Xponential Fitness, Inc. (XPOF) Q4 2021 Earnings Report, Transcript and Summary

Greetings, welcome to the Xponential Fitness, Inc., Fourth Quarter and Fiscal Year 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, [Operator Instructions]. Please note this conference is being recorded. I will now turn the conference over to your host, Kim Esterkin, Investor Relations. You may begin.

Thank you, Operator. Good afternoon. And thank you all for joining our conference call to discuss Xponential Fitness 's fourth quarter and full year 2021 financial results. I am joined by Anthony Geisler, Chief Executive Officer, John Meloun, Chief Financial Officer. Sarah Luna, our President, will also be available during the question-and-answer portion of this call. A recording of this call will be posted on the Investor section of our website at investor. xponential.com. We remind you that during this conference call, we will be making 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 more detailed description of these risks and uncertainties, please refer to our recent and subsequent filings with the SEC. We assume no obligation to update the information provided on today's call. Please note that the fourth quarter and full year 2021 financial results discussed today do not include contributions from BFT prior to the acquisition in October 2021, unless commented on as being stated on a pro forma basis. 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 press 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, Kimberly. And good afternoon, everyone. We appreciate you joining our fourth quarter and full year earnings conference call. Xponential Fitness is the largest global franchise or boutique fitness workout brands. Through our franchisees and master franchise agreements, we operate over 2100 studios in 12 countries around the world. We own ten leading brands across all major workout modalities with our newest additions, including boxing and functional training. Our business model is straightforward. We licensed our boutique studio operations, share our business processes and branding with friends. Franchisees at an exchange charge, royalties, and other fees for our services. As our studio AUVs grow, and as we increase the number of studios, we become more profitable, given that the royalties generated from our system-wide sales are virtually 100% margin flow through. And given our SG&A platform scales, we are extremely proud of the operating. Operational accomplishments that drove our record financial performance in 2021, which further provides us great momentum into 2022 on a pro forma basis, including our two new brands, Rumble and BFT. Exponential sold 955 franchised licenses and open 334 new studios across nine countries. Our 2021 new studio cohort of 238 North American studios, added almost 50 million to the over 700 million in system-wide sales generated in 2021. We deployed our XPASS membership offering across the system, signed a strategic partnership with LA Fitness, and reported record financial results. For the full year, Xponential posted net revenues of $155 million, increasing 45% year-over-year and adjusted EBITDA of $27 million or 18% of full year revenue compared to $10 million or 9% of revenue in the prior year period. We attribute our success of the system we have created to our dedicated franchisees, as well as our employees, our international master franchise partners, our members and vendors that together support our studios. In December, the same community of over 2,000 individuals traveled to Las Vegas from all over the world to attend our annual franchise convention. At our annual convention, we recognize franchisees for their hard work, share best practices, provide training, showcase vendors exhibits, and align on our goal to carry forward the momentum for the coming year. I'd like to thank all those who contributed last year for your hard work and commitment to achieving our mission of making boutique fitness accessible to everyone. We finished 2021 with strong fourth quarter performance as our business remained resilient to the Omicron surge that began in late November. This resilience is evidenced in our fourth quarter actively paying members and visitation rates, which increased by approximately 70% and 50%, respectively, year-over-year. We also experienced strong demand for our franchise licenses, selling 301 licenses in Q4 pro forma for BFT. This brought our 2021 quarterly average to almost 250 licenses sold per quarter or a run rate of almost 1,0000 licenses sold, creating a solid new studio growth opportunity as we head into 2022, driven primarily by our younger brands. While Omicron continue to dominate the headlines early this year, we have experienced minimal impacts to our business and our growth momentum continues. In fact, average unit volumes, or AUVs, quarter-to-date have continued to increase driven by higher active members and increased member visits. We are confident our business remains on track to fully recover run rate AUVs to their pre -pandemic levels in the first half of 2022. Our recovery to pre -pandemic levels and beyond continues to be driven by four key strategic areas of growth. I'd like to discuss our progress in each of these areas, beginning with growing same-store sales and AUVs. I am pleased to note that our Q4 North American system-wide sales grew for the sixth consecutive quarter, increasing 76% year-over-year. We ended the year with North American Q4 run rate AUVs of $446,000, up 56% compared to 2020. The key to our ongoing success is our ability to proactively manage the health of our franchise system. You've heard me discuss before that we track our core KPIs continuously by leveraging our technology capabilities and data analytics tools to better understand real time business performance and ensure our franchisees drive continued engagement, whether through in-person classes or through our new digital platform, X-plus. X-plus, which provides live and on-demand access to sought-after workouts and thousands of studio locations around the world will launch this quarter. Advertisements announcing the launch began in December to develop consumer awareness. Our brands have started to pre -sale subscriptions to the new platform and are seeing early success. X-plus as the evolution of our previous platform Go. Our new standalone app combines all of Xponential Fitness's digital offerings in a single platform, providing subscribers greater access to our robust fitness portfolio. The new platform also enables Xponential to offer business-to-business subscription options, as