finished the quarter at – kind of that mid – or the high 570s, I do believe that as you kind of move into the later half of 2024, you'll start to see us push into the – the higher ranges from an AUV perspective, trying to cross over into the $600,000 and driving our way towards $700,000. I don't believe you'll get to, based off of the assets, the brands we have today and the mix, I don't think you'll cross $700,000 at this point in 2024, but I do think you'll start to threaten towards the high $600,000 as we progress through this year. A lot of the growth you got to remember is, Club Pilates has kind of been in that $900,000 to $1 million range. Your StretchLab, we opened a lot of StretchLab last year. Those studios get to a $600,000 AUV very quickly as we open up more Rumbles, BFTs, and now we have Lindora's that will start to show up in the later part of this Q4 kind of timeframe, albeit a very small sample set, but it is just studios entering at high AUVs. Those will continue to pull up the overall AUV. Brands like YogaSix have done very well over the last coming quarters. They've actually kind of accelerated a little bit from an openings perspective. The AUV continues to grow there. We got really great response to Pure Barre. So those AUVs, so you're getting a lot of support in all the brands that are at scale doing fairly well. So, AUVs right now as they sit today, they were relatively flat to Q4, but with the studios that'll start entering the 6 months of age and they enter the calculation probably midway through the year, they'll start pulling up the AUV because they're performing very well right out of the gate.

Okay, that's helpful. And then, of course, you sold 40 Lindora's licenses, and I'm sure you're selling more as we speak. Can you give us any more color around the sort of the trends in other brands in terms of the composition of new licenses sold in Q1?

Yes, of the 173 licenses sold in Q1, about 55% of them were Club Pilates. So, there was about 100 that we sold of Club Pilates. Again, over indexed in Club Pilates, Lindora as you mentioned, and then BFT, there was about 20 BFTs that were sold in the first quarter. StretchLab had about 15. And Pure Barre, as we mentioned, the performance in Pure Barre has led to new license sales. So, we saw 11 new license sales in Pure Barre. So, the balance was with the rest of the brands, but 173 licenses in Q1, with about 55% of them in Club Pilates. It's not a surprise given where the license sales are coming from because they're coming from brands that are performing very well with high EVs. So, franchisees are very motivated to buy more licenses and whether you're a new franchisee or an existing one, trying to expand your existing portfolio.

Your next question comes from Warren Cheng from Evercore ISI.

I wanted to follow up on your comment about the increased sales of Pure Barre and StretchLab packages in the fourth quarter. It seems there's a discrepancy between when those packages were purchased and when they were actually used, with customers buying them earlier due to strong sales. Instead of focusing on revenue, could you tell me if the number of visits for StretchLab and Pure Barre aligned with your expectations from three months ago?

Yes. Visits were up in the first quarter. And that was the one thing we were interested about because when we've heard on other earnings calls, people kept talking about weather. So, we knew it wasn't weather because at the end of the day, visitation was really high. So, when we look across on a national scale, we didn't see visits fall off. We actually saw class offerings high. We saw visitations high. When you look at Q1 of 2024 versus Q1 of 2023, visitation was up 6% on average per studio. So, you actually had more engagement from consumers in Q1. So, it really led you down the path. And when you look at the individual brands, just Pure Barre and StretchLab had this kind of effect where we did see the sales, in essence, get pulled into Q4 versus Q1. So, it's a good thing because you got the revenue faster earlier. The consumers are now using whatever they purchased. And with the expectation now is the franchisees have the opportunity to convert them to members and get them more onto that reoccurring membership from a growth perspective.

And then my follow-up is on Lindora. It's great to see 40 licenses signed out of the gate here. Can you help us understand what you expect normalized AUV to look like? Because I know those open at a pretty high AUV in year 1?

I mean, look, AUVs are close to $1 million. They're about $980 million and change. So, we haven't really gotten our hands around or on to tech, lead flow, closing percentages, attrition, all the things that we do really well as a sales and marketing engine. So, all that stuff is just starting to get implemented. Our teams are together, starting to work together, all that kind of type stuff. So, I don't think we've really seen a lift, really, from us yet on stores.

Yes. We kind of built it into the model. And to Anthony's point, there's a lot of – when we start nationally deploying this, there's a lot of learning curves as you put it into different markets. Right now, the assumption we've built into our model is they perform very much like StretchLab, which is better on that $600,000 AUV. It's above the $500,000 that we designed from a unit and economics perspective. But similar to StretchLab is how we've kind of modeled in their growth curve. We've always tended to lean on the conservative side, but the consumers and the franchisees kind of map very similar to our Club Pilates kind of franchisees and members. So, we'll see how they perform. But right now, we're just assuming they get to $600,000. The existing portfolio that joined when we acquired, as Anthony mentioned, they're just right under $1 million. So, if they do anything north of $600,000, it's upside for the business.

