Xponential Fitness, Inc. (XPOF) Earnings Call Transcript & Summary

Thank you for joining us today at the New York Stock Exchange for Xponential Fitness' First Analyst Day. We are excited for you to be with us today, we look forward to providing an in-depth look at the company and some key performance metrics we have not previously shared. For those of you who are accessing us presentation via the web, please note that today's presentation is available on the Investor Relations portion of our website at investor.xponential.com. Replays of the presentation will also be available at that same location. Today's presentation will be divided into 4 modules. Anthony Geisler will provide a business overview and an update on M&A, followed by Ryan Junk. After Ryan, we will have a break. And then Sarah Luna, Xponential's President, will give an in-depth overview of Xponential's international, omnichannel, marketing and technology efforts. Gary V will also be here. He's the Head of Intermedia and our new National Marketing Agency. We'll also speak briefly about Xponential's new relationship. Finally, John Meloun, Xponential's CFO, will run through an in-depth financial overview, including new long-term guidance. We'll have another break, a Q&A and then lunch will be served. I have had the direct pleasure of working with and knowing Anthony for many years. It is quite incredible what him and the Xponential team have done in the boutique fitness space. Without further ado, please let me introduce you to the Founder and CEO of Xponential Fitness, Anthony Geisler. [Presentation]

All right. Good morning, everyone. I get to grab my clicker here. Good to see a lot of familiar faces, and I thank you guys for showing up. Obviously, a lot of you here, and so we're really happy you all made the effort. Some of you have seen our announcement this morning, it just came out, so I assume you were talking about that already. And so we'll get through the details of it. I won't read the legal disclaimer, but it is there for you. Some takeaways for today, things where we want to target on. We're kind of starting with the end, but we knew the release was coming out. We'll continue to open 500-plus studios, increasing AUVs. As we've said, we will continue to do, yielding 20% to 25% EBITDA margins, and targeting 40% to 45% margins overall. And we'll continue to drive our brand awareness through all of our B2B partnerships. You saw more of those this morning announced with Gym Pass, but we'll continue to do those with Princess and Lulu and Google Voice, LG, everything we've continued to do is our broad base continues to grow. More and more people are now inbound contacting us to be able to do deals and leverage the brand in its breadth, okay? So as we look at the brands at a glance across and we'll get into expanding TAM, but this is just looking at what we call snow sold, not open across the 10 different brands. We obviously took a portfolio approach to mitigate risk against brands and/or modalities that may not be as popular, right? Boxing and yoga will always be most likely more popular than dance or rowing or running or something. And I'm sorry, as my Brand Presidents are in here. But it's just -- it is the way it is, right? And so we did that to make sure that over time, if something doesn't work, we're able to swap it out for something that does work, right? And that has been the intent and then to leverage SG&A. There's 400-plus Club Pilates today that are sold and not open. And you'll see the TAM as we look at it later on, actually, that particular business still has the ability to double. And so we'll look for that 500 stretch labs currently sold, not yet open. And you'll see that a lot of those openings coming and contributing to AUV over time, will be from a lot of these scaled brands and even some of our newer brands that are starting to scale. Accomplishments since the IPO, the company has done a ton. We acquired a tenth brand, a lot of people forget that. It was right after the IPO that we ended up doing the BFT deal, which was our first international deal for us. As you know, typically, we buy a brand domestically, grow it, scale internationally. This was doing the inverse of that, which is really great because the international business was already built in operating with our partners, and we were able to scale the U.S. is what we are best at, obviously, launched our B2B partnerships that we just discussed that you're seeing help build out and improve XPASS and XPlus. And as a result of that, we have 3,000 studios in 19 countries, and we're the largest boutique fitness franchisor in the world with the stock today, even where it's trading up 80-plus percent over its issuance, right? And I'm not going to call out others in the space or even 2021 IPOs. But if you look at what that is, either against our peers at the same time, or just how we're operating as an IPO from 2021, it's pretty astonishing. So looking through the management team here, I think the majority of you know us already. But for those that don't, myself, Anthony Geisler, CEO and Founder, I've bought and sold multiple businesses in this space from L.A. Boxing, the UFC, originally Club Pilates, which then sold to TPG, and then TPG and I created Xponential together, and launched Club Pilates as its first brand. And so I've been through it about 20-plus years. There's really -- I'm in a small niche. I just turn 1 trick over and over and over again. A lot of great entrepreneurs out there that I really respect will run a business in fitness and then go run something in restaurants or something unrelated. I'm okay with just doing one thing for 20-plus years over and over again. John Meloun, our CFO, I begged John and Mark Grabowski and I did steal him from the joint because he did an amazing job there running a public company, and we want him to come and set up the business for that about 5-plus years ago. So John is not new to the public company game nor is he new to Xponential. He's been there really since day 1 of Xpo. Sarah Luna, our President was one of my very first hires at Club Pilates back in 2015. And matter of fact, Sarah taught me my first Pilates private at Equinox. That's how I met her. And then I continue to build my relationship with her and try and learn about Pilates. So she was getting her masters in business in her MBA. She was also President of the women's entrepreneurship society. She was a jazer size franchisee of, of all things. And so she really understood that and was a Pilates' instructor. And so I ended up nabbing her. She became kind of #3. It was Shaun Grove, who's here today that you guys know and Sarah that were running Club Pilates when Xpo started. Sarah moved out and ran Pure Barre for us, our second biggest by unit count brand that we had. She run that for years. So her sitting at President, she's really run the 2 biggest brands underneath Xponential. So has a lot of relationships with all those franchisees that she brought into the system. And then Ryan Junk, I've known probably the longest set of everyone. I was President of UFC Gym. When I left UFC, Ryan had my job and say he took my job, but he -- Ryan had my job after I left UFC Gym. So he was President of UFC Gym. He was a 24-hour fitness forever prior to that, and then came in and ran CycleBar for us, which really was that first acquisition in Xponential, right, because we built it off the basis of Club Pilates, really the first brand we wouldn't bought was CycleBar, and so Ryan has been with us forever as well. So the depth of the team is really strong at Xponential and then across the brands. We typically hire in kind of the second or third space in a brand and build people up and out. And then presidents either go up to Xpo or they go to run other brands. So Shaun Grove, who started with me from day 1 running Club Pilates has now running Rumble. Lou, who started StretchLab and did a great job is now running BFT for us, and their #2s or 3s all came up, right? We're not out really kind of recruiting somebody new to come in. We're taking our team, building our team internally and raising them up. If you look at our Board, also a lot of depth there. Mark Grabowski, who's in the room. I met Mark when he was at TPG and LCAT prior to that. And then Mark stepped out and created Snapdragon, and we used Snapdragon as an SPV to buy TPG out and then continue on. So he's been -- Mark and I have been together since day 1 as well. Brenda Morris, who we have is various C roles in public companies. Almost 4 decades of experience kind of in the CFO public company type world. Chelsea Grayson, that we have served on several public boards, CEO of True Religion and American Apparel and M&A partner at Jones Day. So that helps the Board on kind of legal issues, supply chain issues, things of that nature. And then we have Jair, our most recent one, CTO of Microsoft, 15-plus years in technology and held executive positions at Disney and IBM before. So that's how we've built that. When you look at boutique fitness and what is boutique fitness, I think the majority of you either, A, already know, B use our product. You don't get to use anyone else's, but B use our product. We've been around us long enough to know what boutique fitness is. But it really is a crossroads, in my opinion, from a big box and private training, right? And you'll see when we go through kind of the various slides. On one side, you have a big box that provides as much as I love Baram and I love Chris, and I love lifetime and plan. I think they're great businesses. But just the big box model itself doesn't have accountability, right? So people show up when they want to show up, leave when they want to leave. It doesn't get education, right? And there's not really any community there. On private training, you have total accountability to get education, you have community maybe with your trainer because everyone seems to love their trainer, right? So you get that, but you don't get community with anybody in the system, right? And so that's why people talk, well, when a trainer leaves what happens? Well, the community is built with the brand, and it's built with the box. It's not built just with the trainer like you would have in private training, right? And so -- so for us, when you look at boutique fitness, it sits in the middle. You don't pay as much, right? You pay us about as much a month as you pay for an hour in private training. But since it's class based, you still get the community, you still get the education, right? You still get the accountability, and so those are the things that are important. All right. When you look at franchising and scalability, what is it, what makes sense for these. So an average of 1.9 open studios and 2.6 sold licenses, there are sold licenses per franchisee. So we support all these franchisees with a 300-person team across the business. So some of you have been to our offices or seen our offices. And so that's where we support everyone from. It's not -- there's not sales functions in there. It's all support. So we use our operating playbook to bring franchisees in. We charge them a 7% royalty and a 2% marketing fee. And then we make money on equipment margins, tech fees, things of that nature. And so as AUV increases, we received almost 100% margin across there. So we support franchisees every step of the way, right? And so what we look at is, step one, when they come in, obviously, they buy a franchise. We're looking at territories where they're going to go. Those are mapped out in advance. We use Buxton technology for that. So when we're looking at our TAM, our TAM actually is scientifically driven, right? We are taking our membership that we already have, and we're looking at that membership and saying, okay, given that this is our core customer, and we want to have a designed AUV, where can we put these customers that make sense for that brand, right? And so when we start off, we're optimizing where they're going to go in a territory. They're not picking it. We're letting them pick it from a bucket of already preselected territories. And then we're looking for the location for them, setting them up with their brokers, using our panel of attorneys to negotiate leases. So every step along the way, we kind of monitor these operations and support. And then recently, we launched a 7-day support system for them. So we have live people inside the office 7 days a week to handle franchisees. We have internal Facebook pages at all 10 brands. So somebody post, like this morning when I was at Starbucks, a franchisee at Pure Barre posted that she didn't get her remit yet this morning, right? Because people forget that Monday was a holiday, so they forget to put their trash cans out the wrong day and they forget their mails coming late, all those kind of things. So if you have a holiday sometimes a remit will get pushed out, right? And so franchisee says, "Hey, where is my money?" from the processor and it's like, "Hey, you forgot that there's a holiday" it comes today. right? And so some stuff will get pushed out a day, and so it's a place to communicate. So we have live operators now, 24 hours or 7 days a week and during operating hours for the franchisees, they have direct support. And then we have a ticketing system for that, and so we can track and then be able to survey how well are we doing, how many tickets are coming in, and kind of where are they coming from. So when you look at this large and growing boutique fitness industry, right, that we're a part of, we're obviously the largest in the space. But even at us tapping 1 point plus, $1.3 billion, $1.4 billion of system-wide sales. We're still only looking at about 5% of the marketplace, and 1% internationally. So even though we're one of the largest, and even they were processing large system-wide sales, it's actually a small piece of what we're still aggressively going after and $100 billion in addressable spend in 2027. And so we're aggressively going after that and making sure we can capture the most of it that we can. Looking at our consumer base, who is our customer. So their majority female right? 20 to 60 years old. Males have actually increased since 2019 to today from 5% to 11%, right? Some of this has to do with Rumble as a modality, right, where more men box than they do bar or then they dance, right? So some of it is modality shift as we go forward. And obviously, StretchLab and things of that nature is more of like a 50-50 split. And more men do yoga today and Pilates than they did before, right? If you think about it, when Facebook was a place everybody posted their food and everything they did all day long, which would now seem weird and old, but people did that, right? And you were progressive 10 years ago, if you were a male and you posted going to yoga. Today, if you posted, I went to the yoga class, it's a who cares moment. right? And the same is true when we did Pilates in 2015, a lot of males weren't doing palates. Today, if someone does Pilates, 8 years later, it's another kind of who cares moment, right? So we're driving more males in there, and then we would say the XPASS of people can try all brands and XPlus so that we can capture our member wherever our member wants to be, right? When you look at customer loyalty, so very loyal reoccurring base. Members stay, on average, about a year, spend about $1,500 a month with us. We're not seeing any trade downs. So we've answered this question before, but we sell in a reoccurring 4 times a month, 8 times a month and unlimited, right? It's really small, medium and large. Do you want to come once a week, twice a week or more than twice a week. And in doing that, people select it, about 25% of our membership base is on the 4, 25% in the 8 and about 50% in the unlimited. So people like to ask about the macro and those kinds of things. We're not seeing any trade downs from unlimited to aids or aids to 4s or more 4s entering the system. And our attrition rate is still low single digits, which has remained consistent from pre-COVID and post-COVID type world. When you look at our customers, see Xponential is a big part of what they do in their daily lives. This isn't 1985 anymore when it was cool to have a Country Club membership or a Gym membership. If you remember back, for those of you that are my age, right? It was cool to have a Gym membership, but it was cool to have a cell phone, right? Now if you tell somebody you have a cell phone or even gym membership, nobody cares, right? And so I think people still have a bit of that archaic thought process of like, well, it's a gym membership and they're just going to get rid of it, right? But there's a massive amount of community there. We have customers who get married in the stores. We have customers who unfortunately will have cancer. We just had a cancer ride at CycleBar where a member had cancer. They came to CycleBar to shave their head with their community and do the ride, right? That doesn't happen elsewhere. And that's not something -- that's not a community people are looking to cancel, right? And that's why you saw our members really stick with us as well through COVID. So an average member spends $135 a month with us, which equals about 1% of their monthly income. So I said this back in '08 because I'm one of the only ones that live through that economic crisis in this industry, but I said there would be bread lines before people gave up their gym memberships. And that turned out to be true, and you'll kind of see this on later slides. When you look at kind of the