Greetings, and welcome to the Xponential Fitness Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. 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 fourth quarter and full year 2023 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 obligation 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 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. During 2023, we experienced substantial growth in revenue and adjusted EBITDA, while further streamlining our business and better positioning Xponential for an even stronger year in 2024. As the largest health and wellness franchise door as of year-end, we had 3,062 studios operating globally with 6,255 licenses sold across our portfolio. In 2023, we opened an average of 1.5 new studios each day and we have the pipeline to continue at that rate in 2024. North America run rate average unit volume or AUVs continue to rise and Xponential members have time and time again demonstrated their consistent commitment to their health and wellness routines. During the year, total members across North America grew 21% year-over-year to 717,000 while our visitation rates increased 31% to a total of 51.5 million in studio visits for 2023. This drove North American system-wide sales to over $1.4 billion in 2023, an increase of 36% over 2022. North America run rate average unit volumes of $590,000 increased 13% from $522,000 in 2022, while same-store sales increased 16% for 2023. Same-store sales growth was strong across our studio vintages and not limited to just new studios. In fact, studios older than three years increased 17% in 2023, demonstrating the value of adhering to our operating model and the durability of our modalities. We are pleased to see this continued growth at the studio level and while we do not yet know the maximum potential of our AUVs over 350 North American studios across our portfolio achieved $1 million or higher AUV in Q4, with another 160 exceeding $900,000. While these high AUVs are predominantly concentrated in Club Pilates, there are studios in StretchLab, Rumble, Pure Barre, YogaSix and CycleBar, and of course Lindora that…

Thank you, Anthony. Xponential continued to produce exceptional results within the fourth quarter of 2023, with visitation rates in North America growing 27% year-over-year and our North American actively paying membership base growing 22% year-over-year. Our studios are an essential part of our members' weekly routines and as such frozen memberships have remained consistently low. We've continued to see strong visitation trends so far in the first quarter of 2024. New member acquisition and retention is important for growing and sustaining AUVs and we know that customer experience and satisfaction ultimately drive engagement. Over the last few months, we have focused our efforts on introducing new class formats as a few of our brands and repurposing existing equipment as a means of engaging and retaining members. New and improved class formats create a better experience for our members and we are excited to continue innovating within our studios so that we stay both relevant and cutting edge. In 2023, we introduced a new class format at Pure Barre that resulted in 15% North America's same-store sales growth for the year. We are also testing the rebranding of AKT into KINRGY Studios with new dance class formats and studio branding, launching in March, in an effort to replicate the success we had at Pure Barre. Julianne Hough, who is well known among dancing enthusiasts from Dancing With the Stars is behind the KINRGY concept, which we believe will help revitalize our dance modality. Julianne has been instrumental in helping drive awareness for the rebrand, engaging and energizing her network both in-person and online. Similarly, at CycleBar, we launched a new strength focused class format this January. The strength class was the highest utilized class in January, which helped drive the 11% year-over-year increase in North American visits per studio and resulted…

Thanks, Sarah, and thank you to everyone for joining the call. In the fourth quarter, North America system-wide sales of $384.6 million were up 31% year-over-year. The growth in North American system-wide sales was driven primarily by the 14% same-store sales within our existing base of open studios that continue to acquire new members coupled with 169 gross new studio openings. Further, 94% of the system-wide sales growth came from volume or new members, which has remained consistent with historical performance and 6% coming from price. On a consolidated basis, revenue for the quarter was $90.2 million, up 27% year-over-year. 75% of the revenue for the quarter was recurring, which we have consistently defined to include all revenue streams except for franchise license sales 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 $39.1 million, up 22% year-over-year. This growth was primarily driven by an increase in royalty revenue as system-wide sales reach all-time highs. In addition, an increase in monthly tech fee revenue and instructor training revenue was due to more studios operating domestically. Equipment revenue was $16.4 million, up 42% 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 $10.1 million, up 27% 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 $7.5 million was up 29% year-over-year primarily due to continued growth in system-wide sales from a higher…

Thank you. And at this time, we'll conduct our question-and-answer session. [Operator Instructions]. Our first question comes from Randy Konik with Jefferies. Please state your question.