well as direct marketing partnerships. To further promote engagement, the app allows users access to book classes at nearby Xponential studio locations. Another key sales drivers are XPASS offering, which provides access to all of our brands under a single monthly reoccurring subscription. As I noted during the fourth quarter, we met our milestone goal of fully deploying XPASS across the United States. XPASS continues to be a great funnel for new customers with more than 15% of account holders having never interacted with one of our brands prior to joining XPASS. And nearly 60% of account holders being previously lapsed from an Xponential brand or deemed inactive by studio sales staff. We are optimistic about our differentiated offering and expect XPASS to contribute more meaningfully to our business in 2022. Finally, we are thrilled to announce the recent hiring of our XPASS President, Dan Ali. Dan previously was Vice President and Head of Global Strategy and Analytics at Gympass. And before that, he was Head of Strategy and Analytics at Groupon. Our next two growth levers are to increase our franchise studio base across all brands in North America and expand our brands and studio base internationally. We entered 2022 with the largest studio count in our company's history, and expect to open over 500 new studios this year. Opening over 500 studios in a year would be a company record, and is a testament to our strong pipeline and the resilience of our franchisees that we have primed to achieve such a milestone. Today we have over 1,800 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 license obligations alone. That said, the approach we took of adding brands to our portfolio over time has now provided us with a replenishing pipeline of organic, new studio expansion, offering us four to five years of visibility into our long term growth. And based on our latest white space study conducted by Buxton, a leading consumer intelligence technology and services company, we have the white space for approximately 7,900 studios in the U.S. alone; nearly quadruple our current total number of open studios. Our international growth also remains solid. As of the end of the fourth quarter, including BFT, we now have over 2,100 global studios with over 175 of them operating outside of North America. Additionally, we now have almost 1,000 studios obligated to be opened internationally, paving the way for future growth. Our master franchise agreements are structured to provide Xponential with virtually 100% margin flow through. Another organic studio growth driver for Xponential is our nationwide partnership with LA Fitness, which we announced in October. Through this partnership, we have the exclusive right to open our Xponential Fitness brand studios within LA Fitness locations, with a minimum development commitment of 350 franchise locations over five years. We are providing existing franchisees who have an LA Fitness location within their protective territory, the opportunity to open another Xponential Studio within that specific gym location. We are still in the early stages of launching in these locations, but have already opened our first few initial studios and look forward to speaking more on their progress on future calls. On the M&A front during the fourth quarter, we announced that we welcomed our tenth brand, BFT, a community-based high energy functional training offering. BFT transforms our global growth trajectory at time of acquisition, adding over 130 franchise studios across Australia, New Zealand, Singapore, and the U.S. along with an additional 150 studios previously sold and contractually obligated to open in the next 12 months. As it relates to the BFT integration we are on track and have already started selling franchise licenses in North America. I am also happy to announce. We named Lou DeFrancisco as President of BFT. Lou previously served as President of our StretchLab brand, growing it to over 150 open studios to date domestically and selling more than 570 licenses since we acquired the brand. Lou also has extensive international experience in Australia, New Zealand where BFT has a very strong presence, having sold 80 studios in these regions through our master franchise agreements. Leveraging the leadership bench strength in our brands, we have promoted Verdine Baker who served as the Vice President of Sales and Second-in Command for StretchLab to backfill the StretchLab President role. Looking ahead on M&A front, we will continue to opportunistically evaluate potential brands and new modalities, taking a disciplined approach to capital allocation. Since our founding, we have strategically and thoughtfully curated a portfolio of the 10 best-in-class boutique fitness brands. We believe our diverse portfolio differentiates us from any other franchiser and provide stability to our business model. Investing in Xponential is not just an investment in a single company, instead we like in ourselves to investing in a diversified portfolio, the best boutique fitness companies. The proven rigorous diligence process used to assemble our portfolio has ensured that we welcome complementary brands and modalities with longevity and long-term sustainable growth trajectory protecting our position as the industry leader in boutique fitness franchisee. Contributions from our first three growth levers, coupled with continued operating excellence, will support our fourth growth lever. Expanding our operating margins and driving free cash flow conversion. The asset-light nature of our franchise model together with the many benefits we experienced because of our scale and shared services platform has supported our margins today. This year, we expect our adjusted EBITDA margins will expand from approximately 17% at year-end 2021 to over 30% in 2022, strengthened by the continued growth and maturation of our business. In summary, we are very pleased with our fourth quarter results and the continued momentum of our business. We expect to achieve solid system-wide sales growth in 2022, driven by the continued recovery in AUVs. We're experiencing in our current North American studio base, and by our aggressive pipeline of planned new studio openings. As is clear from the 2022 outlook, John will discuss shortly, Xponential is well-positioned to continue executing our four growth levers as we open new studios, drive same-store sales, expand our operating margins, and create value for all stakeholders. Thank you again for your time. I'll now turn the call over to John Meloun to discuss our fourth quarter results and fiscal 2022 guidance. John?