resiliency of this membership base over the last 3 years, obviously, the company has been public for 2. We were going public right when COVID hit. Everybody's got their COVID story, that's mine. We were here on the floor at the stock exchange in late February, early March, getting everything ready and I flew home. And instead of coming back here to go public, we shut everything down, reopened it again and then came public. So when you look at it, we've had inflation, 11 rate hikes, war in the Ukraine, right? People have been asking, investors have been asking me for 2 years, like what happens if the economy gets worse, my reply is always like isn't it worse, right? And so we've lived through this process asking what's going to happen if interest rate spike. I remember we were going public in July, they were already talking about inflation, right? And so it is a 2-year story at this point, but you kind of -- you see AUVs continue to grow. And our members continue to stay with us. Boutique fitness offers the best of all worlds. So as I said, lower cost than personal training, but you have the community and the accountability. And then the XPASS, which we can do that others can't allows you to snack across all the other brands. So a big differentiator there. People ask us about fads and fad risk, right? And you typically think of this just like you think of small restaurants in your community, or you see gyms or studios open up in your community. And usually, these are passion projects, right? Usually, these are Patty, who loves Pilates and her dream is to open Patty's Pilates, and she typically doesn't open it up in a grocery-anchored shopping center next to Whole Foods because she doesn't have the capital to do that. And so she sort of bootstrap something that may have 1 or 2 pieces of equipment, and it's more like a quasi personal training business, right? So that's what we saw, and we saw a lot of that during COVID close, or we see those looked at as fads. I always tell people, if you think about the restaurant industry, right, in the food industry, Mexican food is not a fad. Italian food is not a fad. Steakhouses are not a fad, right? But you end up with chefs who try and be restaurant tours, whose main goal is just to serve food. They want people to enjoy their food. And so you see those stories all the time and they seem like fads. And so for us, our modalities endure, we take vanilla-type modalities, right? So when we look at yoga, we don't do fainting goat yoga. We don't do hip-hop yoga to Drake in the dark free flow. Like those things are cool, and you can open 2 in Manhattan and 1 or 2 in L.A. and then it goes away and everybody calls it a fad, right? But yoga is not a fad, right? And so if you look at our -- like what we do at Yoga 6, that's more up the mainstream-type yoga, right? If we want to add a hip-hop class on Wednesday nights because we think that's great, we just add it to the schedule, right? And if it has demand, we keep it, if not, we can take it away. Same with the heater, right? We can heat the room, we cannot heat the room. So it gives us the capacity and flexibility to do what we need to do. Kind of look at our size compared to everyone else sort of unparalleled size, obviously, in an aggregate together against our competitors. But even if you look at it on a single modality basis, and you look at something like Club Pilates is almost 900 open against what would be the closest solid core, which I think some of you know in this area about 9x their size. And so same with stretch zone or any of these other ones that are out there, when you look at an individual modality basis, we do a great job. And when you look at it in aggregate, it's a lot more. So kind of -- highlights are there. Our Studio license members revenues and system-wide sales have increased by double digits, while our EBITDA has increased by more than 200%. $1 billion plus in system-wide sales and $90 million in LTM EBITDA. And you guys saw the announcement this morning kind of projecting what we're seeing, and John will go into more depth in that as we go along. Massive growth since COVID still double-digit same-store sales, high and climbing AUVs. And so we continue to produce that. We are comping about high single digits, call it, 8%, 9% in a pre-COVID world, and we're seeing almost double that, right? And we continue to be able to sustain that in the near future. When you look at our installed base, it supports 74% of our system-wide sales, and it's still growing rapidly. So 74% of our system-wide sales stem from cohorts that are 2020 or earlier, and 45% of our system-wide sales stem from cohorts that are in 2018 or earlier. So installed base is now growing at 16%, right? And you guys have seen that as we rounded Q3 and Q4 of last year and then Q1, Q2 and running through Q3 this year. So our new cohorts continue to do better. When you look at this, we've talked about what happens in a recession. I operated through what wasn't a recession, but was an economic crisis. I actually operated in North Las Vegas, which was the only city that was deemed an economic disaster area by the federal government. And so I kind of operated in the -- they kind of -- the worst, the worst spots that could have happened around the country, and the only thing that really matters that the stores stay open and we see free cash flow coming in, right? And so the businesses will shrink class sizes, right, but it will stay open. If somebody already has a membership, they will keep it. Where you don't see growth as the new people won't spend new money, right? And so you'll see exactly what we saw during COVID. Competitors will close, right? And we will eat up their membership, right? Because we are still open. And we saw that same exact thing. If you look during COVID, people weren't paying labor, right? There's obviously decreased labor because they were closed, there was rent abatements, those kind of things. So the expense side of the business shrinks, but you still see these revenues even during that time with revenues climbing. Membership is really the normal attrition that drops off with not new members coming in, but you still see people visiting, right? Because in a recession, people had more free time. So people would come into the studio a little bit more often, but it really is their release, right? It really is their escape. When you look at access to capital, we've got partners like Amerifund who does the majority of our equipment leasing. That's how a lot of our franchisees will access capital or Navitas or SBA lenders. So when you see rates increasing by about 1%, it has a 0.5% of our AUV impact. And we have low defaults. And so Amerifund and Navitas haven't seen any less demand for what's coming in, no less material demand if you want to look at it that way. But no less demand really coming from franchisees, right? Because we're still selling and we're still opening stores and still driving AUV and that's because members are still coming in, right? And so as long as the lifeblood of our business with their members, continue to come in and utilize our products, then we'll be able to continue to do exactly what we're doing. This is an interesting stat that we've never really looked at before because a lot of times, people will ask us, "Well, how do you know? " how do you know you're going to hit your opening number, right? How do you know you can continue to grow? And there's 2 really good indicators. We opened -- we grand opened 350 units during 2020 when it was actually illegal to open gyms, right? We all forget that, that was an illegal use, so it was like prohibition in the fitness industry, right? But we technically were not allowed to open stores, and we still grand opened 350. And the reason is this pipeline, right? While we're sitting here today, somebody is signing a lease. That's not considered an open store. While we're here today, somebody is executing a letter of intent, and our letters intend are about 7 pages long. So there are many leases. We're not putting out letters intent to landlords that we don't know with some 1 pager that ends up going to a long-form lease and blows up, right? We're doing it with all the major national REITs that we do hundreds of deals with every year, and we're doing it with a long-form templated LOI that we have with them. So these deals don't blow up. About 90% of the leases -- letter of intent that we signed turn out to be open locations. 95% of the leases we signed turned out to be open stores, right? And even in that 5% bucket of people who sign leases and don't open, there's been 58 stores in the history of the company that signed a lease and didn't get open, right? And that includes COVID. There's only been 11 sent in a pre-COVID world who have signed a lease and did not open their store, right? We were able to get some franchisees out of their leases when COVID happened, delay them and then reopen them, right, actually get a new signed lease going forward. So when we look at it today, we already have the addresses of the next 456 openings. Right? So we take the total number of leases that are out there. We say, okay, we'll discount it even with pre-COVID numbers in it, right, and say, well, discount them 5%? We know we've got 456 more to open, right? And so that's why we're very confident we're able to continue to hit our opening numbers like we have kind of quarter-over-quarter. If you look at these future openings and license are skewed towards Club Pilates and StretchLab currently. So 65% of our first half 2023 license came out of CP, SL and another 32% from BFT, Y6 and Rumble. So you guys can kind of see the -- the makeup that's there. 60% of the openings, like I said, are expected from CP and SL and a concentration of these openings in CP, Rumble and SL provides a strong tailwind, because these are AUVs. So we're starting to see the brands like BFT and Rumble as they opened, they're being born, what I call twice as smart. So when Club Pilates started at $250,000 AUV, that's grown to almost $900,000. But Club Pilates and Rumble and StretchLab as their opening or being born at about $500,000, right? So they're starting out with kind of twice the work done for us already as we continue forward. 323 license sales for the first half of 2023. We've talked about that we think license sales will slow, right? And they're not slowing from the macro, they're not slowing from financing, they're slowing because we haven't bought a brand in almost 2 years, right? And so we're selling through the TAM that we currently have. For us, we want to make sure that license sales are always exceeding our openings, right? So we're always adding to the backlog because we already have a several year backlog as it is. Right? And so as we continue to add to that, we're just continuing to shift and open from the front end and add to the back end and open from the front end and add to the back end of that. And if we do acquire an 11th brand, which we'll get to M&A in future slides here, but we do acquire an 11th brand, then those license sales will go back up, right, because that's the intent. We don't want to oversell or oversaturate an area. And like I said, we use Boxing and we're scientific about our core customer and where do they live? And Boxing is very strict on, look, this is how we run the analysis, and we're not signing off on territories. So we're not just out selling franchisees, feel like opening. We're going out and actually creating a bucket of territories, and we're selling that distinct bucket to the franchisees. So kind of -- as we said, we talk about TAM, we just picked a few of the brands here to show you an illustration as the modality grows, right? We started with a TAM of 966 at Club Pilates. As you get open units going forward, we've gone from 633 to 819, right, in the last 2 years. The TAM continues to increase, right? So as Pilates became more popular over the period of time, as our stores do better, as the brand itself gets a bigger following, it allows us to expand our TAM across these different brands. So we picked a couple of the openings that will be here this year, and you can kind of see a difference between one of our oldest brands, where TAM has increased over time at 75% and something like Rumble that's brand new, has already seen some TAM increase. As every year, we go back and we run the same analysis with Buxton by taking our core customer, doing experience credit checks, all these different things that Buxton does to drive detailed information about our consumer, and then mapping that against competitors and ourselves. right? So we map against our other outside competitors, but we also view ourselves, right, because we don't want to have cannibalization. So this isn't about just going out and opening 10,000 units of something and watching AUV shrink. So we're gas and breaking between making sure AUV is increasing, franchisee health is there and then how do we increase TAM, right? And so it's a refined process. When you look at our strategy, it's remained the same. It really is simple. It's sell more, open more, right, increase AUV and try and get SG&A to 0, right? John has been talking to me since the end of last year saying, "Hey, look, as we have these corporate stores, these transition stores, right, having it be a couple of percent of the base, it's not a big deal to 1,000 stores". It becomes more 2,000 and 3,000 if we go to 4,000 and 5,000 and it gave headwind to SG&A. So we said, okay, we'll just continue to sell off those stores down to 0 and then get -- turn it from an SG&A headwind to virtually a tailwind, right? For the business. And so the drivers are still the same for us is really these 4 keys, right? And so we're not just focused on selling franchise. At the end of the day, we're in the royalty business. So we're in the AUV business. But in order to get to AUV and get to royalty, we've got to open them and in order to open them, we got to sell them, right? So it really just becomes sell them, open them, drive AUV and then make sure we're operationally being efficient so that we can drive SG&A to 0, right, is always the ultimate goal, but continue to push that down. So I talk about M&A because we get this question, and kind of the benefits of franchising versus going at it alone, right? So why would somebody buy a franchise from us. We look at this kind of in our M&A section to say, okay, where are other people operating and how do we aggregate it, right? We didn't invent Pilates. Pilates is already happening, right? But it was very independent. It was very segmented. And so for us, we looked at it and said, okay, there's a lot of people operating Pilates inefficiently, right? There's people operating stretching inefficiently. And so there's a lot of benefit to Xponential coming in and creating a brand and creating a playbook and a support system, so our franchisees can benefit from our expertise and our scale, right? And so we go look at modalities that make sense there. When you look at target modalities, both in the health and wellness space, if you guys seeing of our filings, you'll see H&W Invest Co. That was health and wellness investment company, not cleverly hidden by somebody who decided to set up a legal entity, right? But that was the idea on the basis of Xponential from day 1. That's why we had StretchLabs kind of our foray into this wellness space. So you'll see the company continue to develop its H&W thesis from the very beginning in some of these other modalities as we kind of start to cross the spectrum. When you look at the acquisition process and how we identify targets. And so we look at a core modality that we think is compelling, like I talked about. You won't see us doing fainting yoga or gyms that have had 1 or 2 in some kind of weird niche, it's very hard to expand that. So they've got to have the potential to benefit from what we discussed on the earlier slide, right? So we look at those -- kind of that criteria to make sure it makes sense. So we want these brands to be sustainable and modalities to be sustainable over time. When we look at buying and leveraging, right, we also look at -- we're going to hire a 4-person team. It's typically what we hired. So when we bought Rumble, we hired a 4-person team. BFT, we hire a 4-person team. So that team consists of a President, a Chief Marketing Officer, someone in charge of the content, so an instructor trainer, right, someone who's going to deliver the workout and someone who's in charge of system-wide sales. Someone who's in charge of selling memberships basically in that network. We hire those 4 people. They're the franchisee-facing people. And the back office was about 80-plus percent of any of the brands org charts is your construction, real estate, HR, legal, retail, apparel, those types of things, graphic design, all of that is done at the Xpo level, the shared services level, and then we add 4 new people. So that's why you're seeing margins going from 17% to 30% to crossing 40% and targeting 45%. It's because as we add new stores, as we open 550 new stores, we're not having to add as many people to SG&A because we're leveraging that back office, right? And so that is the design then we go in and we refine the FTD if they're not a franchisor already, we have to create one. But if they are a franchisor, we go in and refine that FTD and then it drops into our sell them, open them, drive AUV bucket, right? And so that's how we kind of look at the acquisition side of it. So with that, thank you. Appreciate it. [Presentation]