Hey guys, thanks a lot. I'm on a plane, so hopefully you can hear me. I guess, Anthony, I want to ask you about portfolio construction. You announced the divestiture of Stride. You've got some learnings of the recent acquisition in the wellness area with Lindora. So just maybe kind of give us your thoughts on how you're approaching your strategic direction going forward around potentially other areas of the portfolio, potentially, I don't know, trimming or not trimming and how you think about areas of focus for potential acquisitions going forward, whether it be fitness or wellness. Just give us some thoughts, there would be super helpful. Thanks, guys.

Yes. Thanks, Randy. I think managing the portfolio will always continue to be opportunistic. And so if we are able to repurpose labor or dollars or focus, whether that be into acquiring a new brand like Lindora and/or kind of reutilizing labor out of a brand like Stride into another brand will continue to do that. And so I think like any good portfolio, you would expect Xponential over the years to expand and contract from a brand perspective. But you'll find everything continuing to be, of course, in health and wellness. But as we continue to forge forward, we'll be focusing on what makes the most sense to focus on and modalities and verticals that make the most sense to focus on.

Great. And just, I guess lastly, John, maybe you can repeat the metrics you gave us around. You talked about a certain percent or a certain number of studios had AUVs above a million, a certain number above $900,000. I just want to get those repeated, if you can, and then give us some perspective on if you think about the younger businesses, Lindora, Rumble, et cetera, it would just seem like just through mix you should be able to get those total company AUVs to continue to rise along with some healthy productivity improvements in the existing core as it is. So just want to get some thoughts there on a) just repeat the numbers that you gave earlier and b) just give us some perspective on AUV having opportunity to just rise at a mix but also rise through additional productivity gains. Thanks.

Yes. So starting with the prior statistics, the AUVs are 350 that are over $1 million and we have another 160 that are already over $900,000. So you're roughly well over $500,000 that are -- 500 that are over kind of the 900 plus. And then you look at the brands that those are in. These are the brands where you have strong AUVs and you have a lot of openings coming from as well. So one thing also, remember, it's not just in the Club Pilates and the Rumbles and some of those StretchLab brands. You also have high AUV performance in Pure Barre and YogaSix's, and that's really encouraging because those brands typically have a higher age. But we're starting to see more openings in those brands as well. So you're kind of seeing a little bit of a resurgence in growth there. When you think about AUVs in total and the influence over time and the ability for AUVs to grow again, you got to refocus back on where in the brands are you seeing the most amount of growth on future. There was a slide up there kind of showing where we opened and sold licenses in 2023, and the concentration going forward is very similar. So you will see Club Pilates continue to open up studios at a healthy pace, a very high AUV, StretchLab, a lot of openings, a very high AUV. You're starting to see the Rumbles and BFTs come into the mix, a very high AUV. So you will see those brands really drive up with volume, the AUV. The thing that's also very comforting is when you look at it from a portfolio approach; you have brands like YogaSix, which have really strong same-store sales. So you expect to see as we open more of those, not only that the new studios are comping and growing at a very healthy pace from a cohort perspective, but you're also seeing the older studios continue to grow at a healthy percentage as well. So Pure Barre, same thing, really strong 2023 growth, really strong same-store sales, a huge install base of open studios. So kind of going back to the question you asked Anthony about a portfolio approach, we're really focusing our resources and energies around these brands that are at scale, that have a lot of licensed sales already sold, and a lot of openings to come, because that's where the AUVs are really going to be driven from the health of those brands. So that's what we're going to focus our energy.

Very helpful. Thanks, guys.

Our next question comes from John Heinbockel with Guggenheim Partners. Please state your question.

Hey, Anthony, let me start with on Lindora, right? So that that would suggest maybe 1,000 potential unit potential to start with. That's there -- how do you think that kind of ramps in terms of openings and then the maturation curve, right? When you think about year one of AUV through year four or five, remind us how that looks versus the other brands.

Yes. I mean Club Pilates started, if I remember the exact number, it was like 938, I think that Buxton did like six, seven years ago. And obviously, we have 1,000 approximately open of that today, plus about another 500 sold. So the TAM continues to expand over time as the modalities expand and the brand expands. Not at the cost of AUV, because as you've seen, Club Pilates from 2015 to 2024, a nine-year period, while you've watched TAM expand by 50%, 60% so far, you've also seen the AUV climb from what was originally about $250,000 to about $1 million. So you can get additional 50%, 60% TAM, while you're also seeing a 4x growth of AUV. When you speak about Lindora, yes, you can see over time that those will be most the same, much like StretchLab, where it started in the 500 range. And now we have 800 plus solds, almost 500 open. So you'll continue to see that that TAM expansion. And so that's kind of what I think you'll expect over time. Lindora obviously is starting with about a $900 to $1 million AUV is where Club Pilates started 250. So the idea is to go into Lindora drive, focus on sales and conversion, add things like apparel, which we believe will do very well in there that they don't have now as a part of their retail mix, and continue to grow the AUV at that brand. So the first 18 months to 24 months are really franchise sales of a brand. And then so you'll start to see openings for Lindora from a franchisee perspective, obviously, the 31 will be existing this whole year, but by the end of the year, you'll start to see Q4 openings of Lindora in 2024. But you'll see the majority of openings in 2025, 2026, 2027, as we kind of sell and then build out the model.

