Greetings, and welcome to the Xponential Fitness, Incorporated Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to Kimberly Esterkin of 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’ second quarter 2022 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 forward-looking statements are based on management’s current expectations and involve risks and uncertainties that could cause our actual results to differ materially from such expectations. For a more detailed description of these risks and uncertainties, please refer to our recent and subsequent filings with the SEC. We assume no obligations to update the information provided 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 we 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 second quarter earnings conference call. I’ll begin with an overview of our performance. Sarah will then join me to speak about our progress against our growth strategies. John will conclude with a review of our second quarter financial results and an update to our full-year outlook. Xponential Fitness is the largest global franchisor of boutique fitness workout brands. Our business model is straightforward. We license our boutique studio operations, share our business processes and branding with franchisees and in exchange, charge royalties and other fees for our services. As our AUVs grow and as we increase the number of studios, we become more profitable, given that the royalties generated from system-wide sales are very high margin and given our SG&A platform scales. As of the end of the second quarter, franchisees collectively operated over 2,350 studios in 14 countries around the world across 10 leading brands and major workout modalities. We are pleased with our operational execution and resulting financial performance in the second quarter. Total members in North America for the second quarter increased by approximately 32% year-over-year. Our Q2 North American system-wide sales grew for the eighth consecutive quarter, up 45% year-over-year. Finally, we ended the quarter with run rate North American AUVs of $480,000, up from $384,000 year-over-year. The dynamic growth and run rate AUVs is a strong reminder that despite inflationary pressures to date, the workouts our franchisees provide across our diverse portfolio of 10 brands are an integral part of our members’ lives. Importantly, as we continue to open more studios and as our AUVs continue to grow, our profitability increases, driven by high-margin royalties from growing system-wide sales with an active pipeline of approximately 2,800 studios contractually obligated to open globally and only…

Thank you, Anthony. The health of our brand portfolio remained strong. As noted earlier, despite the elevated inflationary environment, Xponential consumers continue to prioritize their health and wellness, engaging with our brands through both in-studio and digital experiences. Our visitation rates have continued to increase, with total visits growing 28% year-over-year. This member engagement demonstrates that our offerings are not considered discretionary, but rather an integral part of our customers lifestyle. Our core KPIs are continuing to grow and our churn levels remain steady at approximately 1.5% after 12 months. During the second quarter, we continue to optimize the ways in which we attract prospective members, while simultaneously focusing on delivering increased value to current members. Continued investments into improving our customer experience will translate into growing memberships, AUVs and overall system-wide sales. Beginning with our in-person offering, XPASS provides subscribers access across our U.S. studio locations under a single monthly recurring subscription. XPASS has been a powerful engagement platform for us, helping us attract new, retain existing and reengage previously churned customers. The platform’s primary goal is to fill classes to 100% capacity, which we are currently doing at a $0 customer acquisition cost for the franchisees. By driving more bookings into existing classes, XPASS helps our franchisees increase studio profitability. XPASS has also proven to be a powerful acquisition tool for the broader Xponential system, with 25% of XPASS members having no prior studio relationship, purchasing an additional membership or class pack at our studios. Many of our cohorts are still in the earliest stages, and we are excited about these early signals of customers adopting both XPASS subscriptions and in-studio memberships. Since being fully rolled out at the end of 2021, XPASS has been profitable for Xponential, due in part to our capital management of acquisition and…

Thanks, Sarah. It’s great to speak with you to discuss Xponential’s second quarter results. Second quarter North America system-wide sales of $249.8 million were up 45% from $172 million in the second quarter of 2021. On a consolidated basis, revenue for the quarter was $59.6 million, up 66% from $35.8 million in the prior year period. All five of the components that make up revenue grew during the quarter. Franchise revenue was $27.6 million, up 55% from $17.8 million in the prior year period. The growth was primarily driven by higher royalties, as well as increased revenue generated from franchise license fees. Equipment revenue was $12.4 million, up 160% from $4.8 million in the prior year period. This increase in equipment revenue continues to be driven by a higher number of equipment installed, along with a greater concentration of installs within equipment-intensive brand. Merchandise revenue was $6.8 million, up 50% from $4.5 million in the prior year period. The improvement during the quarter was primarily driven by a higher number of open studios, along with increased foot traffic across studios. Franchise marketing fund revenue of $4.9 million was up 49% from $3.3 million in the prior year period, primarily due to strong system-wide sales and average unit volume growth. Lastly, other service revenue was $7.9 million, up 45% from $5.4 million in the prior year period. The increase in other service revenue was primarily driven by an increase in credit card rebate on higher system-wide sales and higher B2B and brand fee revenue. Turning to our operating expenses. Cost of product revenue was $13.5 million, up 115% from $6.3 million in the prior year period. The increase was driven by higher equipment installations for new studio openings and merchandise revenue in the period. Cost of franchise and service revenue were…

[Operator Instructions] Our first question has come from the line of Alex Perry with Bank of America. Please proceed with your questions.