Hi, everyone. Ryan Junk, COO of Xponential Fitness. So I'm going to dig into a little bit of the operations that Anthony was talking about. Really talking about the support that we provide our franchisees and at the end of the day, kind of share our playbook. And he touched on it. Our playbook is driving royalty revenue, and we drive that through system-wide cells and AUV. So when you look at our playbook, and it's really simple. At the end of the day, how do we get franchisees qualified franchisees, as Anthony mentioned earlier. And how do we get them to open their studios? And not just open studios, open in the right way, so they're driving AUV. And so we kind of go in sequential order in that way because you have to have a franchisee first. And so our process of really finding these franchisees is through our franchise development team. They do a phenomenal job of building relationships. And a lot of these relationships have been through our broker networks, and we have a proven track record. So one, you have these years of experience and expertise in this business. And you got to really gain the trust from your brokers. And what I mean by that is they're getting lead flow and they're spending millions of dollars on these leads. They don't want to just hand them off to somebody. Right? If it goes to us and it dies, we're going to stop getting those leads. And so those relationships are really crucial. The team does a great job there. You can have great relationships. But if your product is not delivering results, they're not going to send anybody either. So you have great validation from our franchisees like you guys just saw some of the testimonials, but also the business is actually being predictable. The growth of driving these openings really comes to figuring out how we can not just get these studios open but performing, and we will talk about the presale process later on, but we also have a resale program as well. And so we have some franchisees that are coming in, and they've done a lot better than usual and they look at their exit. We have some that open their second or third and now they see a higher multiple, so they want to exit. So these brokers are actually doing a lot of their own third-party sites. They're spending their own marketing dollars to generate lead flow so they can actually do resells as well. After we award a new prospect of territory, that's really when the opening process starts. And so we start onboarding them. Anthony touched on it. We actually -- because we're pretty predictable at our process. We know that by the time the franchisee is awarded or prospect is awarded a franchise, we know what market they're going into. So we actually start reaching out to our local brokers and start looking for size before even they sign their franchise agreement. And the whole idea there is to get to opening as quickly as possible in a great qualified location. Our construction support team really assist in that. We like to be as involved as they want us to be sometimes a little bit more than they want us to be. But we really walk them through the entire process from the build-out process, and we're building 2 things when we're looking at our studios. So the lease is signed. We're swinging hammers, but we're also building a membership base. And that's something that's very unique, and we are actually excellent at doing this, which is finding members in that market to sign on a membership. So you're actually paying cash to the owner, and you're waiting for that studio to open before it's even built. And so when you open, you have this great energy, this great vibe and it's a profitable -- a successful business at that point. And so once opened, the brand leadership team that Anthony was talking about, that's franchisee-facing. Their sole purpose is to make sure that the AUV continues to grow, and we'll get into those details later. The synergies that we've been learning over the time -- over time has been really crucial to our success. Anthony talked about how we're lowering our SG&A, and I hear that from John and probably every week. But really, we're finding out we can take this model and make it extremely simple and not complicated because with franchising, that's the key. It has to be simple, and so when Anthony first started Xponential, his vision is he's very entrepreneurial, and everything was going to live in the brands. And so every brand would have a president, their own controller, their own head of finance, real estate, construction and so on and so on. And as we grew, we started finding some of these similarities that we could start kind of streamlining. The first was John. When John came on board, he took away my controller and he took away my finance person -- actually, I didn't lose my finance person. He promoted him to operations, so I wouldn't lose my finance person as he made him President of CycleBar. But if you look at that made sense. Finance and Accounting, that's simple, right? So you pulled that up to Xpo. The next thing that we noticed was real estate. We started having the same real estate directors talking to the same landlord in the same shopping center because we had multiple brands. And so we've cited there is how can we leverage that talent and that skill set. And so what we did was we pulled them to Xponential as well, but gave them regions. And so now instead of a brand because you're just signing leases, you don't have to be intimate with that particular brand, but you do have to know the REITs. You do have to know the local brokers, and that's where we're strong. We have great relationships there are boots on ground. That's the key in real estate. That's how you can move quicker because if you're just opening up your a mom-and-pop shop at 1,500 square feet, you have no leverage as landlord. -- you're lucky to get back to you once a week. But when you have the power of Xponential behind them and all the relationships that we drive, we see that our franchisees get a lot more attention. And so by doing that, we can send people out. We can deploy them, they can go into markets and then we also manage it from a national perspective as well. So then you got construction support. Same thing. We said, "Hey, those 2 departments are aligned. And so it only makes sense to pull them up as well and do the same divide, but it didn't make sense because there you have to be brand specific. You want to make sure the bars on the right wall, you're catching mistakes, and only you catch that is by seeing patterns of doing hundreds and hundreds of these openings. So we decided to pull them up to Xpo, but we gave them brand focus. And the nice thing with that is the pipeline. And so as you guys will see every year, sometimes our spread will shift on openings, and so we're able to shift that with this group of people. So we're not having to add a bunch of SG&A because we're opening more studios, we can easily shift the focus. So if I know this quarter, I'm going to have a lot more openings in this brand. We train them on multiple brands. A lot of them only have 2 brand experience, but I'm able to shift that around to maximize their bandwidth and relief from some people that need help. The other part of it was human resources no-brainer, right? I don't think all the brands want to be working with the HR first in every single week. You look at legal, you look at warehouse, retail, IT, MarTech, which is a new department. Sarah's going to touch on that a little bit later on. All of these things, it sounds like, yes, it's a no-brainer it makes sense. But the driver of this is not to just save money. The driver of this is in SG&A, even though John is excited about this because it keeps going down. The driver is AUV. So everything that we're doing, it wasn't just to save labor and it wasn't just a streamline. It was to allow the presidents and their teams to fully focus on supporting the franchisee. So if I'm a president, you guys can imagine, if you have direct reports, you have to have weekly meetings. You're putting out fires, you're dealing with one offs, right? And you're dealing with outliers. They don't have to have those meetings anymore. They can truly focus on getting leads, converting leads and maintaining leads. That was a driving force. The second advantage was SG&A and being able to save some money there. The last 2 strategic partnerships that's been taking off for us. We have a lot more eyeballs on our apps. We have a lot of people taking classes. And so the opportunities to drive strategic partnership is huge and then franchise development. For the presidents to not have to go through that process. It is a very skillful process, and it takes a lot of time. It is very scary to start your own business. And so there's a lot of handholding and that process has to be on point. And so for a president, if they were going to spend time going through that entire process, they would spend probably half their time on that. Now they don't. They're pulled in towards the end. And so that's how we kind of came up with leveraging these synergies, and I'll dig into a little of them here. So talking about franchise sales. In order to kind of go through this process, I talked about our team. We have a phenomenal team, veterans with tons of experience. They really get the prospects. A lot of them have opened their own businesses, and so they can connect from a human perspective. Like I told you the fear of starting your business. They're really good at that process. It really starts with them. The other part of it is really -- how do you give so much information but make it consumable so they can understand it and digest it? What I've seen in my years of experience is if you give them too much too early, they can't digest the information and you lose them. The team does a really good job of getting that information down to our prospects. The other part of it is we have to make sure they're a good fit for us because the last thing that hurts us is if you bring on a partner, that doesn't want to be a franchisee that they want to do it their own way. It just becomes a headache for everybody, and it slows down our growth, and so validating and getting through that part is huge as well. And so our team leverages over 2,000 brokers. And these brokers are paid 100% commission. So they're invested with us. They want this deal to be done. And so when we're going through that process and we're getting that lead flow, it's crucial that we can make sure that we're weeding out but people that would not be a good fit for us. And making sure that they're qualified that they're going to be great operators. We also spent a ton of time on marketing. They go to 3 to 4 marketing events every single year. These are big conventions, and they also go to our annual convention. We've got a lot of internal sales as well because as we grow, we continue to sell with our current franchisees. And then one thing that we've really been seeing, that we've been really happy with is the growth of our organic lead flow. As we open up more studios, we're starting to get a lot more qualified members that want to be a franchisee, and as that grows, then they can't get their brand, but there's other brands that they want to purchase. And so we're seeing a lot of organic lead flow come through as well. And like I mentioned earlier, these third-party sites that some of our brokers have been putting up. So regardless if we're selling them dirt or for selling a resell, we have a proven process that we make sure everybody goes through, to make sure that they're qualified and that they're a good fit. So here's an example of kind of the funnel. I hate low closing percentages. And so in this stat, I'm actually excited about it. This is a kind of high-level kind of overview of when you get the leads. And so you guys can do the math. It's low single digits of conversions. And that's by design. We want to make sure we're getting the best of the best franchisees that are coming through our system, and you'll see the different stages that they kind of go through. And we want to make sure that they're coming in the right reasons. We want to make sure that they're capitalized and that they're going to hit the ground running. And I'll just ensure that we're awarding the right territories as well. So Anthony touched on Buxton, kind of our streamlined site selection process. I will tell you, one thing that I want to make sure you guys picked up on what Anthony said, is that we're able to pivot easily, right? I think that was the most commonly used word during COVID is pivot. And we didn't -- we didn't furlough people. Some franchise partners they took the opportunity to furlough and close their offices because there are certain functions that there's just no need for it to save the money during COVID. Anthony did not furlough anybody. We all want to work from our house, but we all want to work. And here's an example of that. And so you think that if you're going to shut down any department, it's going to be your construction team that's building out studios because the whole world just shut down or your real estate team. We didn't. So we switched. The real estate team literally started finding ways to negotiate abatement and deferrals for our franchisees. And that was a lot of -- that's the world that they lived in for the next year. They're still doing that work this day and that wasn't something that we did before COVID, we do it now. Before it was, hey, you have to reach out to a real estate attorney, they'll be able to help you out. To this day, we're still supporting franchisees with deferrals, with abatements, with their landlords and working through that process. And that's something that I feel is a huge benefit that we offer now that we didn't before. But the idea here is that, like I mentioned earlier, these team members, it's all about relationships. And so it's relationships with local brokers. And so as we continue to add more brands, we're -- our footprint is growing. And so these brokers do trust us. And like I was mentioning earlier, they treat our franchisees like they're 2,000 studio franchise or business, right, because they get the power of Xpo when it comes to those relationships. Our construction support team is huge because their goal is to make something that's extremely scary and uncomfortable because most people don't have a construction background and they walk them through it. And so again, they're franchisee facing. They assisted the broke out, the build-out. They help with ordering your equipment. They manage vendors for you. And so we do that because, obviously, it helps us get the studio open quicker but also open the right way. The other part of it is that it's a simple build-out. So it's not that difficult. These are small footprints, 1,500 to 2,000 square feet. We're seeing on average about $80,000 in TI, ranges from $40,000 to $120,000. And so it is pretty simple. We're not building from scratch. And so the team is really project managers that really help the franchisee, and again, going back to my comment earlier, the brands aren't having to deal with this, and the franchisees aren't having to do with this, so they can focus on prebuilding their memberships. Because if they're having to meet with their contractors and all the different subs and getting equipment and getting anything ordered, that's going to pull them away from getting leads and getting out in their community and driving more membership. And so the sales team then is spending time with the franchisee educating and teaching them that are on that -- we're on that process. Buxton like Anthony mentioned, is a lifesaver for us. It's data-driven. We know our core customers. We can basically tell how many core customers are in that market and how to target that. We even leverage that from a marketing perspective as well. So with the sales team, real estate, construction, working directly for our franchisees, along with all the Xpo departments, it really does make it a lot easier. And like Anthony said, the Brand Presidents are here, their job is not easy but it makes it easier for them to really focus with our franchisees. And so this is the look, it's simple. It's you have -- each brand has their own President, and that President owns that brand 100%. Like I was mentioning earlier, Anthony wants a very entrepreneurial environment. Our office is not typical. The energy is not normal that you don't see new business. The Presidents are the ones driving their business. They have their own head of marketing. Their marketing team members in charge really of protecting the brand, driving leads into the studios, and that's it. They're not having to focus on a lot of the MarTech or the tech pieces of it because we support them from there. Anthony mentioned Gary V coming on board with VaynerMedia. So it's really supporting them so they can drive that part of the business. The sales team's role is to convert. So marketing, their job is to get leads. The sales team, convert leads. And so it's a simple KPI that we manage, and I'll talk about dashboards here in a second. And then you have your education and member experience. It's delivering the experience for your modality. So each brand has a different experience. And so each team member has that focus on training instructors, making sure that they're delivering a consistency of service, so they're not out there doing their own spin, no pun intended on [ sweat ] -- CycleBar, but no spin of the workout because you have instructors that will say, hey, we should do it this way. Mr. Franchisee who's the owner of the business, right? And so it's really how do we make sure that they're staying aligned in delivering our brand standards. And so that's what that team is there for. And so when you're really focused on that, and that's the world that you live and breathe in, it makes it really simple to move quick. And that was the whole goal is to support the franchisees and move quick. And in order to execute that, to have that vertical and horizontal alignment, you've got to leverage technology as well. And so what we started to do is how do we train our franchisees quickly, how do we continue to train our franchisees to make sure that it's getting down to their members. And so I think COVID really helped us because you went from, hey, we can jump on a plane whenever we want, to fly people to the office whenever they want. And then now everything was shut down, everybody was grounded. And so for a good 60 days, our teams had to go to now how do we get Zooms, how we pull off Zoom trainings. Anthony mentioned 350 studios that we opened during COVID. We opened -- we helped franchisees open studios that we could not fly to and they opened up yoga in the park. They put rowers in the parking lot because they had to start paying their rent, and they had expenses coming on. And so the team did a phenomenal job, but if they're having to focus on all of this, there's no way they could have pulled it off. And so they get franchisee training within 30 days of the franchise agreement being signed. So we have them fly out to the office, and we put them through training. We teach them everything from construction and real estate, just enough to be duly just to give them the understanding of the process, and then immediately dive into how do we start preselling your memberships. How do we get your business going? How do we start building your membership base? We do GM training. So we actually participate in helping them train their staff. And I know that not all franchisors do that. We're big on it because that to us is the ultimate support because we don't want franchisees buying a business, right? We -- they need to have a general manager. We don't want them running the studio. We want them to work on the business and not in the business. And so we help support them on even recruiting and hiring these managers and then training them. And then instructor training is crucial to make sure that they're delivering the process of the experience that they need in that brand retain. So if you go back to what I was saying earlier, it's simple. Marketing gets leads, sales teams converts the leads, and then the education team keeps the leads, that's the business. How do I get more leads? How do I convert those leads? And then how do I get them to stay? And so we use dashboards and KPI monitoring to help them. This for everybody in this room can understand, I mean you can turn this into a charger map and everybody's going to go crazy, franchisees will be on their computers all day, trying to figure out the data. And so we pulled a lot of that out. Now they can dig deep into this. But really, what we did was how do we make it simple. So that way, we can give them these KPIs that they can kind of look at on a daily basis and manage it. And a lot of them there aren't in the studios every day. So how can we make it conversational? We teach them how can you look at this dashboard and have a simple business conversation with your $60,000 to $80,000 a year employee that's driving your business? And so that's a big part of it. It's how do you take the data and how do you make it actionable. And so we spend a lot of time leveraging these dashboards and these KPIs are really simple because we get to see ahead of time when they're going to struggle. And the goal is to actually reach out to them before they reach out to us, because they're reaching out to us, it's -- they're in the whole. It's going to be at least 3, 6 months to get this thing turned around. We want to reach out to them beforehand. And so if we see lead flow dip, we can see that, and we can reach out and have a conversation and start to dig in. We have regional managers and VP's of sales, and there's an escalation process that we go to. So if we reach out to a franchisee and we don't see the results start to shift, we escalate that and it goes all the way up even to myself. We will get on the call of franchisees. But the reason that's crucial for us and for them, we're completely aligned on the same data. We're looking at lead flow, we're looking at appointment bookings. We're looking at phone calls. We're looking at conversions. We're looking at lead conversions, we're looking at first visit closings. We're looking at attrition, we're looking at capacity and just living in that world, and so they can pull these reports. We have pushed reports, and it makes it very simple for them to really look at their business from a revenue perspective versus just having hospitality and clean studios, which is what we harp on as well. So in our continued efforts to really support the Brand Presidents to be able to drive this, that's the shared fitness model, shared department model. That's kind of how we've gotten to where we're at today, and we're constantly looking at ways for efficiency. And this is just a small portion of it. Sarah's going to talk here a little bit about MarTech. She's going to talk a lot about international support because you guys can imagine if our Brand Presidents had to lived in international as well. That's another full-time job. And then really thinking through our strategic partnerships and business to business. And so we'll dig into that, too. But I appreciate you guys' time and we'll talk to you guys later. Thanks.