The follow-up for maybe for John, right? So it looks like, at least by my math, around $60 million of free cash flow in 2024. Is that fair? And then how do you think about executing the buyback, consistent versus ASR given where the shares sit today?

Yes. So in regards to free cash flow, yes, I've kind of estimated that free cash flow generation will be about 60% to 70% of the adjusted EBITDA number. Probably closer to the 70% numbers is kind of where I'm estimating it. As far as the buyback, what we want to do is we want to put the company in a position where we have a very CapEx light business. We will generate a significant amount of cash going forward. And I talked about that in the Investor Day back in September. What do we do with that capital? We prioritize the growth of this business and looking at M&A to kind of continue to grow top-line and bottom line. But when we are in a position where there's nothing opportunistically, we're going to go ahead and be purchasing, what do you do with that capital? Buying back shares at this -- at the current valuation are pretty attractive. So the timing and cadence of that, you'll probably see more activity kind of ramp up throughout this year, and then probably in 2025, you'll be a healthy amount of buyback opportunity there. But we are conscious of our current debt and interest rates. But as I mentioned, we got the extension done with MSD, and therefore, it's kind of a variable arrangement where it'll float down over time. So we are paying attention to that too, versus paying down debt versus stock. And that's why we're doing it in an opportunistic way where we have ability to control where we direct cash that's in the best interest of the company. But we are in a good position that the cash will -- the business will be highly cash generative. So it gives us the opportunity to do buybacks -- stock buybacks opportunistically.

Our next question comes from Jonathan Komp with Robert W. Baird. Please state your question.

Yes. Hi, good afternoon. Thank you. John. I just wanted to follow-up, could you give a little more color as we think about the SG&A dollar run rate you spoke to, and the decline in the underlying rate ex one-offs and stock compensation. Could you just give a little more color, the corporate studio impact and anything else that's going into the projection there?

Yes. I mean, when you look back at 2023, one of the reasons why yesterday was higher was because of the transition studios. So we spent a lot of resources and energy in the back half of 2023, focusing on getting studios refranchised where it made sense, where it didn't make sense, we closed down studios. I talked about the true run rate of our SG&A being in that $110 million to $115 million range. That's where it is when you exclude kind of the P&L impact of kind of breaking these leases with landlords. So those are one-time in nature. So we will be in that kind of $110 million to $115 million range for SG&A. When you take out stock-based comp, you're sub-100. Over time I think SG&A as a percent of revenue in a, what I can say a most efficient state or after you exclude stock-based comp will be in that kind of mid-high 20%s of revenue range. So we look at the restructuring costs and the lease liability as one-time. So we're excluding it from the purposes of our normal run rate for SG&A, which should be in that $110 million to $115 million range. With stock-based comp, without stock-based comp under $100 million for the full year, next year or in 2024.

Great. Thanks for that added detail. And then one follow-up. Just wanted to ask about the Rumble brand. It looks like you sold fewer licenses relative than the number that you had opened in 2023. So just wanted to ask sort of that the health of that brand, what you see going forward for Rumble. Thank you.

Yes, the brand is fine. I mean people are -- there's 10 brands, 11 brands now minus try it again. So there's 10 brands to choose from. So it's not like we're driving one brand. And so that's kind of where the brand is from a franchise sales perspective, you'll find that in franchise sales in general, you will sell a brand like we've been selling Rumble since I think we bought it March prior to going public. So after 2.5 to 3 years, that's what you'll kind of see as you start to tap out the TAM, right? I mean, we've been selling that business for almost, it'll be three years this March, and then BFT after that, Lindora after that. So you don't want to see us selling 5,000 Rumbles because that means that we would be saturating the market, right? So nothing really to read into there. Same-store sales up 11%. So brand is doing fine. We're working with franchisees to engineer cheaper openings, make the item seven less expensive, so we can get some open, as we've been going and operating more like in any brand, we know what it's like to own 100 of a lot of things, but we don't know what it's like to operate 100 Rumbles. And so as you get from zero to 100, there are learnings that go on and you find ways to value engineer the openings. So the openings are less expensive, but still don't have an impact on AUV. So you keep capacity the same, but you start to find ways that you can get the stores open for less money and then continue to operate them. So that's great.