Hi. Thanks for taking my questions and congrats on a strong quarter here. So, I just wanted to get maybe a little more color on the guidance in terms of the revenue guidance. You kept the system-wide sales number the same and the studio openings the same. So presumably, the equipment number would sort of be in line with your expectation. What was the delta that brought the rev guide up? Thank you.

Yes. Thanks, Alex. So from a revenue perspective, the three categories that we saw upside in kind of the first half, which we wanted to adjust guidance from a mix perspective is upside in the franchise revenue. We’ve announced a number of these B2B deals, which have provided some revenue upside that was favorable, and we perceive as favorable through the rest of the year. And then we’ve seen better performance in the transition studios that we’ve spoken of in the past. Roughly 0.5% to 1% of transition studios that we own have been performing better than the assumptions we originally had in our original guidance. So the three of those combined gave us the opportunity to adjust the guidance upwards on revenue.

Perfect. And then just in terms of the system-wide sales guidance in particular, what does it sort of assume in terms of run rate AUVs? Is there – do you expect a continued progression at the franchise level? I think you’re already above sort of pre-pandemic AUVs. And then maybe if you could also speak to, do you normally see the same sort of churn as the rest of the fitness industry in the back half in terms of members leaving as people go back to school and the holiday season? Maybe just speak to us about sort of the seasonality as well. Thanks.

Yes. So Alex, as it relates to – you had a couple of questions in there. I’ll tackle a couple and I’ll turn it over to Sarah. From an AUV perspective, yes, we have exceeded pre-COVID levels, $480,000 on average per studio in Q2. We do expect AUVs continue to grow into the foreseeable future, which will drive the system-wide sales. I think that answers the first part of your question. And I think you had a couple else in there that – what was the second part to that?

Just in terms of the seasonality of the business, could you just talk to the AUV progression and how you tie that back to potential membership churn in the back half? Do you normally lose members in 3Q and 4Q like other fitness players?

Yes. Typically, what we see on the second half of the year is that Q4 tends to be a little bit higher in terms of AUVs because of the Black Friday promotions and some of the year-end promotions that lead into a strong January interest across our membership base. But because we are in a recurring subscription model, we don’t typically see that churn increases or that people cancel because they’re away for Thanksgiving for four days, they’re way for Christmas and the holidays for a week. They typically keep their membership and continue to come as often as they can during those times, but they’re not canceling and then re-upping once they’re back into the regular routine. So, we do anticipate that AUVs will continue to grow in steady state for the rest of the year.

And one other point to add, prior to COVID, the AUVs climbed and we never really saw the top end of where the studios could perform to. So the expectation going forward is AUVs will kind of get back onto that trend where they’ll continue to climb as we fill capacity and add new members to the studio and as the younger cohorts of studios that have opened last year, this year get to, I don’t want to say, full potential, but continue to grow to higher capacity.

Perfect. That’s really helpful. Best of luck going forward.

Thank you. Our next question has come from the line of Brian Harbour with Morgan Stanley. Please proceed with your questions.

Hey, guys. Maybe the first one. How many of the openings in the second quarter were international? And what kind of countries and brands are you seeing really drive that right now?

Yes. So from a mix perspective, we’re still seeing about a 75% to 25% split between domestic and international. So about 25% of the openings in the second quarter were international. Some of the brands that typically drive more of the openings are the ones we’ve sold the most of and are relatively new. Club Pilates still seems to be a top performer. We sold a lot of licenses, and they have a pretty strong AUV. So, we’re getting openings continued there. StretchLab is another brand where we sold a lot of licenses, and those licenses are now translating to openings. And our most recent acquisition of BFT continues to be one of the top openers. So the three top are Club Pilates, StretchLab and BFT.

Okay. Great. John, also just your comment on SG&A and the cost pressure in there. Is that mainly just personnel related? Are you hiring more than you expected to in the past? Because I assume that kind of stays in the base. I don’t know if there’s anything one-time in there?