We'll be now taking a 10-minute break, 10-minute break. [Break]

Can everyone take their seats. We're going to begin the presentation.

Please welcome, Sarah Luna, President of Xponential Fitness.

I'll give you guys a second to sit down and settle. So thanks again for your time today. I'm going to cover off on 3 different sections: International Omnichannel and Marketing and Technology. So let's start off with International. International expansion presents an exciting opportunity for us. With significant growth potential on top of the existing international installed base of more than 350 open studios that we currently have in operation. We've been extremely intentional with our international strategy, leveraging what we've learned domestically from our rapid and successful U.S. expansion and focusing on key international markets, and excellent local partners to help us scale in all the various countries that we're operating at. So the International Market is massive. It's $97 billion, but it's not just 1 global market. To accomplish this growth, we partner with local operators and deploy a master franchisee strategy. These are highly experienced operators who know how to open and operate retail businesses within that local market. And through this combination of high-quality master franchisees, we're able to scale very effectively within the individual markets, and we feel very confident about this international opportunity. So to date, this model has been very successful with over 350 studios open, and over 1,045 licenses sold where they're contractually obligated to already be open. And we have great visibility into each development schedule. So we touched on that domestic side, we have that same visibility on the international side as well. So this tremendous opportunity, we're proud of the footprint that we've already established and where we're going on this growth trajectory. And to date, we've only tapped into a very small potential of what we can develop across the world. So this slide here shows the current open international studios and the composition by brand. So as of June 30, 2023, we had over 357 studios open across 8 brands in 12 countries across North America. Club Pilates and BFT have the largest number of open studios and the highest future development schedules across the majority of our signed countries, and that's actually then followed by StretchLab and Rumble. Our master franchisees conduct local research and they determine the best brand to launch with in a given market. So some of our masters will actually launch with 1 brand, after they've done local research. They'll start to see scale and momentum, and then they'll go ahead and come back and sign on for additional brands. And then we have other masters who commit to a handful of brands right from the very get-go. They know exactly what it is that they want to execute on. But the point is, is that our acquisition and development and growth strategy will look very different in every single country, and it's going to be led by the master franchisor and where they're going to grow and where they're going to feel the most success. And Xponential is focused on expansion into international markets with the best conditions for growth, and this is going to include strong unit level economics as well as future opening potential. Those are the 2 main variables that we're going to look at to identify which markets to go into. So that might be established markets, such as Australia, the U.K. and Germany or emerging markets like Japan, Mexico and the Middle East. Australia is our most scaled market with nearly 50% developed. While Europe is just getting launched with about 4% of the 257 studios obligated to be open. And then Japan is an exciting market for us. And it's one example of an emerging international market with exceptional untapped potential. So to further illustrate the opportunity that Xponential international expansion encompasses, we're just going to dive into a little case study and look at the Japanese market in specific. So to date, we've awarded the rights for 5 brands. So that's about 50% of our portfolio. And that's actually just to 2 master franchisees, with 4 out of the 5 brands awarded in the last 15 months. So we've actually sold a good amount of that most recently. There are 39 studios that are open and over 75 licenses awarded, and 346 studios obligated to open under our current master franchisee agreements. Club Pilates is a great case study for this. As we actually awarded the rights for Club Pilates in 2019, and then we soon after opened the very first studio also in 2019. We now have 28 studios that have opened across the country, all under Club Pilates, and we have over 50 franchise licenses already awarded and 165 studios obligated to open. What we're starting to see is that Club Pilates had this great momentum that began. And each year, we continue to increase the number of openings underneath that particular brand. But we're also seeing that, that sort of development escalation is happening across each of the brands as well. At Club Pilates, we also have a dedicated teacher training facility. So we're feeding the labor into each individual studio to make sure that we can fuel the growth. The Japanese franchise market is especially accessible, and it's due to fewer developmental hurdles. So we're actually able to get from lease signing to studio opening very quickly in the Japanese market. And that actually enables this faster sale to open turnaround times that we see compared to any other country. So the Club Pilates studio openings are accelerating as a direct result of what we see at the local market. And again, we're seeing that very similar across each of the different brands as we're entering those into the Japanese market as well. All right. So that's our international strategy. Moving on to Omnichannel approach. So our Omnichannel approach is our focus on sales, marketing and value proposition for the end customer. This is driven by our Omnichannel approach where we want to make sure that we have a seamless and unified brand experience across each of the brands, but then deep within a very specific brand. That keeps our members fully engaged. So our approach to making boutique fitness accessible to everyone is that we're providing a competitive advantage, that we have a competitive advantage, because we have so many brands we have so many layered assets and ways to connect with the end consumer. So you can see this chart behind me, where we've got an attractive proposition for our B2B partners. But most importantly, for our end consumer and our members who are looking to incorporate fitness into their daily life, into their daily routine, they're looking for entertainment, they're looking for community, they're looking for a great fitness experience and a little bit of entertainment as well. So they might get this by enjoying our XPLUS opportunity as well as the XPASS.They might go to a Michelob Ultra event and enjoy Rumble boxing while they're out drinking new beers, or go on a vacation with Princess Cruise. So as we bring new B2B partners into the system, we evaluate the value as well as the benefit that, that partner will bring into our ecosystem. And we have a few economic structures that we will pursue when we bring a new B2B partner in. But typically, we're looking to determine whether that partnership will be either a lead generator or a member retention partner for our customers. In the perfect scenario, we get both, and we're looking at ways of tapping into our partners' customer base to then bring them into our own system. And then we look at these partners as ways to further expand the 4-wall economics for our franchise partners. So we're looking at ways that we're bringing and driving incremental revenue into the 4-wall experience for the franchisees, and that's without incremental expense or capital from the franchise partner. So the franchisee isn't paying for the Princess Cruise vouchers. They're not paying for the Michelob Ultra installation, but they get the benefit of all of that big brand experience, the leads that are driven as well as the excitement that we've created for their members who benefit from that because they're a member of our brands. So ultimately, our goal is to continue driving value for our franchise partners, as well as our end consumer when we're looking at bringing each of these B2B partners into Xponential Fitness. So that brings me to our driving button seats strategy. So Xponential is highly focused on driving studio revenue through many different mechanisms, and you heard that from Ryan as well as from Anthony, but primarily driving it through visitations, which is our butts and seats strategy and then, of course, utilization. So our goal is to continue to take market share, and we ensure that we're tapping into various audiences and that we're acquiring those audiences at a 0 acquisition cost. So in order to do that, we have partnered with various aggregators, which you can see on the slide. And each year, we measure whether or not the strategy is working. And so far, what we are seeing is that bookings are increasing, but also each booking revenue stream is increasing as well. So that means that these aren't cannibalistic. They're not pulling from different audiences, but that we're finding new audiences to come into the ecosystem and that each is driving incremental visitations and incremental dollars to the franchise partners. So today, we're seeing about 96% of the visits come from our brand direct memberships. So those are the memberships that are sold directly at the studio level and brought in from our lead flow opportunities. This is a majority of the revenue that you see at the studio level. So this is driven through class packages, but primarily through our recurring revenue and the memberships. And then you have about 3.2% of bookings that have come from retail aggregators. That will be a combination of both ClassPass and XPASS and about 1% of those bookings come from health care partners, such as Optum as well as ASH. But as you can see, we don't currently have a corporate wellness partner that has allowed us to scale on a national level. So historically, franchise partners will go to a local corporation and strike up a deal for their particular studio in the particular business or campus within their neighborhood, but that wasn't something that would scale nationally. So what we've untapped or identified is that by creating demand for our limited supply overall, we then create a supply-demand issue, if you will, where we're able to then increase price memberships over and over again. Take price on a daily basis across each of the studios as we continue to fill a perishable good and that Monday at 5:00 p.m. each and every week. So by driving visits, not only are we capturing more revenue from those direct bookings, we're creating demand. And again, that allows us to continue to push AUVs and system-wide sales. So with that, it's with great excitement that we introduced Gympass as our new Corporate Wellness Partner. Gympass is the leading corporate wellness platform. They offer the best network of gyms as well as studios, various classes, personal trainers, and wellness apps all within their own ecosystem. They have generated over 300 billion check-ins to date. They've got over 50,000 wellness partners and 15,000 corporate clients. So we're joining a great network of facilities to bring corporate wellness to all of our studios nationwide. They have over 2 million subscribers that we will be able to tap into immediately. And those subscribers will come into the studios and pay incremental revenue for every single booking that they book. So Gympass is launching across our domestic studios in the next couple of weeks. We'll have both recurring customers as well as new customers that are coming in, and we're very excited about this new partnership. That brings me to our next 2 aggregators that we've now developed our system. They're very familiar with them, our XPASS and XPLUS. Platforms with XPASS that is our direct brick-and-mortar aggregator that we've built across our ecosystem, across our 10 different brands. And we continue to use this application to innovate the way that we are meeting our customers across each of the different modality types. So we introduced most recently a couple of components that bring now gamification as well as community to the platform. So I talked earlier about Xponential fitness being the meeting place of fitness community, lifestyle and entertainment. And we're now trying to replicate that and bring that into our digital technology experience. So that the applications become more than just a booking technology, but it is a place that reminds them why they enjoy their Xponential fitness experience so much. XPASS now rewards customers for completing streaks by either walking 5,000 steps a day or taking fitness classes. So we tapped into those that are walking every day because most people are walking. So we wanted to be able to drive a new consumer base that maybe they had never taken pilates before or bar or yoga, but they're walking. And they start with those 5,000 steps every single day. They start to earn rewards. They start to see different milestones, they unlock different exciting features within the app. And then from there, they start to get interested to come and enjoy our classes. So while we're rewarding them, we're telling them about the benefits of the classes and getting them into our studios for the very first time. So some of those rewards might be exclusive discounts from the B2B partners that we had on the other slide. But it might be also across mental health, apparel, healthy foods, free cruises, maybe a Porsche and much more. So we're building out those rewards and unlocking them every day. At the end of the day, we aim to be a part of the customers' everyday experience. So we're looking at ways in various excuses to talk to our customer and bring them back into our studios. And then we have one central testing platform with the XPASS. So what we like about the XPASS is that to recycle our own leads that are already within the system as well as tap into new lead flow. And we have this new -- this platform where we're able to test new features and new ways that we're talking to our consumer. See what's sticky and then deploy that across each of the 10 brand applications as well. So we really use this as our testing ground to see what is resonating with each of the customers, and then from there, launch it across each of the brand applications. And then our second aggregator is our on-demand platform. And this is our platform where we have all of our different videos that we're constantly updating and filming on a weekly basis. And we view this as an essential and a complementary platform to our brick-and-mortar operations. It's an additional way for the 10 brands to reach people on the go while also providing incremental revenue back to the franchise partner. Again, we talked about bringing in individual and incremental revenue for our franchisees so that they can scale their 4 walls beyond the 4-wall operation through B2B partnerships, but also through XPASS and XPLUS. And they're able to do that with Xponential Plus having to fill the content, find the instructors, deploy kind of this live stream experience on their own, but leveraging what we've already built and delivering it to their end customers. So we actually have a state-of-the-art production facility that's right across the street from our headquarters. There's over 70 LED screens. We've got an entire production facility and editing crew and everything that goes with that. And we're able to bring the instructors in on a weekly basis. It's incredibly efficient from there, we're able to deploy across each of the 10 brands. So the franchisees are always able to offer new and exciting experiences to their customer, and they're able to couple that in with their brick-and-mortar operations. Simultaneously, XPLUS drives member engagement and retention. So we do see that the customers now have this opportunity to be able to do XPLUS where they are whenever they would like to take work out with us and it's becoming more and more sticky, especially as we're leveraging more and more partnerships across XPLUS. And then rev share is a great opportunity for the franchise partners. So some of them have actually bundled it into the membership, while others are actually having their members pay incrementally for every individual subscription. And then last but not least, our international partners are now tapping into this asset, and they're able to leverage the exact same content, the overall structure with their individual franchise partners as well. On the back end, we're targeting a small royalty for the international partners, but they're able to get this asset into market very, very quickly and scale that omnichannel experience for their franchise partners and their members as well. All right. So finally, let's dive into another exciting pillar here. That's marketing and technology. So through the power of the 10 brands, Xponential is able to lower the cost of acquisition and curate marketing partnerships that otherwise would be unavailable to stand-alone brands. By leveraging the learnings across each of the brands, Xponential is able to better understand and deploy efficiencies through the use of technology. And then this perpetual improvement of operations and customer management, allows for our studios to simultaneously become better, and they're all doing it together. So as we're learning across XPASS and XPLUS and different technologies that we own and deploy, we're able to do that at a very rapid pace and learn from 1 brand and then scale it across the line without having to learn the exact same lesson 10x over. So the larger the brand continues to grow. The larger Xponential's footprint continues to grow from both a marketing and a technology standpoint. In the marketing technology section, we'll make sure to talk about all the exciting changes that are happening, and how we are leveraging each of the brands to do that. But I want to take a moment here to talk about our ecosystem overall. So you can see that we've got the member at the center. The member is what really drives all of the exciting B2B partnerships as well as the way that we're thinking about marketing, and the way that we're thinking about talking about our product to then bring them into the studio. So that it's not just promotion based, but that it's a sticky way that we're initially talking to the customer that allows them to continue to be retained across each of the brands. And then you can see that we talk to them about we have retail opportunities and Apple Watch connections and different ways that they're able to experience the brands and the different ways that we talk to them, whether that's going to be through the mobile application, literally picking up the phone and talking to our customer, they get pinged and reminded to be brought back into the 4-wall experience or a virtual experience as well. So this is the type of brand advantage that exists at iconic companies who have become household names across the globe. And through Xponential's current fitness experiences, our brands, our B2B opportunities, our expansion opportunities, these impressions continue to grow in unique in very various ways. And this is a chart to show just the growth of the marketing fund in general. So as the location footprint grows, it gives Xponential brands a unique competitive advantage in spend compared to most of our competitors. So the Xponential Fitness marketing fund, combined with the local franchisee spend will be over $50 million in marketing. And this will continue to grow as we open a new studio each and every day. In addition, by having various brands, this allows for all brands to learn from the spend and from the consumer experience and the reactions that they have to the various marketing opportunities that we're going out with. And then we reallocate that spend so that we're more efficient. So if we're starting to see that there's an efficient way to spend at CycleBar, we make sure to apply that across each of our different brands. This is a very unique marketing advantage that we have at Xponential Fitness. So every single month, we've got the CMOs that come together on a monthly basis, and they share best practices and then immediately the next day, they're implementing those best practices so that we can be efficient with this money. So with this growing spend, Xponential has recently taken a more focused approach on our national marketing efforts. And we're now going to be leveraging the acclaimed agency VaynerMedia, as you saw the announcement this morning for all of our Xponential brands. You'll see that our old model, our original model, was that we actually had national agencies at each of the individual brands. A lot of times, it was the CMO deciding at that brand, which digital agency they liked, who they have the best relationship with. And that would be the agency of record that will help manage that fund. What we saw, though, of course, is that the learnings in a fragmented national agency from an Xpo standpoint, didn't allow us to iterate and learn as quickly as we needed to, to be efficient with those dollars. So what we liked about VaynerMedia as we were looking at who to partner with. They've got a very current approach. They're tapped into what's happening in today's marketing realm. They're plugged in at a different level than our CMOs, they are plugged in that. And so we're excited to spearhead this experience with the great Gary and his team, and Gary is actually here today, and he'll speak about what that partnership looks like. So Gary, welcome you up to the stage.

Thank you. It's very nice. Good morning. Very humbled to be a part of this. I hope everybody here had a great summer. We're really in an interesting time in the history of marketing for a room like this that's paying very close attention to a lot of things specifically in the area of business. I think there is a stunning misunderstanding of what's actually happening with consumer behavior. And I think for us at Vayner and the brands we support and we're obviously very humbled for this partnership and excited for the X team. I think this framework is best categorized as day trading attention. I think the reason we think about it in the framework of day trading attention is if you look at the history of marketing over the last 70 or 80 years, there have only been a couple of inflection points where technology has advanced so much mapping consumer behavior that we have an incredible arbitrage between people that overpay for attention, and people that underpay for attention. If you think about what Procter & Gamble was able to do when the television became the core medium and not the radio, they were able to build enormous consumer brands by outspending in that medium. If you look even more recently at what Amazon and eBay did in the first 5 years of Google AdWords, they were the distant like leaders in spend by a high-margin in comparison to anyone else, and they were able to extract attention at a very underpriced point. As we sit here today, most of the Fortune 5000 brands in the world are grossly overspending on traditional mediums, on the media and on the creative. And at the same token, there are widely underpriced vacuums. The problem is the skill set that's required to extract it is quite high. Even though we continue to dismiss social as this cute little thing that's emerging, the talent that's required both on the media side and the creative side is pretty challenging in comparison to coming up with Where's the beef or Just Do It. And so we sit in this chasm where most people are just not educated enough on how much is overspent and underspent on media and creative. And it's not just new channels versus old channels. I would stand here and argue that the most underpriced attention in marketing today in America is the Super Bowl ad. Even at $7 million or $8 million, you're actually getting 120 million people to consume it. The problem is, as everybody here knows, you're at the mercy of how good is that 30-second video, if you're going to make it ROI positive. On the flip side, most of the television channels and most of the programmatic digital banners and pre-rolls are grossly overpriced in comparison to what they're giving clients in actual consumption. And that's just on the media spend. We don't talk enough about especially in a Wall Street environment, on the creative variable that makes this happen. For the most Nordion marketing in this room, there was also enormous important thing that happened in this world and their competitive set and for you to pay attention to, which was the iOS 14.5 update that Apple did around privacy, which made customer acquisition pack and LTV, lifetime value, very hard for these VC-backed companies to arbitrage because you couldn't cookie people anymore and just suffocate them until they gave up and signed up for your stuff. In this new environment that we now live in, specifically around the TikTokification of all social media, which stands for the fact that now you don't need to amass followers. You need to amass the creative that reaches followers. Everyone in here could literally not have a TikTok account and tomorrow post a video or a picture and reach millions of people if they understood best practices. For the last 14 years, we've been religious around the science and the math around the art that works in these channels. And I don't have to tell anybody here, but the television landscape is about to change massively as everything is now screaming, and all of the media infrastructure and the way you run ads on Roku and Hulu and future Netflix is all much more based on what happens in social media than on what we all grew up with. So I'm very humbled because the reality is this conversation in detail is something I have 7 or 10 times a day with plenty of PE firms and hedge funds and Fortune 500 companies. And the reality is humans are very romantic about yesterday, and they've been very slow to adjust to reality, and that's why we have so much disruption. And when we're able to find an organization that actually understands what's happening and is willing to bet on it, we're humbled and. I'm humbled to share a couple of moments with all of you. I hope everybody is well, and that's the steel.