Thanks, Anthony. And good afternoon, everyone. It's great to speak with you and share details on our strong fourth quarter results to close out the year. Fourth quarter North American system-wide sales of $213 million were up 76% from $121 million in the fourth quarter of 2020 and represent Xponential's highest system-wide sales quarter ever. We saw solid visitation at all our brands, most notably Club Pilates and StretchLab. On a consolidated basis, revenue for the fourth quarter was $49.4 million, up 78% from $27.8 million in the prior year period. All five of the components that make up revenue grew during the quarter. Franchise revenue was $23 million, up 87% from $12.3 million in the prior year period. The strong results were largely driven by higher royalties, as well as a significant increase in franchise license fees. Equipment revenue was $7 million, up 80% from $3.9 million in the prior year period. This increase in revenue was largely driven by a higher number of equipment installs, along with a greater concentration of installs within equipment intensive brands. Merchandise revenue was $6.5 million, up 47% from $4.4 million in the prior year period. The improvement during the quarter was primarily driven by a higher number of studios open along with increased foot traffic across all our studios. Franchise marketing fund revenue of $4.1 million was up 85% from $2.2 million in the prior year period, primarily due to strong system-wide sales and average unit volume growth. Lastly, other service revenue was 8.8 million, up 78% from 4.9 million in the prior-year period. The increase in other service revenue in the quarter was primarily driven by sponsorship revenues generated from our annual franchise conference Anthony discussed earlier on the call, and by revenue generated from our temporarily owned corporate studios. Turning to our operating expenses, cost of product revenue were 9.3 million up 71% from 5.4 million in the prior-year period. The increase during the quarter was driven by higher equipment and merchandise revenues in the period. Cost of franchise and service revenue were 4.1 million up a 117% from 1.9 million in the prior-year period. The increase during the quarter continued to be driven by costs related to franchise sales commissions. And from technology fee revenues because of a higher number of studios operating. Selling general and administrative expenses of $32.7 million were up 93% from $17 million in the prior year period. This increase was largely due to costs associated with public company expenses and higher non-cash equity-based compensation. Our annual convention, which was in-person this year versus digital last year, and operating costs from the company-owned studios that we're in transition. As a percentage of revenue, SG&A expenses were 66% of revenue in the fourth quarter compared to 61% in the prior year period. Depreciation and amortization expense was $3.3 million, an increase of 67% from $2 million in the prior-year period. Marketing fund expenses, which include expenses related to corporate marketing, was $3.7 million up 80% from $2 million in the prior-year period. The increase was driven by higher spend afforded by higher marketing fund revenue, as well as lower spend in 2020, when studios were required to be closed due to the pandemic. Acquisition and transaction expenses totaled $23.1 million versus no spend in the fourth quarter of 2020. The increase in acquisition expenses is related to our acquisition of BFT, along with $22.4 million in contingent consideration primarily related to our acquisition of Rumble. As I noted on our Q3 2021 call, we value this Rumble contingent consideration on a mark-to-market basis each quarter and accrue for the earn-out. Net income is reduced. However, the share count will not increase until the shares vest. We recorded a net loss of $29.8 million in the fourth quarter compared to a net loss of $5.1 million in the prior-year period. Net loss during the quarter is primarily the result of the previously mentioned contingent consideration related to our acquisition of Rumble. I would like to note that it is difficult to forecast the impact of the contingent consideration since it is fully dependent on the trading price of our stock at the end of the period. As such, we believe that the adjusted net income figure is a more useful way to measure