Yes. So related to SG&A, there was some one-time expenses that I called out, particularly around legal. We did have to do some defensive legal work around trademarks, particularly around BFT and then we had some patent issues, again, related to one of our public competitors around defending a patent around BFT as well. So, we do view those legal costs as one-time. We don’t believe that there will be a material spend going forward. However, if they are, we will treat those as one-time add backs as we did in this quarter.

Thank you.

Thank you. Our next question is come from the line of Jonathan Komp with Baird. Please proceed with your questions.

Yes. Hi, thank you. I wanted to just ask about the recent consumer behavior you’re seeing, if you’re seeing any changes in the membership or the packs that members are buying within the concepts? Or if you expect to see any differences across the concept, if there is a tougher consumer environment? And if that were the case, how might you react?

Yes. Well, the answer is no. We’re continuing to see membership up, usage up, the consumers continue to spend money. So, we’re still seeing that 25% of our membership is on the reoccurring 4 times a month, 25% on the reoccurring, 8 times a month and about 50% of the member units on the unlimited. About 60% of the dollars gathered are coming from the unlimited members, but the unit split is about 25% to 50%, and that’s remained constant and still continues to be the case today.

Okay. That’s great to hear. And then, John, maybe one follow-up on the outlook for the year. Can you maybe just help to clarify? When I look at your revenue year-to-date, it’s up a lot, 70% in the full year. At the midpoint, it’s up 39%. So could you just provide any other shaping comments on factors we should think about when modeling revenue in the second half and some of the pieces?

Yes. I mean the position we’re taking related to raising guidance is kind of looking at the performance of the first half and making the adjustment to the full year based off of the upside we’ve seen so far. Given the macro environment, we still want to remain somewhat cautious and not be naive to think that things couldn’t change or go flat. We’re not seeing that. We are seeing the momentum continue into, up to the point of this call. So, we’ve again taken a conservative approach and make sure that we deliver on the outlook that we’ve put out there. So the $221 million on the top end, that’s kind of where we’re committing our outlook from a revenue perspective and roughly the $72 million on the bottom line adjusted EBITDA. That’s where we see the high end right now as we continue to perform through Q3. We’ll come back to you guys and provide updates at that point. But I think the outlook now represents, based off of the performance in the first half, the upside we saw and we’ll continue to adjust through the back end of this year, the guidance as we see fit.

Okay. And just last clarification, if I could. The master franchise agreements you’ve signed this year, could you quantify how much that’s contributing to the year or any rough perspective? Thanks, again.

Yes. I mean from an international perspective, we don’t break out what the contribution is. Again, when you think about the international business, the flow-through is much higher as we arrange these master franchise agreements where we get an upfront fee for the initial licenses to sell in those markets. And then as they sell licenses to their sub-franchisees, we don’t have the SG&A cost to support that because that’s borne by the master franchisor. So there’s high margin flow through. So although we don’t break it out our segment international, there is a very profitable margin flow-through on the international and particularly with the acquisition of BFT being a contributor from day one that they do have – the international side of the business does have pretty high-margin contribution and will continue to increase quarter-on-quarter as they open more studios and sell more licenses.

Understood. Thank you.

Thank you. Our next question has come from the line of Randy Konik with Jefferies. Please proceed with your questions.

Hey, guys. I just want to follow up actually first on the master franchise agreement. Maybe just remind us where you have them, where you are – don’t have that in our planning to potentially have them going forward? And just like longer term, how do you think about international, let’s say, like five years out from now? Again, pretty nice margin opportunities and so forth and just adding to your TAM. Just wanted to get more flavor on that longer-term piece on the master franchise side. Thanks, guys.

Yes. Happy to take that question. So today, we have MFA commitments of roughly 1,100 studios across 12 different international countries. And our international strategy is to find the best partner to grow and scale our brands internationally on behalf of the brand. So, we’re going out looking for various countries where we know that we can be successful, both economically and the legal conditions are conducive to franchising. But more importantly, we’re looking for the right partner to be us in that given country. So today, we’ve got some good presence in Australia, as well as Japan and then some of our other countries are kind of in the early innings of starting to develop and open their studios. From a contribution standpoint, it’s still about 25% at this point, but we’ll start to see that shift as the countries continue to grow and develop and we’ll see a little bit of that shift on the P&L.