I appreciate it. Yes. Can you just touch real quick on the daily consumer attention that you guys focus on and how you iterate on that because I think that's huge.

When I think about 10 brands and what is the actual customer acquisition cost required to make these viable businesses that get you all excited. It's -- if you were not paying attention day-to-day, you may be overpaying grossly for something that worked yesterday. Again, it's really fun to use the term day trading attention here in these hollow grounds. It is that serious. 99% of the marketing, the Fortune 5000 world does is they set their media plan, press a button and go to sleep for months. To actually make the math work, that's going to appease everyone in here, you have to be looking at it every single day and realizing that creative on TikTok yesterday was acquiring customers for $13.19, and today, it's $29.06, and that might have flipped the ROI that we're looking for, especially when you start spending hundreds of thousands or millions of dollars. Understanding that science, not just on TikTok, but understanding that there is arbitrage on LinkedIn, on Pinterest. Look, all these platforms, the collective attention on this device is extraordinary. And there's about 7 to 10 platforms that control most of it. We continue to understand that these platforms are disrupting geopolitics and our society. We continue to underestimate what it means to marketing, the arbitrage is extraordinary. So whomever is best at pulling the levers on a daily basis on the creative and the media spend on these 10 platforms have been the organizations that have outperformed in the last 3 to 4 years. The major media outlets, the major institutions, the biggest companies in the world have just not caught up to this, and the comp to that is when we went from radio to television and we went from television to early Internet. And so it's happening, it's happening in front of everyone's eyes. The commitment to the creative in these environments is not there yet. All these other -- can we go back to the last slide, just for fun, if we can? I don't know if you -- can, people, these national agencies, as all of you know, they're all publicly traded companies. All the agencies that rep all the brands are publicly traded. They worry about their margin. You make a lot more money making 1 video for $2 million, then you make making 17,000 pieces of ads for $1.5 million. So what's happening is there's a huge amount of customer growth and equally for a business like this, retention. When you are remarketing to all these consumers that they have within the channels of what they're consuming in Instagram, YouTube shorts, Twitter, you're keeping them longer on retention. So we're really excited. You've already got a pretty strong crew of CMOs that I think are romanced by the really the science of the art, and that is the punchline in today's environment.

Awesome. Thank you. [indiscernible]. All right. So with that, our fully integrated approach to marketing at our scale will help us to demonstrate the flywheel. So this is something that we're continuing to just become a well-oiled machine. This will continue to be improved as we're in partner with Gary and his team as well. And the key to our marketing efforts, obviously, are going to be driving the lowest possible cap out there. And then this growth will be benefited, again, by the B2B partnerships and the organic reach across each of the members. And the larger the customer base larger the marketing fund continues to grow. We have 2% of system-wide sales, and it just continues to go round and round. Then the larger the footprint to -- of our franchise base, then we can improve the technology, the way that we're talking to the customer and again, attracting new customers. So that brings me to our apps. Our brand apps continually and constantly beat even the best -- best-in-class apps that you're seeing out there. We have app scores that exceed both the top 100 paid and free apps that are out in the app stores and over 1 million monthly active users across these applications. So we really lead the fitness industry in quality and scoring across our applications. Our apps aim to generate, again, more leads. So they're constantly pinging new customers and bringing those customers in, whether that's through an XPLUS or XPASS lead flow, we're then trying to drive that person into their local studio. We come with innovative new products and features, as I talked about a little bit earlier. And then we're going to touch on a couple of those new features that we're launching, and have rolled out most recently to increase that stickiness as well as the retention at the customer level. So we queue a video real quick. So you can hear from our members directly. [Presentation]

So we have very passionate and loyal customers. And the way that we're going to continue to retain them is to tap into that excitement. Tap into their own communities and help them bring their communities into our studios. We see that members that work out with their moms, their best friends, their sisters, tend to retain longer as well because they're working out with their own home community and bringing it into their studio community. So according to [ Nielsen ], we did see that 92% of customers trust referrals from people that they know. So we know that, that's a very healthy and a great referral source for our studios. And these referrals take place in our studios on a daily basis. Through either word of mouth or studio conversations. But we wanted to make sure that, that conversation then was translating to our digital applications as well, and that there was an easier way for people to refer their friends into their classes. So we've launched a new Refer Friend feature within our app and these referrals now help boost or -- excuse me, bolster lead generation through technology, and this is at a $0 acquisition cost. So ultimately, the customer is able to go in and share some of the contacts that they have within their cell phone, and that directly uploads to our point-of-sale system. Then the front desk staff is able to engage with that person. They know exactly who the referee was and they're able to say, "Hey, your mom referred you in, let's get you started for your very first class" and tap into that additional lead flow. So since we've launched the Refer Friend program and the brand apps, we've generated around 250,000 in-app referrals, and that launch is just a couple of weeks old. Rich push notifications. So airship data revealed that when there's images that have -- that are in these push notifications, that there's about a 56% higher direct open rate and a 77% rate that they'll actually pay to be involved with that brand in a personalized experience. So we deployed these rich experiences and push notifications to increase engagement on our apps, and to make sure that the 1 million monthly active users that are coming in are actually doing something. That they're not just downloading the app, booking a class and then bouncing out. So we deployed these rich push notifications to increase engagement on our apps and again, to make sure that we're constantly touching base with those 1 million consumers. And our brands are moving from a threshold of a based experience to a personalized experience. One of those examples is going to be -- going from -- you've rode 7 million meters to now, you've rode the distance of the Nile River. And that sort of customer engagement and discussion allows the customer to really feel the weight of their accomplishment so that it's more than just the meters that they've rode, but they're actually translating to that, how that actually applies to their real everyday experiences. And that's the way that we want them to interact with our brands. We want them to be able to translate it to their day each and every day. And then here, we have a challenge center. So it's no surprise that fitness challenges can keep users retained in the program. Historically, we only ran 1 challenge at a time. But as we saw that each customer was motivated by completing their own individual challenge as well as community challenge. We started to deploy different features that allowed simultaneous challenges to be occurring. We found that our Apple Watch consumers at Pure Barre actually took double the classes in a monthly basis so that they could close their rings and celebrate both Apple milestones as well as their peer bar milestones. And the newness of these challenges once done at the studio level brought directly into the brand apps, allowed for the brands to then deploy challenges on a regular basis, but most importantly, seamlessly with lifting very little infrastructure and costs at the studio level. Again, this resulted in customer retention and allows the franchisees to be focused best on driving AUVs at the studio level. A technology that we're really excited about and has just recently launched again is our lead flow and booking journey. Previously, this was what our old lead flow journey looks like, so they would submit their information and then the studio staff would reach out and call the customer. We would train excessively that as soon as a lead would come in, you had to call them immediately because you knew they were on their phone or at their laptop. But a lot of times, the lead will come in and then all of a sudden, that lead would be off doing something else. So the front desk staff was spending a ton of time making phone calls, sending text messages, just trying to get that person to answer, so they can book them into the class. Initially, we thought, well, that's a white glove service, and that's helping the customer book into the class. But what we saw unsurprisingly was that we would find lead flow drop off. And that we were chasing people and spending a lot of labor dollars at the studio level trying to get these people booked back into class. So knowing that customers are looking for booking, simultaneously being able to control their own decision, we then -- we launched this Instabook feature here. So this allows the customer now to put their information in and book directly into class so that they can know exactly what day and what time they're coming into the studio. And then lastly, we are going to be launching ClassPoints. So we did survey our franchise partners and asked them about a loyalty program. And 80% of them said, yes, we need a loyalty program. Today, currently, we're celebrating birthdays and class milestones, but we need something that's then layered even on top of that to continue on our retention efforts. So given Xponential size and our scale, we are excited to announce the ClassPoints program, which will reward Xponential Fitness customers for taking classes as well as other behaviors within the studio. So they'll be rewarded for referring friends or buying retail or enrolling different challenges so that every engagement interaction they have at the studio level, they will be rewarded for that activity. And then these rewards will be redeemed for free classes at our studios, exclusive rewards, chances for exclusive prices. Again, it just continues to feed that excitement for being a part of Xponential Fitness studios. This program is still under development, so it will launch early next year. We're partnering with a consulting partner, IBM prior to the launch so that we can make sure that we get it right. And that we're going to be speaking the language of our consumers so that they are excited about what we're bringing to them. So that covers our 3 main growth strategies between Anthony, Ryan and myself. We talked about overall growth within our domestic footprint as well as international, driving AUVs and system-wide sales. So now I'll pass it on to John Meloun, who will provide financial overview of our fourth strategy. So thank you very much.