the performance of the business. On an adjusted basis for the fourth quarter, excluding the $22.4 million of non-cash contingent consideration, along with $1.3 million related to the re-measurement of the tax receivable agreement according to our [Indiscernible] structures, adjusted net loss totaled $6.1 million compared to an adjusted net loss of $5.1 million in the prior year period. In order to calculate adjusted net loss per share, we isolate the portion of the net loss that is attributable to Xponential Fitness, Inc. which is $3 million, then we reduce this number by $1.6 million to account for the dividend paid on our preferred shares. This results in an adjusted net loss of $0.21 per diluted share on a share count of 22.6 million shares. Adjusted EBITDA was $8.6 million in the fourth quarter, compared to $3.3 million in the prior-year period. Adjusted EBITDA margin grew to 17% in the fourth quarter of 2021, compared to 12% in the prior-year period. In future periods, we expect to realize significant margin improvements with greater than 30% margins in 2022 and over 40% long-term as we expand our franchise studio base and leverage our shared services platform across each of our boutique fitness brands. In summary, for 2021, we surpassed pre-COVID revenue with $155.1 million for the full-year, which was 45% higher than 2020 and 20% higher than 2019. Adjusted EBITDA totaled $27.3 million for the full-year, which was 179% higher than 2020 and 66% higher than 2019 as our revenue growth outpaced our operating expenses and resulted in increased operating leverage. Turning to the balance sheet. As of December 31, 2021, cash and cash equivalents were $21.3 million, up from $11.3 million as of the end of last year. Total long-term debt was $130.9 million as of December 31, 2021, compared with $181.8 million at the end of 2020. Based on current business conditions and our expectations as of today, our full year 2022 guidance is as follows. We expect our total 2022 global new studio openings to be in the range of 500 to 520. This represents the highest number of studio openings in our company's history. We project North American system-wide sales to range from 995 million to 1 billion, 5 million, or 1 billion at the midpoint, which represents a 41% increase from the prior year. Also by far the highest in our history. Total 2022 revenue is expected to be between 201 million to 211 million, an increase of 33% from 2021 at the midpoint of our guided range. Adjusted EBITDA is expected to range from 67 million to 71 million. A 153% year-over-year increase at the midpoint of our guidance range. We anticipate our capital expenditure budget for 2022 to be approximately 5 million to 7 million and will be primarily focused. On integrating BFT onto our website and mobile applications. Completing the build-out of a Rumble studio with the remainder being allocated to maintenance and other technology investments to support our digital platforms. In terms of SG&A, the investments we have made in our business have increased the scalability of our model. Today, we require nominal additional SG&A expenses to support our growth of the business. In addition, our SG&A expenses in 2022 will also benefit from no longer operating the company-owned studios, re-acquired during the COVID-19 pandemic. Based on the visibility today, SG&A, excluding equity-based compensation for 2022, will be roughly 33% of total revenues at the midpoint of the range. 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 stock. A full explanation of our share count calculation and associated pro forma EPS and adjusted EPS calculations can be found in the tables at the back of our earnings press release. In terms of more recent performance, following a strong Q4, we are pleased with our early Q1 results. AUVs, system-wide sales, visitation, and membership counts, continue to increase, demonstrating both new and existing members remain committed to in-person community-based workouts. In summary, we are very happy with our fourth quarter and full-year 2021 results. Importantly, Xponential 's momentum has continued into 2022, and we are confident in the growth trajectory of our company. Thank you again for the time today, and for your support of Xponential. We look forward to speaking with you on our next earnings call. We will now open the call for questions. Operator?