Thank you. And our next question comes from Megan Alexander with Morgan Stanley. Please state your question.

Hey, thanks very much. First question, I just was wondering if you could give some color on any quarter-to-date KPIs. January is typically positive from a seasonality perspective, but I think we're all well aware weather's not been ideal. So was hoping you just give us any more color on what you're seeing, maybe as it relates to member adds, monthly visits, quarter-to-date, and then how the comp is trending relative to the low-double-digit you talked about for the first quarter. Thanks.

Yes. So we've been watching this and evaluating the KPIs that drive kind of the Q1 activity. Overall, we've looked at system-wide sales performance in January and February, same-store sales, active members, visits, total new members, cancellations. We haven't seen any real variability from prior year that stands out like there's something different with the consumer in the way they're acting. It is -- January and February was a little bit lighter than we were kind of expecting from our upside case, but overall, the business is strong. The AUVs are still delivering. There's nothing that says that there's something meaningfully off from a growth perspective on Q1. Same-store sales, I talked about that. Those will normalize over time as we expect. I still expect to see 2024 go from a low-double-digit to a high-single-digit from Q1 to Q4. So based off of that, you can expect to see again a low-double-digit in the first quarter. That's where our models are kind of wrapped around. And the new members and the growth that we're seeing at the studio level support that. So there's no like smoking gun, like anything's wrong. It's definitely in line with our expectations and what we've kind of modeled out in relation to our guidance.

Okay, great. Thank you. And then as a follow-up, I think if my math is correct, it looks like you may be closed 94-ish stores in the fourth quarter. It's a pretty big step up from the third quarter. I know there were some transition studios left, but it still implies a pretty sizable number beyond that. So can you just help us understand what those closures were, and then how do we think about that run rate in 2024? I guess maybe said differently, you're expecting gross open 540 to 560. What should that look like on a net basis?

Yes. When you look at the fourth quarter, it was 87 studios that were closed in the fourth quarter. A fair amount of those were related to the transition studios that we discussed as part of our strategy. So you could probably look at that as more of like a backlog of studios that we had acquired. When you kind of take the 131 studios that have closed inception to-date of this company and extrapolate that back, you're looking at really like a 3% closure rate per year. So that kind of is our historical trend. So when you think about 2024, that's how we're kind of thinking about it going forward. We'll get more information quarter-to-quarter as we continue to operate. But right now, the best kind of indicator of future is obviously the past. So we're going to probably say it's probably in that low-single-digit percentage of total studios.

Thank you. And our next question comes from Joe Altobello with Raymond James. Please state your question.

Thanks, guys. Good afternoon. This first question, I'm curious, any takeaways that you may have had from the franchisee convention that you hosted in December and having conversations with your franchisees? Was there anything that was on top of their mind?

Yes. It's interesting, Joe, you bring that up. I'm always super invigorated at the convention time because I'm actually getting to be with franchisees and operators, and that's what I enjoy doing is operating. And so, from that, as I kind of looked at that, I looked at a kind of micro convention we had in November with CycleBar owners in Texas when we launched our new training program there just like we did in Pure Barre. You kind of see that excitement that's there at convention, excitement that's there when we all get together and really just kind of honed in on what really happens there is communication and franchisees knowing what we're doing every day, us knowing what they're doing every day and really working together. And so in January, I launched the franchise forums, where the franchisees actually self-nominated five representatives to come to the corporate office and sit and meet with me all day. We kind of transcribed notes from that created to-do list from that, and then we're completing those to-do lists between now and the end of Q2. So things that we can do in six minutes or six days or six weeks, we will do things like technology development or things of that nature with third-party vendors that we may not control could take six months. But the idea around that is I met with 50 franchisees, 50 plus franchisees for several hours. In an aggregate, it was about 70, 80 hours of one-on-one with franchisees. And now, we have the 10 to-do lists that we need. And that to-do list is sitting with the base and we're constantly updating it on a daily basis. So franchisees are getting to see the communication, see exactly what we're working on daily to move the needle, so that they know that they are heard and that we are working in their best interest. So we've been doing that and it's been going very well. So we're very excited about that. And then the first week of July, we'll be doing the same exact thing again and completing another six-month list. So by the time we get back to that convention that you were talking about; we've had twofold -- two set quarters. So a whole year of doing two big to-do lists at every brand. And so when you look at that Xpo wide, I mean you're really talking about thousands of tasks over a one-year period to help align between franchise or franchisee on what's working, what's not working, and simply do more of what's working and do less of what's not working and fix it.