Thank you, Sarah. Good morning, everybody. Nice to see you guys all here in person. So let's get started. So the strength of our franchise model is that it can undergo the scaling process without having to sacrifice the quality of service, it can grow locations without having to add a lot of additional overhead costs and raise capital. As discussed earlier, the franchising is our core growth model. Xponential took it to the next level by building a portfolio of boutique franchisees and leveraging our operations across all 10 brands. Our revenue streams are highly reoccurring with multiple streams carrying, multiple high margins. We have already invested in the material amount of SG&A infrastructure needed for growth. So as we continue to add 500-plus studios a year, we're not going to add a bunch of head count to grow those brands and support the openings. Our operational model is asset light with CapEx investments and working capital in the low single digits as a percent of revenue, and declining as the business continues to scale. CapEx in recent years has largely been investing in our technology, integrating the brands. So it will be less over time. Our free cash flow conversion based on adjusted EBITDA is greater than 90%, and that will continue to go up as the business comes. So turning to how we generate revenue. There's 5 core groupings, the largest being franchise revenue, and that's privately made up of franchise territories and our royalties, which are derived based off system-wide sales. But in addition, there's more. We have our technology fees, our training revenue and our studio transfer revenues. Equipment revenues are essentially upfront sales to franchisees, but we also receive rebates from preferred vendors. And we do this to ensure that not only do we have the inventory available, but there's consistency in equipment across all our brands. Merchandise revenue consists of both wholesale, direct, branded and unbranded retail, but we also have preferred vendors that our franchisees could buy from, and we get a rebate for managing those relationships. Marketing fund revenue is 2% of system-wide sales, and that provides us the capital for brand building and national advertising, and our other service revenue. This line includes our rebates for payment processing, our transition studio sales, brand access revenues, XPASS and XPLUS, a lot of the stuff they are just covered. This pie chart provides kind of a current view of our year-to-date revenue mix, and we'll expand on that a little bit more later in the presentation to show how that's going to evolve in the coming years. So with almost 75% of our revenue being reoccurring, it leads to high predictability as we forecast growth in our future periods. Royalties can range from 6% to 8%, depending on the brand, they make up 30% of our revenue today, and it's virtually 100% margin. And it is the largest revenue component from a growth perspective amongst the pie chart that we looked at earlier. Merchandise revenue will grow as we open more locations, as we see more increased foot traffic across our studios. Blended margins for our wholesale -- excuse me -- excuse me, the margins across our wholesale and our direct vendor is about 30%. So it ebbs and flows to based on where people are writing more wholesale or they go direct, but 30% is the blended margins. Marketing fund is 2% of gross sales. Each brand does have its own fund. We don't mix the dollars. So in the early stages of a brand's development, Xponential actually invests in the expense. So from our perspective, we cover the cost of the brand building upfront. Over time, as more studios get open as they generate sales, we recoup those dollars. But over the life of the brand, 0% margin contribution from marketing fund. We do spend all the dollars that we bring in. Monthly technology fees, that varies by brand to brand. And that's really relevant so we generate capital to support the franchisees from a digital tool perspective. Our mobile applications, that Sarah just went over, data and analytics that we provide to our studios and most importantly, our point-of-sale system. We have merchant processing fees of 1%. They support the processing of all our monthly memberships. They're 100% margin, and they're driven by gross sales. Training revenues are generated for new instructors upfront. So our studios are getting open and as existing instructors that we recertify or as we need to open more studios, or they need to add more instructors to their studios, we generate revenue from that as well. And then lastly, our all other service revenue. So the largest portion of all other service revenue today is from our transition studios, which is going away. And we'll talk to that a little bit more in the future slides. But there is revenue associated with XPASS, XPLUS, all the brand access fees are in there. Very high margin flow through roughly 90% because there's little -- very little cost of service to kind of generate these revenue streams. So turning to our nonrecurring revenue, which is about 26%. We define this as franchise territory fees, master franchise agreements and equipment revenue. These revenues are paid for in full upfront by the franchisee. Equipment revenues are recognized at the point of installation, which typically occurs a few weeks prior to a studio opening and they generate blended margins of around 30%. This margin covers the SG&A costs for supporting studio openings that Ryan went through, the vendor management, supply chain and insurers, as I mentioned earlier, consistency of the member experience across all the studios. The equipment refresh revenues do occur monthly today, but they're not very material. Our average studio is just about 3 to 4 years old. So as the volume of refresh activity will increase in the coming years, it's still about 2 to 3 years out before we see more meaningful reaches. But we consider that all onetime and not reoccurring. Domestic franchise territories, they're sold for about $60,000 each. We do offer a discount of $45,000 per license. If you buy 3, we amortize those over 10 years along with any commissions associated with the sale of a license. International, we first sell International Master Franchise Agreement upfront and that is to really just operate in that country. So each MFA is brand and country unique. There's an agreement for each brand and country that they operate in. And it gives the right to sell sub-franchise licenses into that local market. MFAs can vary in price. It depends on the holding capacity of the country. We amortize those for 20 years. It's 10 years for the initial term of the MFA. And with the assumption that you sell all license on the last day of the 10-year, that license goes for 10 years, so it gets spread over 20 years. And then lastly, in the Master Franchise Agreement, they sell sub-franchise licenses. Those are sold under the MFA in that market, and the prices can vary depending on market as well. But Xponential typically gets a nonrefundable revenue share up to around $30,000, which we can recognize immediately. So it's treated more like cash versus in the U.S., it gets advertised. So let's turn to an example of a Master Franchise Agreement. It is important to point out that Xponential's brands leverage our franchise model, the tools we've already developed, the training materials, studio operations to assist getting that MFA operational in their market. So we releverage the learnings that we already have. So in this example, we saw a Master Franchise Agreement for $400,000. Cash comes in immediately, but the margin benefit, as I mentioned, is spread over 20 years. In the second phase, the master franchisor begin selling licenses in the country. And based on the revenue share that we have with that MFA, in this case, 50%, we receive a cash payment from the MFA in that period for $30,000. So they sell a license for $60k, we get $30k, and we recognize that immediately. In the Phase III, now that franchisee they sold a license to, they opened. So when they open their studio, we get a rev share on the equipment packages. We get a rev share on the merchandise they're selling, which is ongoing. We get a rev share on the royalties that they generate. In this example, again, 50%, and the cash is paid in the period, and the margin is recognized immediately. The benefit of the master franchisors, they do all the SG&A work. We do not have to do a lot of SG&A or invest a lot of SG&A to run in their country. So it's roughly 100% margin flow through for us. So very profitable. As these MFAs come online, they build out their systems. The revenue comes in both upfront, onetime stuff as well as reoccurring revenue. So looking at our revenue composition today, you can see the 2023, it will get more favorable over time. So the strength of our franchise model is that it supports high recurring revenues with high margin flow-through and it's driven by increased performance. So when comparing our revenue today to, in this example, 2026, which is you'll see more about 2026, if you haven't skipped to those slides already, the revenue is getting better and the margins are getting better. When comparing the amount of royalties we'll generate this year, which is roughly about 32% fast forward in 2026, based off of the studios, we're going to open the AUV ramps we're expecting, royalties will make up 41% of our future revenue composition in 2026. So this increase will be driven by the installed base of continuing to mature studios. It will be driven by the incremental studios being opened globally, both domestic and internationally. And as Anthony mentioned, our studios are coming online at higher AUV. So we're opening them smarter, and they're performing better. The all other service revenue, as I mentioned, shows it going from 14% this year to 8% by 2026. And what we're doing there is we're moving away from the transition studio model, and we'll talk about that again in later slides. So as we open more studios internationally, the international revenues will increase from a dollar perspective, but not significantly from a percentage mix perspective. So international is going to grow, but the speed at which North America is going to grow, you're only going to see low to single-digit percentage increase in overall mix between domestic and international. Okay. So one important KPI we look at to monitor the health of the system is same-store sales. We use a standard industry definition to measure performance on the change of Studio's period-to-period. To be included in the measurement, the studio must have generated sales for at least 13 consecutive months at the measurement date. If a studio doesn't have 13 months of consecutive sales, we exclude it. We exclude nontraditional studios. So things like our Princess Cruise lines. We don't include the L.A. Fitness. We don't include them. They're not a like-to-like business model with our traditional core brick-and-mortar studio. Prior to the pandemic, we averaged 8% same-store sales each quarter. Post pandemic, we've seen elevated levels of 15% and holding. Over time, we do expect same-store sales though to normalize. For me, my projections and the assumptions are always conservative, but I think they'll return back to the mid- to high single digits on a quarterly basis, probably late 2024. I do want to point out that our mature studios, those that are over 36 months are still comping very high. They did 21% and 16%, respectively, for the past 2 quarters. So even the older studios are still growing at a very healthy rate. One of the other KPIs we look at is our quarterly run rate average unit volumes or AUVs. They're calculated by averaging all the sales for that quarter. We multiply it by 4, we get an annual number. To be included in that sample site, they must be open for at least 6 months at the beginning of the measuring period. Any city that's opened last 6 months, we don't count it. Traditional locations. They're not included. So you could see here, largely 99% of our studios are included in our AUV calculation. The Xponential's portfolio recovered on average to pre-COVID levels in the first quarter of 2022. Consecutively, we've grown each quarter since. The true potential of our AUV, we get that question a lot as we continue to see these brands perform and mature, we don't know yet. We don't know where the top end of the AUV is. I can tell you that 7 of our 10 brands in our portfolio today have AUVs over $1 million. It's not the expectation for all our brands. I wish that would happen, but I don't think we're all going to get to $1 million AUV, but it does show the potential for growth across at least 7 of the 10 brands. All right. So today, 94% of the system-wide sales in North America is generated from our scaled brands. So as of Q2, scale brands representing 90% of the open studios. So 90% of our studios are generating 94% of the royalty income. And this is really important. 150 studios is the threshold for moving from a growth to a scaled brand, because at about 150 studios is when we can generate enough stand-alone royalty income not only to cover the cost of the brand, but also the cost of the Xponential overhead. So we define our scale brands as Club Pilates, CycleBar, Pure Barre, StretchLab and YogaSix. Our growth brands, those with less than 150 studios in North America, are Row House, AKT, STRIDE, Rumble and BFT. The proportion of system-wide sales today has a lot to do with the maturity of the brands, the number of cities that are operating, how long they've been in operation. And as a company, we don't expect all our brands to perform to the same level. It's a portfolio. That's why we built it. We want to diversify risk. We want to leverage our learnings, operational efficiencies that we share across all our brands. That being said, we want to focus our discussion today on the brands that have significant influence on the financials today. Over time, we do expect our growth brands to contribute more financially. But today, they're just not the right point in their growth cycle. They don't have enough units open. The AUVs are just not quite there. So we're going to focus on where 94% of the revenues are coming from. And not the 6%. All right. So let's take a deeper dive on scaled brands and their individual performance. I think you guys have been asking for this for some time. The charts lay out here are scaled brands and how they performed on a same-store sales basis, a run rate AUV over the past 5 quarters. As you can see, same-store sales in the early quarters, a lot of our brands benefited from comping on the tail of the COVID recovery. But since that have remained very resilient as they've kind of leveled out and normalized. CycleBar showing the lasting effects from COVID, a little dip here. But as you can see, it's now turned positive and showing positive same-store sales. Turning to AUVs. The very top line is your Club Pilates have been very strong. StretchLab as well has remained very strong post-COVID. and Pure Barre, CycleBar, YogaSix, positive AUV increases and continues to climb. StretchLab is showing a little bit of flatter AUV. But really what's happening there as you've seen in kind of Anthony section, we're opening up a lot of StretchLabs. So what you're really seeing is a lot of young studios come into the AUV calculation given the volume on a very low basis studios. So we're very happy with the results of these brands. We continue to see support in same-store sales as they stay elevated. We continue to see rising AUVs into the headwinds of the macros. And I do want to point out that we don't plan on providing AUV and same-store sales detail by brand every quarter. I don't want to be talking to 10 brands on every earnings call, but we are going to do it once a year. So we figure at the end of every year, we'll do kind of a state of the union on our scale brands and kind of walk through how they're performing. What you'll probably hear us continue to use the scale and growth brand terminology as we move forward. All right. So let's talk about transition studios. The company has maintained a strategy to support every studio, every franchise at every location, noting that an operating model, it's not uncommon to have locations that underperform as businesses scale. Early on, when we founded Xponential, this was very manageable from a resource perspective and a capital perspective to support all underperforming franchisees. Fast forward a couple of years, we built out the portfolio, the number of locations