At this time, we will be conducting a question and answer session. [Operator Instructions] One moment please, while we poll for questions. Our first question is from Randy Konik with Jefferies. Please proceed with your question.

Hey, guys. Thanks. I have a couple of questions. So first on the 2022 opening guidance. As you talked about, I think it's the highest in your history and well above your long-term annual guidance. So maybe you give us some perspective on what's driving that much higher number for 2022, which is great. And then do you think that is something where we could expect potentially a higher number of annual openings above your long-term guide or long-term annual guidance trend line going forward because of strength in franchisee partners and then availability to real estate. Thanks.

Hey, thanks, Randy for that. What's driving the spike that you'll see in 2022 is really being driven by the number of license sales we had in 2021 plus some pent up demand related to the COVID period when studios were closed. As you could see, we almost opened 1,000 on a run-rate basis in 2021 and we typically sell multi-packs so about a third of those will roll into 2022 as openings. When we acquired BFT, they also had already sold over 100 additional licenses -- I think the number is closer to 150 -- at that time. So we'll see a significant amount of openings related to U.S. Domestic from the license sales plus the international front with BFT continuing to build out in the Asia Pacific region. Lastly, on the U.S. studios, as you mentioned -- as we mentioned earlier, that the LA Fitness deal that we put together will contribute a number of studios per that build-out agreement that we have. So all the three of those things will contribute in 2022. As we talk about our long-term target, we put out there around 250 to 350 long term. We view that as out five years, assuming we don't require any new businesses and drive new lead generation with license sales. So we look at the 250 to 350 as a long-term steady-state after we go through what I would consider a heavy growth phase over the next couple of years.

That was super helpful. And then my last question would be, any more granularity or let's say just color around what you're seeing in, let's say, new member adoption or new member growth versus higher utilization from existing members. Just want to get some color on any trends you can share with us beyond the statements you shared in the scripted remarks will be helpful and then any color you can give us around utilization rates between suburban markets versus urban markets would be super-helpful as well. Thanks guys.

Happy to take that, Randy. We're starting to see that our members are coming back with strong utilization of our current classes. So I'm see is our offering more classes. They're seeing more participants, more foot traffic as a result, membership sales are an all-time high, as well as our retail sales. So things are looking really good. Ed, and continue to perform strongly into the early part of the year.

And just on suburban versus urban.