That’s super helpful. And then just on – as we think about – you talked a little bit about some cost items impacting things. Any thoughts around – any offsets you guys can kind of have with that potential changes in royalty rates or anything like that? You are mandating kind of pricing changes on the studio side. Just kind of curious on how you’re thinking about inflation and just maybe some offsets or things to react? Thanks, guys.

Thanks, Randy. Yes. And we continue to be focused on that in Q1 as well as in Q2. We did procure some equipment, which allowed us to not only hit the opening numbers we needed, but also allowed us to kind of hedge against any of that type of inflationary situation. So, we continue to look at that and continue to progress forward. But John had some more thoughts on that, too, as well.

Yes. I mean, some of the other things we’re looking at in the second half is opportunities around some of our Pubco expenses. Obviously, going public, D&O insurance is one of the high ticket items that we had and recently going through a renewal of that policy and seeing some favorable expenses there. So, we are looking pretty much across all our vendors to optimize spend in the second half and again try and drive margin expansion. We do see the commitment we made around getting to the 40% to 45% adjusted EBITDA margins long-term. We’re on track to achieve that. Even though we had a little bit of higher SG&A this quarter. Again, we view that as one-time. So the focuses in Q3 and Q4 is getting back on track, driving optimization out of SG&A, continue to focus on vendors. As Anthony mentioned, making sure we mitigate inflation or cost increases around equipment by procuring in advance, and/or in larger volumes to make sure that we hit the openings, but again, hit the margin target. So it’s kind of all hands-on-deck effort across the company to continue to drive down costs through various strategies.

Very helpful. Thanks, guys.

Thank you. Our next question has come from the line of John Heinbockel with Guggenheim Securities. Please proceed with your question.

So maybe you can talk – I know all the brands are different. But maybe talk to the issue as you climb towards $500,000 AUV capacity utilization or excess capacity still to be utilized in the studios, right? So where do we stand on that? And also from a functional standpoint, right, not all slots are created equal, right? There are obviously more popular slots. And I don’t know if you have a thought at what AUV level, maybe we’re not even close to it, does capacity become an issue for the member experience? That would be helpful.

There are actually a couple of different strategies that we deploy when we’re looking at capacity and how that then correlates with AUVs. So when we first opened a studio, we opened with a pretty minimal schedule so that we can fill the studio, fill the schedule and create this community feel across the members as well as within that location. And we start with very aggressive pricing. As we start to see that there’s more demand, we add more classes very carefully, but also start to increase the price points so that we are able to then meet the supply and demand curves with the appetite that the consumer has for spending on their membership. Once you get to a mature studio that’s in their sustainable business, we then look at driving AUVs with some of the vendor partners that we have. So driving retail and some of the brands that’s driving private training or workshops, teacher training like with a brand with Club Pilates and now that we have a B2B department now bringing in additional lead flow and revenue opportunities through those partnerships as well. So, we’re looking at continuing to expand the four-wall economics without necessarily driving additional utilization at the studio level. We chatted about bringing XPLUS to the Club Pilates and StretchLab membership. And part of that idea was to continue to add value and benefit to the existing brick-and-mortar membership, but also giving the member the opportunity if they can’t get into a class or into a stretch session to still be able to enjoy an XPLUS experience. So, we’re looking at a lot of different ways of how we continue to meet demand where it is, while also driving AUVs.

Right. Maybe as a follow-up to that, right? As you think about the real estate strategy going forward, the tension between cannibalization and network effect, I guess I would think most of the brands right are at such a young level that the network effect and convenience benefit far outweighs cannibalization. But how do you think about that dynamic?

When we launch a brand, we go through a very aggressive Buxton research analysis. So, we really take the members that we know like the brand, follow the brand and take that demographic and then map it across the country. And we now then have enough data within the 10 brands to look at various fitness rows and what happens within those fitness rows as we continue to open various studios and various concepts within a concentrated area. We watch that very closely. We haven’t seen any sort of cannibalization. If anything, we actually see that it becomes an attractor. So, you have kind of like a food court, people go to that area, everyone has something to eat, and it becomes a hub. So, we find that with our studios as well. So if anything, the data is actually a little bit stronger, dictating that that’s actually a good model rather than saying that the studios and various concepts need to be set apart.

Okay, thank you.

Thank you. Our next question has come from the line of Warren Cheng with Evercore ISI. Please proceed with your questions.

Hey, good afternoon. Nice job in a pretty tough environment. Can you give us an update just on your franchisees’ unit economics? Because the AUV side continues to trend really nicely in the right direction. But are your franchisees starting to see inflation show up on the cost side, especially just on the labor rent or financing side that are offsetting that AUV accretion?