Got it. Very helpful. Just to follow-up on that, in terms of the openings for this year, I think previously you had said that BFT and Rumble would represent about a quarter of 2024 openings. Is that still the case, and are you expecting any Lindora's open this year, or is that more of a 2025 event?

Yes. I mean, we're in the process of opening or selling Lindora right now. So the kind of the cadence when you buy a brand is a lot of upfront selling. And then you see in that six months to nine months by time they find a location and do the build out, they get open possibly to see a handful, maybe two handfuls of units in the fourth quarter of this year. When you look at the spread of where the openings are going to come from in 2024, we opened 30% in CP in 2023; you'll likely see a high volume similar to that. We had about 30% in StretchLab. You'll see a similar cadence of that. And then obviously, there'll be more BFTs and more Rumbles, probably in that 10% to 15% range as well. And then the rest sprinkled across the rest of the brand. So largely, the -- this video mix that you saw in 2023, that should be the expectation for 2024, and then an additional handful of Lindora's will come into the mix.

It's also good to note, Joe, that the Rumbles, we're already seeing existing franchisees opening additional rumbles this year. So that brand will maybe have some additional upside as people kind of get in, and rolling out kind of all of those stores. So all of the high AUV brands are starting to see those kind of reopenings even earlier on.

Thank you. And our next question comes from Ryan Meyers with Lake Street Capital Markets. Please state your question.

Hey, guys, thanks for taking my questions. First one for me, so if we think about the 2024 guide, just wondering if you can talk about some areas where you think you potentially see some upside there, come in at the height of the range, if not better, if there's anything that you would expect to see come in throughout the year.

I mean, when you look at the revenue, the things that will be fairly flat is equipment revenues, right? Because really that's just replacement revenue. We opened 557 units in 2023. We're guiding about the same amount at the mid-point for 2024. So that that line itself will be pretty just replacement revenue. The upside opportunities are always system-wide sales. We continue to look at ways to, as Anthony mentioned as he met with all the different brands on ways to improve performance at the brand level. Mix is always helpful too, if we continue to get more Club Pilates open faster and get them up to scale faster or up to kind of their base. AUV, that's encouraging. So I told Anthony this year is all about getting studios open, driving strong same-store sales, controlling SG&A, and getting the margin expansion that we went through the restructuring last year to achieve. So the opportunities are really same-store sales and openings. We have done a lot of work on equipment and retail to optimize that. So we're investing resources into that part of the operation to see how we could further support franchisees and drive better retail for them to encourage more sales at the in-studio. So that could be another opportunity too, as we sell more retail through our warehouse and on our online malls for them. So there are some opportunities, but same-store sales, the royalty generation, that's the ticket.

Got it. That's helpful. And then wondering if you can comment on if you've seen any changes in the willingness of new franchisees to open up more studios or purchase more licenses.

No. When you look at I mean Q4 is probably your -- kind of your best indicator or 2023. In Q4, we opened 160 units approximately in Q4 alone, and we opened 90 in December. So if you look at the average of 2023, it was a store every other day, and you look at the average of December, it was twice that, three a day. So obviously, if there was franchisees weren't wanting to open, then you wouldn't have seen the last month of the last reported quarter be the best the company has ever done and 2x the kind of system average. So that's pretty good. Also, half of those openings approximately for the year were done from existing franchisees. And when you look at the backlog of our sold already prepaid for not open licenses about 66%, or roughly two-thirds of those are from existing franchisees.

Our next question comes from Korinne Wolfmeyer with Piper Sandler. Please state your question.

Hey, good afternoon. Thanks for taking the questions. First one for me is, can you just expand a little bit more on your decision to divest Stride? What really was behind that? And I know it's a small part of the mix, but just curious your thoughts and the reason behind that. And then going forward, is there risk that maybe additional brands you might have to divest that may be struggling or a little bit weaker to allow you to lean into some of the larger brands? Thanks.