increase. So no amount of resources and capital needed to support these increased. Post-COVID, we maintain this strategy. We stepped up regardless of costs. We made sure every single franchisee made it through the pandemic. And if they didn't, we took them on as a small portfolio of studios that we operated. And as a reminder, you guys all know this, this was an environment where local federal authorities forced these franchisees to shut down. So in some cases, they simply ran out of money. I strongly believe we made the right decision during COVID. Post-COVID, it was hard to tell which studios were long term versus short term impacted, but now that kind of post-COVID consumer habits, traffic patterns, et cetera, have kind of stabilized, we can make a more informed decisions on which studios just don't work in a post-COVID negotiated lease or a population shifts that have happened in certain cities. But we do expect that the amount of studios going forward that we would be impacted or we'd have to close will be quite small. So ever since the end of the pandemic, as Anthony mentioned, we've had discussions on the scale of our business and forcing us have to evolve how we support these studios, knowing that we're approaching 3,000 locations, some days 6,000, sometimes 9,000. The SGA is going to continue to creep up as it has in the past few quarters. So we did make the decision early this year that we are going to move away from transition studios and change how we support our franchisees that are underperforming. So we're going to focus our efforts on a more proactive and ROI based allocation strategy of our resources. So going forward, the company is going to execute on a scenario-based model for existing studios. Scenario 1 or what we call life events, death, divorce, it does happen in our system. We're going to leverage the franchise resale department and refranchise these studios to new qualified operators. In scenario 2, when a studio is underperforming, but shows promise or is close to breakeven or at breakeven. These brands -- we'll have the brand's performing assessment. We'll have them lay out a support strategy. Things like a special marketing plan, provide additional training, assess in studio staff, even consider a reasonable amount of studio support dollars to work with the franchisee to increase performance. In this scenario, we'll even consider relocation. If a retail center is no longer favorable given shifts in markets. In scenario 3, if a franchisee is or has strayed too far from the Xponential playbook, not following our operating model. We'll take one last attempt to transfer the studio to a new franchisee. If a transfer is impossible, a studio closure will be recommended. As mentioned on the Q2 earnings call, we are ramping down our transition Studio portfolio. We'll be refranchising all the studios that we currently own today. Any study that doesn't get refranchised, we will likely close. So this shift in strategy will have a positive improvement on SG&A leverage. Using the $300 million revenue at the midpoint of our guided range. SG&A, excluding equity costs, is expected to be in the low 40% range this year. Using the revenue based on the Factset consensus of 352 million next year. Our preliminary estimate SG&A, excluding equity costs, we'll be in the low 30% for the full year. Beyond 2024, you can expect sub-30% SG&A as a percent of revenue. So over the coming years, the business is really positioned for continued margin expansion. We have multiple pillars which will achieve these results. First is the franchise revenue that will benefit from favorable margin mix as the business matures. International growth will continue to be an increasing portion of total revenues with high margin contribution, growing AUVs in the installed base, along with both scale and growth brands, opening at higher AUVs will contribute more royalty margin. The shift in transition to deals will provide immediate benefit to leveraging SG&A costs plus the benefit of continuing SG&A leverage. As I mentioned, there's very minimal investment required to open 500-plus studios a year. We do it already today. So we don't need additional resources. So let's now pivot to 4-wall economics, starting with our brand -- how our brands are designed to perform. Again, this is how they're designed to perform. Using the technology on site selection, Buxton, we discussed earlier, studios are opened in locations where they could achieve $500,000 AUV by year 2. At that AUV level studio, on average, will generate 25% to 30% operating margins and pay back in about a 2.5-year period. With a $350,000 initial investment, net of tenant improvements, and Ryan mentioned somewhere between $40,000 and $120,000 is what they're getting, a 40% unlevered cash on cash return can be expected. All right. So now that we look at how they're designed to perform, let's look at how they scale. So our scale brands ramp, as you can see here, that $406,000 in year 1 to $490,000 by year 5. And what we did here is we've indexed all the studios that we have to month 1 and then we removed just 1 simple period of COVID from March '20 to February 2021, we removed that out. So they still have their months in operation, but they're scaled based off of how old they are. So these ramps are all proforma for all acquisitions, including Pure Barre studios that were in operation when we acquired the brand. So if we exclude Pure Barre, you could see the white bar here, it starts at $456,000, $520,000 in year 2, the ad design was $500,000 by year 2 and achieve $630,000 by year 5. These were actuals. This is actually what the scale brands have done. Post COVID, our 2021 and 2022 and 2023 cohorts for all 5 brands are showing stronger starts year after year after year for those 3 years. And you can see here the light gray bar, they do $486,000 in the first, year 1, and they're doing $549 in year 2. So they're doing better. We attribute the better performance and consumer focus on health and wellness, increasing brand awareness, as Sarah mentioned, our brand partnerships, our expat providing additional lead flow, sales conversion following the Xponential playbook and a stable customer retention. So let's now turn to the breakeven illustration of the 4-wall. The illustration assumes 84 studio operating hours a week, holding 30 classes per week and it also assumes the current weighting based on our Q2. So the number of brands in scaled and growth that's weighted by how many are open in each brand. Based on the illustrative analysis, the average studio in the Xponential system we need to generate $326,000 a year to breakeven. Operating expenses are largely uniform across all our brands. They don't differ. Rent is rent and whether you're a StretchLab opening or a club Pilates [indiscernible], you pay the same [indiscernible] is going to charge you the same per square foot. They don't differ. So salary and wages, though and rent expenses represent 70% of the operating expenses. So this is what we're going to focus. The other expenses are largely uniform based off of scale. So in scale brands like Pure Barre though, this is reflected as an owner-operator model, and we're going to talk about that a little bit later. The owner-operator model allows the franchisee to reduce the cost of their wages. Rent expenses in the growth brands is higher, and that's really because the square footage in brands like Rumble and BFT are larger. Within the 4-wall, about 1/3 of the costs are variable. And this includes instructor wages if the number of classes is higher based off the demand, but that usually comes with a higher AUV. So in general, the average studio in North America will need to generate somewhere between $27,000 to $31,000 a month to breakeven. However, that being said, the breakeven level can be influenced by a DMA, or designated market area, as a cost per square foot and minimum wages in those markets differ in operating expenses. While there's not significant differences in the breakeven levels by brand, there can be based off a geographic location, which show up in the rent expense and to a lesser extent, the payroll expense. You can see in this example, using these are real leases from our franchisees in these markets. The breakeven is much higher in New York City and substantially lower if you're operating in Lincoln, Nebraska. Breakevens range from $45,000 to $23,000 in those examples. But again, largely, it's in that $30,000. If you look at the middle, Arizona and Denver locations, about $30,000 a month. So, so far, the breakeven model that we've illustrated is largely depicted a semi-absentee operation, which is when -- if an owner-operator model is used, the franchisee can reduce their breakeven costs even further. The breakeven illustration assumes annual wages based off of 52 weeks per year, which is conservative as studios close for recognized holidays. But for simplicity of illustration, we're going to say the city is open every day of a year. In the semi-absentee model, the studio operating model typically has only 2 headcount in the studio at 1 time at the breakeven level. The studio is open 24 hours excuse me 84 hours per week we'll have an instructor work during class times and the General Manager or the front desk staff will split the 84 hours running the studio, which is illustrated here. And that resulted in about $153,000. So if it's open 84, the General Manager or the front desk staff will be working at 1 time to cover the 84 hours; the instructor, 30 classes at $30. You can annualize out the salaries. So now that franchisees that use an owner-operator model is much different and it can be more efficient and it enhances the economic to the franchisee, if the franchisees working in the salary because not only could they could take a salary home from working in there, they get the benefit of any profits they generate on the unit as well. So if a franchisee acts as the instructor and manages the front desk before and after class, the hourly cost can be reduced by $15 to $25 per hour. And this is largely what a lot of Pure Barre franchisees that were originally there when we acquired the brand. They work in their studio. They teach class as well. So that's why their AUVs they can operate at a lower level and still make a profit to take home. So franchisees that have multiple studios as well can leverage their staff across multiple locations. Like a general manager can manage across multiple locations and allowing for more front desk staff at a lower rates and get the economies of scale on their salary and wages. All right. Our capital structure. So in order of priority, the company will first deploy capital to drive organic growth of the business. This includes optimizing operations, technology investments and other working capital to increase margins. We did this post COVID to make sure our supply chain was there. We used a lot of our working capital to prebuy inventory to make sure it was there. In order to open studios, but we were able to negotiate lower costs on our equipment. For M&A opportunities. A lot of the brands we have acquired have been small investments that came off the balance sheet. So not a lot of capital expectations from M&A. But on lower smaller deals or a business that we could buy, we could do it from the balance sheet. We'll continue to service our debt to strengthen our balance sheet, but could accelerate principal pay down with excess cash. And lastly, outside the current ASR, we're using to buy back stock. We'll weigh the benefits at the time to decide whether or not we'll repurchase additional shares or return capital back to shareholders, which one yields the best return at that time. All right. So our capital structure today supports our growth objectives. Given our franchise model, highly predictable reoccurring revenue streams, very limited ongoing capital requirements. It gives us a lot of visibility into the cash that we have available to service our debt obligations. The company is currently 3.2x levered today. it's comfortable. We're very comfortable with 3x to 4x leverage range. Our business continues to grow. Overall EBITDA and margin will continue to increase. Our net leverage ratio will continue to decrease. As mentioned on the Q2 earnings call, we are continuing to pursue a more efficient alternative to our term loan. We've talked a lot about securitization as a potential option to reduce our borrowing costs, and we continue to move down that road and explore that as a viable opportunity for us. All right. So using the midpoint of our Q2 2023 guidance for adjusted EBITDA, we will be about 3x levered at the end of this year. For 2024 and 2025 using the FactSet analyst consensus adjusted EBITDA, our leverage will decline closer to 1.5x. This is very conservative as it only assumes growth in adjusted EBITDA. We've held cash constant at our Q2 balance. In reality, we expect we'll have a growing cash position, which would further reduce our net debt below the 1.5x if we included it. All right. Including our convertible preferred, 58 million shares today, of which insiders own 40%. The share count is before any impact to the accelerated share repurchase that we announced on our last earnings call. Management has remained very bullish on the company and its performance, multiple board members, executive officers bought stock recently due to the belief that the stock is undervalued. Even with both Anthony and Mark having to pay discouragement, they still when bought the stock. Insider ownership has provided management and the team a tremendous incentive to increase profitability and maximize shareholder value. Looking forward, Xponential is poised for growth based on their 10 brands in our portfolio today. There is plenty of visibility into our next year's openings based on the leases signed and analyzed, submitted from new units. As Andy mentioned, we've already have 450 leases and LOIs baked into our development schedule. So there's still a ton of wide space for our proven brands domestically. International growth continues to cement itself given the partners we've already signed, early proof points on openings and a very approachable investment cost. That being said, we see 500 to 600 global openings for the next 3 years, each year, not cumulatively. Same store sales have remained elevated as discussed, but they will normalize back in the mid- to high single digits. And as I mentioned, I think that happened probably late 2024. Revenue will continue to grow. It will be in the low teens next year. High single digits by 2026. Adjusted EBITDA will continue to grow with 2024, showing approximately 30% growth, near 15% by 2026. And lastly, we see margin expansion continuing over the coming years. In 2024, adjusted EBITDA will be breaking 40%, and then it will reach 45% in 2026, so actually go higher than 45% in 2026. So speaking to 2023, the company is very confident in achieving towards the high end of guidance for this year. We feel very comfortable with the consensus for 2024 of achieving $353 million and $137 million in 2024. Taking the target out 3 years and based off what we just discussed, based off of the current operating model in the 10 brands we have today, so not assuming any acquisitions. The company is targeting for 2026: 500 new studio openings in that year, $2.3 billion in system-wide sales, $405 million in revenue and $190 million in adjusted EBITDA reaching almost 47% adjusted EBITDA margins. So Xponential has proven its ability to acquire and integrate brands with a shared services model. We buy young brands and scale them. Like StretchLab, we've gone from 3 units to over 350 in 5 years. We've bought scale brands that improved them like Pure Barre. Comps were up significantly within a year buying that brand. As the brands continue to mature, we have realized strong revenue growth at the franchisor level as well as at the franchisee level. Visibility into our pipeline has led to predictable studio openings. We continue to drive profitability, margin expansion in the business has already built in for the coming years. So the company will continue to generate a lot of positive cash flow to support the growth of the business and fund future M&A. As I mentioned, management is very bullish on the company and where we're heading. We continue to innovate, find better ways to execute, and we're very excited to deliver on our 2026 targets. So with that, thank you, guys. We're going to take a break now. And then I think we're going to come back, we're going to do Q&A.