Yes. I mean there’s minimal, not material inflation, of course, everywhere, but we’re not seeing that stores are continuing to operate AUVs continuing to grow. And so we’re not – when you look at kind of labor costs or things like that, the labor that we have typically makes $40 to $50 per class. So there’s kind of pressure on minimum wage or things like that in labor. They’re not coming back to us looking for $51 or $52 a class. So, our employees are already paid kind of above the minimum wage. So as minimum wage or the labor side increases, we’re not really seeing any labor or wage inflation. And so the stores are continuing to operate profitably. Obviously, we opened more units in Q2 than we did in Q1, continued to sell at the current 250 or more pace per quarter. So at the top of the funnel, we’re seeing franchisees want to continue to buy more franchises and we’re seeing franchisees continuing to want to open as we see AUVs continue to grow. So the economics are still strong.

Got it. That’s really helpful. And you gave a nice update on some of the partnerships that you’ve done, and you seem to continue to have new partnerships in kind of new shapes and sizes. Are there certain types that have been the most fruitful from a customer acquisition perspective that you would lean into going forward, or that we can expect you to lean into going forward?

I mean, it’s early innings on these partnerships. But obviously, there’s really a couple of kinds of partnerships that we’ve been doing, one or partnerships that drive really butts-in-seats ultimately, right? How do we fill that last seat or those last three seats or whatever it might be in a particular brand or for a particular franchisee in a certain location. So that’s one. And then the other one is really kind of on the vendor side, things that you see with C4, CELSIUS, or things of that nature, gives another product for the franchisee to be able to sell and service the customer, but it doesn’t necessarily put somebody in class, right? They’re not going to come and sign up, take a CycleBar class, so they can drink a CELSIUS. But there are other drivers like our health care deals and the MIRROR deal and other things that we’re doing to drive our digital customers even into the brick-and-mortar. So the partnerships really broke up in those two ways, but still early innings on the partnerships that are continuing to drive more people in seats. But you are seeing AUV increase and that’s increasing somewhat from price, but also from driving more people into the studios.

Got you. Thank you. Good luck.

Thank you. Our next question has come from the line of Joe Altobello with Raymond James. Please proceed with your questions.

Thanks. Hey, guys. Good afternoon. Just want to go back to your franchisee base for a second. Maybe speak to the health or the financial health of your franchisees. Are you seeing any signs that macro pressures are having an impact on that base? For example, are franchisees buying one or two licenses rather than three to four, for example?

No, we’re not necessarily seeing that. Even in Q2, we were able to hit our current run rate number. And that’s difficult to do typically in Q2 because as a franchisor, we have to refile in all the states and they’ll be able to sell franchises. So, we’re blacked out. So even in Q2 for a couple of our top-selling brands like Rumble and BFT, we were still in the refiling process in Q2 in states like California, New York, which are places we sell well and want to be in. So, we’re still seeing franchisees continue to buy. We’ve never been a big company on doing 20 packs or 30 packs or 50 packs or things of that nature. We’ve typically always sold on average about three per franchisee because that allows them to get out and get open and develop over a shorter period of time. As a business, we’ve never had a problem scaling from the franchise sales side. So another concept, people may look at it and say, hey, if somebody wants to buy 10, I better sell them the 10 and wait to develop that over five years because I can’t sell or scale as quickly. For us, we would rather sell 3-3 packs to get to nine and sell one nine pack and wait, right? Because we could be developing those 3-3 packs in conjunction with each other. So not necessarily people coming and getting ones and twos. We still give a discount at three. So it tends to drive a lot of the sales part towards a three-pack.

Okay. That’s helpful. And maybe just a follow-up on that. Looking at your cash flow, was very strong here in the first half. And I guess you guys are going to have a high-class problem in the sense that you’re going to have sort of C cash build up on the balance sheet. What’s the, I guess, top priorities in terms of cash deployment over the next, call it, 18 months or 24 months?

Yes. So as far as cash and you’re right, I mean, as the company continues to generate cash operationally, there will be more or less a stacking of cash on the balance sheet. In the current capital structure, we continue to evaluate and determine whether or not it’s more efficient to change the preferable or convertible preferred or how we have our debt structure. So, we are evaluating that. It is something that’s on our radar. Long-term, if you look out two years, three years, four years, the company will be putting off a lot of cash. So things that we have considered and talked about is the opportunity to do things like share buybacks or potentially dividends. And we’ll continue to evaluate that this year and into the next year. But from our perspective, our focus right now is driving operations and in parallel, looking at how we could potentially change the capital structure, so it’s more efficient for us long term.