Yes. Thank you. Yes. I mean, there's no have to divesting, just like there's no have to buying. So we don't have to do one or the other. We look at the portfolio and decide what is the best optimization of labor and resources. So, for instance, our President of Stride is going to be running a portion of Lindora. We've shifted some of the -- took 100% of the Stride labor and put that into different parts of Xponential and labor being that the like any business, getting great employees to do a great job is probably the number one hurdle. And so when you have employees, you can repurpose into different brands or different parts of Xponential and kind of focus on core business or other parts of the businesses, whether it be the most recent M&A where we've kind of stacked the deck over there where we have our Pure Barre CMO that we've moved over and put a Stride CMO up in under Pure Barre, and we've taken the President of Stride and put him into Lindora into a second spot position. We've taken Lou, who was the originally founding member of StretchLab, and then BFT, now to run Lindora. We brought back Martin, who was the CMO of StretchLab put him into Lindora. So we're able to repurpose labor is really the driver for us. It's not that it has some massive effect on EBITDA or the business. It's really us focusing on scale to drive more impact in our high value AUV brands or what will be our high value AUV brands. So it makes sense if you have something like Lindora, where the AUV is $1 million and you have 31 units. Do I want to purpose labor there? Do I want to…

Got it. That's super helpful. Thanks for all the detail. And then John, maybe could you expand a little bit on the cadence of EBITDA margin over the course of the year? I think you said maybe from a dollar perspective, it's going to be a little bit lighter here in Q1, but can you talk about from a margin perspective, will that also be a ramp throughout the year. Should it be kind of like even peeled quarter-to-quarter? Thank you.

Yes, great question. I was hoping somebody was going to ask you that. When you look at Q1, maybe first half, second half of 2024, the way you should think about studio openings, revenue EBITDA from a dollar perspective, it is going to be more like 45% in the first half, 50% -- 55% in the second half, city openings and the revenue, city openings will be about 20% in the first quarter. So if you take the 550, it's roughly about 115 openings in the first quarter. It's probably the right way to think and then that'll ramp up much like it did in 2023 with the most amount of openings in the fourth quarter. The benefit of EBITDA margins is almost instant from the perspective of we did the work we needed to do last year to get rid of the transition studios or close them, refranchise them. So the SG&A cost has come down significantly. So you will see probably Q1 will be the lowest EBITDA margin quarter, probably roughly in the mid high-30s. So let's call it 37% to give you an estimate there. As you roll into Q2 and Q3, that's where the 40% plus will start to come into play. So I do expect to see EBITDA margins Q2, Q3 and Q4 to be in that -- start with a Q4 versus Q3. Your actual dollar margins will ramp throughout the year. So you could expect to see EBITDA in Q1 probably closer to what it was in Q4 of last year of 2023. And then that'll ramp throughout the quarters by a couple of million each quarter. So it'll be a progressive from a studio openings, from a revenue perspective, to an EBITDA perspective, and from a margin perspective.

Thank you. And our next question comes from Alex Perry with Bank of America. Please state your question.

Hi, thanks for taking my questions. I guess just first, can you talk to us about your monthly churn rate and if you have seen any changes in that recently? Thank you.

Yes, when it comes to the churn, it's been very consistent. We do measure it after 12 months. So we typically look at churn and it's in the low-single-digits as a percent. So there hasn't been any really change in any kind of consumer behavior. We did again as we even looked into the first quarter of this year, very consistent from looking at it to Q1 of 2023, but it's been very consistent in that 1% to 3% range churn, nothing -- nothing of deviation from what we've seen historically.

Perfect. And then just my last one. Can you just give us some more color on why openings sort of build throughout the year? Is this just sort of the normal seasonality of when franchisees generally open? And what sort of gives you confidence in the sort of gross opening number? Is that based on signed leases and LOIs, just a little more color on the opening progression would be very helpful. Thank you.