Not too much of a difference in terms of what we're seeing. Obviously, some of the mandates affected various cities in different parts of the country but we are starting to see that everyone's coming back at full force and there isn't any notable call-outs on sub-urban versus urban, under-performing or over-performing.

Awesome, thanks guys.

Our next question is from Brian Harbour with Morgan Stanley. Please proceed with your question.

Yeah. Hey, guys. Maybe just to follow-up on the point about the opening guidance, is there any other color you can provide on how much of that is international, just so we can link it to your guidance on system sales? Is it safe to assume that there's, call it, 150,175 if we take the BFT numbers plus some other studios? I'm just trying to link those two figures and how we should think about that.

Yeah. I think from an international versus domestic, I think I would put the majority, I would say, close to about 66% or 70% will come from domestic and about a 1/3 with the BFT business and the other international MFAs will generate the additional balance of the openings. And then pre -asking the question related to the cadence of openings, it'll definitely be skewed to the back half of the year. Assume about 20% of the openings will come in the first quarter and it'll ramp up to about 30% by Q4. So it will be a ramping to the second half.

Okay. Great. Yeah. That's helpful. Maybe just on the refranchising too, just curious if that was completed in 2021?

Yes, we were able to sell through all of our corporate studios. We do have a small subset of studios that we consider transitionary studios, those are the studios that we refranchised out and they stay on our portfolio for very, very short amount of time. So we're back to our normal pre -pandemic levels. Have really healthy interest, in both across our franchise broker network as well as internally for taking over those refranchised studios. We're back to healthy and steady-state performance with those locations.

Okay. Thanks very much.

Our next question is from Alex Perry with Bank of America. Please proceed with your question.

Hi, thanks for taking my question and congrats on a strong quarter. I guess just first, on the margins, how should we think about the equipment and merchandise gross margins for this year? Are you seeing cost increases there, given a lot of the inflationary headwinds that others have called out? And are you -- if so, are you expecting to pass that along to the franchisees? Thanks.

Yeah, thank you. This is Anthony. No material inflation in our equipment and, yes, the mild amount that we are seeing passes through. We are on a cost-plus basis and can always have been. So whether that had to deal with increased gas prices and previous years or decrease gas prices or whatever it might be, we've always been on a cost plus basis and we continue to operate that same way.

That's really helpful. And then just circling back to the studio opening. Can you maybe help us pass through what brands are driving that? And I guess just so we can get a sense of if it's more equipment heavy brands, versus equipment light anymore, color you can give us there.

So on the distribution of the brands, I mean, we look at it from where the openings really coming from, and we have our growth brands which include the Club Pilates, our Pure Barre, and CycleBar. Those are aware of the majority of the openings are going to come from. From a growth perspective, the scale brands will contribute a much smaller percentage of the total openings in 2022. I think the distribution is going to be closer to, again, about two-thirds on the growth brands and about 1 third on the, excuse me, two-thirds on the scale brands and 1 third on the growth brands.

And probably knows that the equipment packages aren't materially different. So it's not like we have one brand where the equipment packages 2x or 3x, the other brands. So fairly agnostic across brands on the equipment side of things, given the size of brands and the margins that are in there.

Perfect, that's really helpful. Best of luck going forward.

Thank you.

Our next question is from Joe Altobello with Raymond James. Please proceed with your question.

Hey, guys. Good afternoon. First question is on the white space opportunity you guys mentioned earlier. I think it's 7900 studios potentially here in the U.S. I think that's up about a thousand from the last time we talked about that number. So maybe help us understand what's driving that? How much of that is BFT, and how much of that is the underlying growth of the business?

Yeah. I mean, the majority of that is the recent acquisition of BFT. So that's what lends the additional piece to it, Joe.

Okay. That's helpful. And maybe a couple of other ones. Could you maybe talk about trends you're seeing in terms of member churn, number one? And number two, have your franchisees talked about having any issues hiring or retaining instructors?