Your next question comes from Korinne Wolfmeyer from Piper Sandler.

My first one is not to harp on this pull forward of promotions too much, but I am curious when you laid out expectations a couple months ago, did you already recognize that there was this pull forward or is this kind of a new realization? And then what's the historic, you're talking about like a conversion of full-time members. What's the historic conversion you've seen with these types of promotions and what gives you confidence that these people will end up converting?

From a guidance perspective, I would say we did not anticipate this. It's difficult to determine because when you look at every fourth quarter over the last couple of years, the promotions perform very well. We've approached them differently each year; for instance, we used to run more promotions in Club Pilates, but we really don't do that anymore due to the high demand. As you try to fill capacity in brands and offer different services, you tend to see varied reactions. In January and February, things seemed a bit lighter, and while weather was often mentioned as an issue, we didn't perceive it that way. However, by March, we noticed the average unit volumes starting to rise again, and upon reviewing the data, it became clear that these two brands really stood out in terms of performance. The key with promotions is that they attract people to your studios, allowing them to experience the product and giving franchisees the opportunity to convert them. Traditionally, we have seen the fourth quarter and the first quarter be our strongest, especially early in the second quarter. It's uncertain whether we will see the same impact this year as we move back into a more normal environment post-COVID. Nonetheless, those brands have performed well, so we anticipate a significant portion of these consumers will either renew their packages or convert to memberships.

And then on Lindora, can you just give us a little bit of color on where these licenses will end up building and, like, where you're expecting the new units to get built up? Is it still more California or are you starting to see interest in other states?

Yes, we've sold across, I think it was 6 or 7 ownership groups across 6 or 7 different states. So, it's starting to spread to the Midwest and the East Coast.

Your next question comes from J.P. Wollam from ROTH MKM.

If I could first start, I believe, and you correct me if I'm wrong, I believe you're changing the online booking platform and maybe that's already underway. But could you just elaborate a bit on sort of how big of an IT challenge that is, kind of what you're doing to prepare for that and prepare franchisees for that, and then just what the advantages are of switching?

Yes, I can definitely speak to that. So, we had an exclusive agreement with our point of sale vendor, ClubReady. We are now out of that exclusive agreement and have the opportunity to go out to market for an RFP. Really, the ClubReady system is a booking and point of sale management system. What we've done over the last couple of years is we've built all of our consumer-facing applications and websites on top of the ClubReady infrastructure. So, in terms of the transition, we won't be needing our customers to learn a new booking system or new application. We'll actually lift our entire customer ecosystem and plug a new point of sale system underneath it or behind it. So, it's been a lot of work already to ensure that we're minimizing any sort of disruption that could occur. I think what you'll see is maybe some learning curves at the front desk or operationally at the studio level. But we've got about a minimum of 18-month runway to be able to select a good partner, put some tests in place, and then ultimately decide a go-forward pathway. This would be for domestic operations. We are open to, of course, a global solution, but this is primarily focused on our domestic operations.

Great. That's very helpful. Then maybe just stepping back in terms of kind of a high-level industry thought and maybe more geared towards you, Anthony. The Orangetheory merger a few months ago, and I think just this last week, there were some potential rumors about Barry's considering a sale. Is there any read-through on this in terms of the boutique fitness industry and just any considerations regarding those news items?

No, I think they're kind of mutually exclusive. Dave and Chuck have been running Self Esteem and Orangetheory for a long time. They're great operators, but they've been running that business for a long time. Roark owned both of those for a while, and I think you can see publicly they merged those together. I think it took a $480 million whole business securitization out of there. So, I think they just merged those together because it's kind of left pocket, right pocket for Roark, but put together, it's more compelling. Obviously, Orangetheory is an amazing brand, and Dave's a great operator. They could bring him and Chuck together under one roof. I think they're looking for somebody to kind of run both of those as well. I think that's totally separate. North Castle's owned Barry's for a while now. They owned it pre-COVID and then kind of came through COVID. I think like any private equity firm, they're looking to close out their fund and see some upside from their acquisition. But other than that, I think those are two separate kind of things happening, but nothing that I see really to read into those together.

There are no further questions at this time. I would now like to turn the floor back over to Anthony Geisler for closing remarks.

Thank you, everyone, for joining today's earnings call and for your support. We look forward to seeing many of you at upcoming Investor Conferences in May and June, and we'll speak to you again on our Q2 earnings call in August.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.