Yes, of course, Alex. Yes. As you see, and I said earlier on the call, there was actually 169 openings in Q4, which is a massive quarter, and 90 openings in December. So the run rate for the year is about a club every 15 hours, and the run rate for December was three a day. So there's a big push always in Q4, in fitness, as I'm sure you're aware, for people to want to be open in January. So franchisees tend to work a lot harder to get deals done by year-end. Same with landlords. We deal with a lot of massive public real estate investment trusts, and so they want to get deals on their books by 12/31. So landlords have a willingness to want to sign leases by 12/31 versus 1/1. And so when you have a willingness of franchisees, the lessor and lessee coming together by the same day at 12/31, you'll see a lot more openings, negotiations happening for the last half of the year than you see in the first half. And yes, we have over 400 LOIs and leases currently signed that we have names, addresses, phone numbers, dates of openings for by brand, across the country much like we gave you at the Investor Day in September, where we showed the list of ones that we have, we always have an ongoing visibility of about 400, 450 domestic units and then about another 100 plus on the international side. And that's how we get to that kind of 500 to 600 or 557 that we did last year. If you kind of look at the ability of that, I believe, and John can correct me if I'm wrong, but I think we got it to 500, 600 the beginning of the year and we tightened that into 550 to 560 later in the year and we landed at 557. We had four openings the day after on January 1, so we would hit 561 if we would had four people that would have had a class schedule. But given New Year's Day, some people tend to wait to the January 2. So you can see from what we've been guiding to historically and what we've been hitting in the real world, we obviously have a very great visibility into what we're able to see in the future.

Thank you. And our next question comes from Jeff Van Sinderen with B. Riley. Please state your question.

Hi everyone. So, wonder if you can speak a little bit more about the performance of the newly opened units over the last few months, what you're seeing there.

Yes, great question. We obviously monitor the cohorts by every quarter, and the one consistent data point is by month three, when you look at the studios that have opened in Q1, Q2, Q3, and Q4 by month three, most of these studios are doing 40,000 to 45,000 plus on average, which gives us really strong comfort that they're getting to that 500,000-ish range AUV almost immediately after doing the grand opening. So that's been very consistent. I just looked at the data prior to this call to make sure we had the most up to date information. And all those cohorts from every quarter of last year are doing strong. So it does show you that when you look at how we're opening studios, we are doing a better job every quarter as we go by to getting studios up to ramp faster, which is important for franchisees because it gets them to breakeven faster and profitability faster. And at 500,000 AUV in the average design model, it gets them into the target market range that is needed to for the franchisees to make that 25% to 30% margin. So very healthy 2023 cohort doing better than the 2022 and 2021. As we also talked about same-store sales in some of these 36-plus month studios, mid-teens, double-digits. So again, it's not even the young brands that are kind of starting strong. It's even the younger studios that are starting strong. It's the older ones as well that continue to comp at a healthy rate.

Okay. Great to hear. And then just circling back to Lindora for a minute. I'm wondering, I know you mentioned the comparable unit size, and I'm wondering, would it make sense to aim to colocate real estate along with your existing fitness brands when you open the doors?

We've looked at that over the years, and what you ultimately really end up saving is kind of a front desk space. If you colocate, you still have and imagine if you colocated a brand that had 20 people in class and 30 people in class, you're still going to have 50 people coming in the door and out the door at 5:00 and 6:00, right? And so you save some front desk, the cost of a front desk, but you still need to put double the staff or you won't be able to sell to 20 people coming out of a class. So you don't really save on that. We don't have massive kind of locker room or shower facilities, and you wouldn't want to just have one men's and one women's bathroom or two unisex bathrooms for that much volume, nor would the city let you. So you end up building two boxes that are exactly the same with no cost savings, the same labor with a wall in the middle, and you take the wall down. So it's not really helpful, right? You have the same equipment, you have all those things. And then if the franchisee in the future wanted to sell off one brand and keep the other brand, they wouldn't be able to. They'd have to sell them both together. So it's harder to do. And if all the brands were born at the same time, then franchisees could kind of pick and choose a buffet. But since we've had these brands over a nine-year period today, you want to be able to just choose what you want to colocate amongst brands because those brands have been sold to other people. So you could incrementally add maybe a Lindora today or a BFT a couple years ago or Rumble a few years ago, but sometimes it's harder to do, especially in major DMAs.

Our next question comes from Warren Cheng with Evercore ISI. Please state your question.

Hey, good evening, guys. I've got another one on Lindora and just the opportunity you see there. So it's a little bit of a different modality than we've done before. You talked in the prepared remarks about potentially a broader expansion into health and wellness. Obviously, there's an interesting GLP-1 angle there. Is there anything different about how you're going to deploy that particular asset and unlock the opportunity there?