Yeah, the churn's still a steady state as it has been about 1.5% after 12 months, same that we've had since the IPO and continuing forward. There are what I'll call minor pockets of places in the U.S. where there's been some labor stress, but nothing material and nothing that affected the overall franchise system. Just more business challenges that we've had to overcome over the years. Labor has always been the toughest part of any business. Hiring and training and maintaining employees has always been a challenge, but our average employees are not minimum wage employees and these are not people that typically work full-time. Our instructors will work ten hours a week or 12 hours a week. So even if you -- if you're having to pick somebody up, you're not having a pick up somebody for full time. And if you do lose somebody, you are losing ten hours a week of labor, 12 hours a week of labor, not 50 hours or 60 hours.

Okay. Great. Thanks, guys.

Our next question is from Peter Keith with Piper Sandler. Please proceed with your question.

Hey, good afternoon. Great results, guys. I know labor is an issue. The other thing we're hearing about more so is on real estate. So with this pace of unit growth, it's certainly exciting. But what about the rent rates out there are you seeing with your franchisees? Are there starting to be some stepped up costs and perhaps more difficult to get prime locations?

Yeah, we're not seeing a massive increase. We're signing more leases than we ever have right now and so there's definitely available real estate out there. Of course, we're taking 1500 square feet, 1200 square feet, 1800 square feet, stuff like that. And so we're not seeing a slowdown in available real estate or costly real estate to a point where it costs us out of our model.

Okay. Good. And then Anthony, in the script, you had talked about -- with your app and you had cheesed out B2B sales. I wonder if you could just expand upon that. Do you have any corporate relationships set up? Is this a relatively new initiative? And how might that function within your business?

Yes. So we are -- part of our hiring of Dan was his pass [Indiscernible], especially a Gympass. And I think one of the biggest differentiators between Gympass and Classpass for instance is that Gympass is a B2B model. And so bringing him in as well as bringing in Steve, this is in our corporate partnership that we announced last quarter, and having the two of them work together, we're going out to corporate partnerships that we have and selling XPASS is on a B2B basis, much like Gympass did, in the past.

Okay. Sounds good. Thanks so much.

Of course.

Our next question is from Jonathan Komp with Baird, please proceed with your question.

Hi. Thank you. I want to follow up on the recent trends that you discussed in seeing continued strength in a number of the metrics. How should we read that? Did you maybe not feel an impact or a different impact from Omicron, this time in January or is it that you saw an impact early in the year and seeing some reacceleration? You could maybe just shed some more light on the recent trends and then how does that inform your view looking forward of fully recovering the AUVs?

That's good question. We had noted we didn't see an impact from Delta when we were there at the IPO and the system is recovering across the AVs or 94% of pre-COVID levels. Members visits are up 70% and 50% year-over-year. And we currently expect to reach our 2019 AUVs in the first half of 2022, but didn't see anything material from Delta nor do we see anything material from Omicron.

Okay, great. That's encouraging. And then maybe a broader question. You've announced a number of initiatives the last 12 months. I know you've been talking about your XPASS nationwide la Fitness exponential plus, now you've added BFT. Could you maybe just share some broader perspective as you look forward in '22 and the next few years, which of those has the biggest potential and how should we be thinking about the financial impact of those new pieces of the business that you've added?

I think as a business continues to grow, BFT, our physical piece of the business will always contribute a lot, the go platform, now, X-plus platform for us is has always been a value-add. The XPASS is a massive differentiator and now we have somebody at the helm of that running that. So we'll see how this year goes out and contributes. But contributions in 2021 were nominal, as we only had it rolled out fully by the fourth quarter. But we do expect the XPASS to have a more meaningful contribution this year, but should still assume it's in the early earnings growth from a growth and maturity perspective. So we will start to scale in 2022, but I would say from any of the businesses, you would you mentioned the physical business. Always like a BFT or one of the brands are the major contributors to what we do.