Okay, great. Thanks, guys.

Thank you. Our next question has come from the line of George Kelly with ROTH Capital Partners. Please proceed with your questions.

Thanks, everybody. So two questions for you. First on XPASS. Just curious what the plan is to keep growing that product and how soon could it be that we start seeing an impact on your overall royalty rate just as that volume through XPASS builds?

Yes. We’re continuing to look at the way that our members are interfacing with XPASS. Today, over the last quarter, we were actually able to drive down our cost per conversion. So that declined even after being able to do that in Q1. So, we’re looking at ways that we can blend our acquisition of customers to make sure that we’re not paying for every customer that’s coming in and then putting those customers into each of the individual studios. So really, we’re working on optimizing the marketing efficiency of XPASS and then making that beneficial to the franchise partners. And then we’re constantly looking at the technology in ways that we can continue to optimize the technology based on how consumers are using the membership as well as the digital experience.

Okay. Got you. And then next question was on pricing. So curious, I know your AUVs now are exceeding pre-COVID, the pre-COVID highs. Just curious how much of that is pricing and how much of that is member growth?

Yes. So today, it’s actually both. So, we’re seeing that the membership – average memberships per unit is growing, but we’re also taking price on a daily basis. So as mentioned earlier, as we start to see that, demand is high, supply is low. We work with the franchise partners at the corporate office to help them with their pricing model. We have five different pricing tiers across each of the brands. So as we start to see that, utilization is high and their capacity is low, we first evaluate pricing and increase pricing where we feel that we can – where we can do that for new customers. And that will start to decrease some of the wait list that we see across the studios and allow us to backfill canceled members with more expensive memberships.

Okay. I don’t know if you have, maybe you don’t, but is your consolidated member count sort of on par with pre-COVID levels? Or maybe you on a AUV – or on a unit level basis or maybe you’ve exceeded it?

That’s definitely way higher. Utilization is higher. Membership count is higher. AUV is higher. So, all those KPIs are past pre-COVID and continue to climb.

And it’s on a per studio basis as well. So the average members per studio is well above the pre-COVID levels.

Okay, excellent. Thank you.

Thank you. Our next question has come from the line of Peter Keith with Piper Sandler. Please proceed with your question.

This is Matt on for Peter. Appreciate you taking the time. One quick one from us. You mentioned some revenue growth in the prepared remarks was driven by higher royalty rates. I was just curious, I thought that was kind of a steady, maybe not as much of a leverage. So I guess what do you have in terms of ways you can increase your royalty rates? Obviously, there’s a balance there. So just – and then maybe what’s the long-term target for that?

Yes. Higher royalty dollars come from 7% times higher system-wide sales, not from driving a higher percentage. However, Club Pilates, for instance, has increased from 6% to 7% to 8%. And so now on a go-forward basis, Club Pilates, which is our – one of our highest AUV drivers, of course, highest system-wide sales driver with the most open units on a go-forward basis for new units coming on, not existing, but for new units being added to the system and opened and sold will drive at 8%. But the royalty growth we’re talking about simply comes from the same average percentage times a larger system-wide sales number.

Okay. Got it. Understood. And then also going back on the business updates with MIRROR and LA Fitness and some of the others you’ve mentioned. I think it was once framed up that you can go to, say, a corporate and roll it out to like their corporate employee base. I was just curious if you’ll have any updates on doing anything like that on the B2B front. Thanks.

Still an opportunity for us, and we don’t have anything we can announce yet, but it’s still continuing to do that. And that’s still a focus like many others for us as we find ways to leverage our assets like XPLUS and XPASS.

All right. Thanks.

Thank you. There are no further questions at this time. I would now like to turn the call back over to Anthony Geisler for any closing comments.

Thank you. And thank you again for joining today’s earnings call. In addition to our investor support, I’d like to acknowledge the entire Xponential Fitness team and our franchisees for their strong operational execution in the second quarter. Thank you, team, for your hard work and dedication to making boutique fitness accessible to everyone. I’d also like to note that next month, we will be participating in the Jefferies Virtual Fitness & Wellness Summit, as well as the Piper Sandler Global Consumer Technology Conference in Nashville and the Raymond James Consumer Conference in New York City. We hope to see many of you out there. Have a great day. Thank you.

This does conclude today’s teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.