Yes. I mean, obviously it's very similar. The footprint is similar. So Lindora is next to Xponential brands currently. So from -- start from day one, the real estate is the same landlords, the same size square foot box and build, as you move forward, at the end of the day, it's about generating a lead and closing that lead and making them a member and then putting them on a subscription base, which is what Lindora does. The GLP-1 part of the business, and we think that will continue to expand. However, for 50 years, Lindora has been achieving 800,000, 900,000 AUVs without GLP business. So that'll be a part of the business that will expand. HRT will most likely expand over time, as I indicated earlier; kind of apparel, retail sales, we imagine will expand given that the average member at Lindora spends more than the average member at our fitness brands. So there's kind of more wallet share there, if you will than the fitness product. Because people that have shown up at Lindora have tried typically some version of weight loss, whether that be diet and exercise or both in the past. And so when they come to Lindora, they're kind of willing to spend whatever they need to spend to get the ultimate result because it's typically not the first place people go. So that kind of gives you some color.

Thanks. And then just one follow-up on a comment you had in your prepared remarks about half of North America openings coming from existing franchisees, very roughly speaking, do you know what that was three years to five years ago? Is that significantly different and is there noticeably better performance AUV or profit on these second or third or fourth studios relative to kind of the cohort of first studios?

Yes, we don’t -- I don't have that data. We could obviously pull it, but I don't have that prepared today, so I don't want to steer you directionally one way or another. However, my feeling would say that it's probably been consistently the same kind of over time. But yes, we don't have anything prepared for that today.

In regards to the performance on the first versus second, you typically see performance better in the second and third units because there's the art of learning from mistakes. So you don't make the same mistakes and when you launch the first time or the second time as you made the first time as far as like how you market. And there's also opportunities to leverage operations and instructors as you open your second Club Pilates, which is your first, so you typically see performance improve after multiple units.

Our next question comes from George Kelly with Roth MKM. Please state your question.

Hi, guys, thanks for taking my questions. So two quick modeling questions for you. The first, your target for SG&A the $110 million to $115 million for this year. I'm curious, are you already there pretty much, or is there going to be a material kind of step down in SG&A throughout the year? And then second question for you. In response to one of the earlier questions, John, I think you said you expect free cash flow to be approximately 60% to 70%, maybe closer to 70% of EBITDA. That's just a bit higher than I would have anticipated. So I'm curious if there's anything this year that's unusual that's benefiting that flow through to free cash flow.

Yes. Let me answer the two questions for you. So the SG&A will be slightly higher in Q1 simply because where, as Anthony mentioned, there's a handful of transition studios that we're just working through. So slightly higher SG&A, in Q1, but virtually we're there, getting back to that $110 million to $115 million range by Q2, Q3 and Q4 that should be pretty normal run rate. The only thing you have in the fourth quarter, obviously, is the convention that we do every year for our franchisees. So that does add some additional cost in the fourth quarter. But in essence, the work that we did at the end of last year is done. And the benefit of the margin expansion will show up pretty quickly in Q1 and then get to, like I said, that 40% adjusted EBITDA margin range in Q2. Keep in mind that as we work through the leases with the landlords, that's all about time and settling with those. So those we're looking as a one-time restructuring charge. So they'll be in SG&A, but we'll add it back for margin purposes like we did in 2023. The second question you had, what was that again? Just remind me.

Yes, sure. Your free cash flow 60% to 70% EBITDA. And is there anything unusual, it's just a bit higher than I would have anticipated.

No, I mean, nothing unusual about that. When you think about where the margin is coming from, and this is again where I was really trying to stress this in the Investor Day is over time, as we continue to open up more studios and drive revenue, the gross profit of this business gets better and better, and it's really on the back of royalties. So the key for us is to, again, as I mentioned in 2024, the goal is get studios open, support franchisees to drive AUVs and same-store sales, because the incremental margin flow through is incredible. And that goes right to the bottom line in cash. So we're not in this for the one-time revenue of licensed sales. We're not in it, obviously, there's equipment margins and all that, but at the end of the day, it's long-term reoccurring revenue that we're looking for. So the cash flow generation of that 60% to 70% lean more towards the 70% is what should be expected. It's just; again, it's a juicier margin revenue mix that we're getting over time.

Thank you. There are no further questions at this time. I'll hand the floor back to management 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 the upcoming marketing events. And we'll speak to you again on our Q1 earnings call in May.

Thank you. This concludes today's conference. All parties may disconnect. Have a good day.