Great. That's very helpful. Thanks again.

Absolutely.

Our next question is from George Kelly with Roth Capital. Please proceed with your question.

Hey everybody. Thanks for taking my questions. Just a couple for you. First on your guidance for 2022, it implies they're really big incremental margin. I was hoping you could break it down between what would be a normalized incremental margin just on the core business? Then what kind of benefit are you getting from the refranchising? That sounds like it's pretty much complete.

Let's break that down. It's like a normalized margin. We mentioned long term that we see the business operating above 40%. Once we kind of hit on more of a mature growth perspective. 40% adjusted EBITDA margins is our long-term kind of view on the business. We were about 18% in 2021, quickly growing to. Should be just about under 30% in the first quarter. So the business is going to quickly leverage. The majority of that leverage is coming from the studios that we don't operate any more from the COVID impact that we had in 2021 and then in addition, contributing now higher system-wide sales and AUVs with more studios opened, throwing that on top, is really driving that really quick ramp to our roughly 30% adjusted EBITDA margins early in 2022. Now we expect to get into higher than 30% as we progress through the four quarters of this year, but the significant amount of increase is really driven by not having the corporate studios and the system-wide sales growth, which again, a 100% margin on royalty flow-through, a large contributor for us fairly quickly. Long-term again, as I mentioned, greater than 40%.

Okay. But I assume that it will take long -- the refranchising bumps this year is helping a lot and then getting from 30% to 40% will take a bit long -- it won't happen in the -- that's going to be more of a steady path upwards. And then second question for you --

I think I'll address you on that. I just want to make sure I'm clear on that. When I say 40%, it's not going to -- it's not the expectation for 2022, but I do see the business progressing pretty strongly into '23, '24ish range where we would expect to see around that 40% range.

Okay. That's helpful. And then second question for me is on XPASS. So just curious now that it's fully up and running and you've got leadership installed there, how aggressive are you going to get behind that marketing and telling everyone about it? And are there any metrics you can share about usage, what you've seen so far?

Yes, on the marketing front, we're still learning a good amount. We went out pretty conservatively last year and tested various paid media advertising platforms. We actually pulled back our spend earlier this year, as we started to learn more and become a little bit more efficient. We were able to drive tact down month-over-month from December to January to February, so trying to be very efficient with how we're spending, and also looking at the way that we're maximizing that flywheel effect within the ecosystem. Dan will be focused on really driving business-to-business partnerships, and leveraging bulk memberships through XPASS. So we're really looking at the platform as bringing in incremental revenue, and incremental members, and we're finding that 15% that are brand new to the XPO ecosystem, are converting to brick and mortar memberships pretty quickly. So we're encouraged by the early results. We definitely don't want to go out and have to pay for every single lead that comes in and convert. So we're trying to be creative with the way that we attract new members into the system and ultimately introduced them into the franchise studios.

Okay. That's helpful. Thank you.

Thank you.

We have reached the end of the question-and-answer session, and I will now turn the call over to CEO, Anthony Geisler for closing remarks.

Thank you. Thanks again for joining our call and for your support of Xponential. I'd like to once again, thank the entire Xponential Fitness team and our franchisees for their hard work and dedication to our business. I'd like to note that over the next few weeks, we'll be participating at the Raymond James Institutional Investors Conference in Orlando, Florida, The BofA Securities Consumer and Retail Technology Conference in New York City. and the 34th Annual ROTH Conference in Orange County, California. We hope to see many of you there. In addition, this being our first year as a public company, we plan to host an in-person annual shareholder meeting at our headquarters in Irvine, California on May 11th of this year. We believe this will be a valuable opportunity for those who are interested to tour our headquarters and our state-of-the-art digital production facilities. All our registered shareholders are cordially invited to attend. We'll be providing more information and details on registration over the coming weeks and we hope to see many of you there. Thank you for being on our call today.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.