We're actually going to go straight into Q&A.

I lied. We're going straight to Q&A.

We have mic runners coming by. So please wait for your question until you have a mic. Thank you.

Perfect. Alex Perry from BofA here. I just wanted to see if we could revisit the studio level economics a bit. Maybe just give us some more color. You gave a great slide on sort of design to your level economics. Maybe just a little more color on how actual studio level economics are trending right now and sort of how they compare versus pre-pandemic? How that sort of differs by brand? And then also I think it was pretty interesting how you showed the difference in the design for the owner-operator versus fully staffed model. And just give us some more color there on how that sort of changes the studio economics.

The trend post COVID -- pre-COVID, post-COVID when it comes to AUVs, I mean there's -- as I mentioned, there's really 2 expenses that you focus on: it's really the rent expense and the wages. You have seen minimum wage come up over the coming years. That will probably continue to happen. So as minimum wage changes, this was reflected to by DMA what the minimum wage is. So as minimum wages continue to increase, that will create some pressure on profitability, but not massive because it's not a huge component of the overall cost going from $13 to $14 an hour. Talking about the owner-operator model versus semi-absentee model. The semi-absentee model even in Pure Barre, if you take Pure Barre as a perfect example because you have a lot of initial franchisees in that brand that run an owner-operator model, typically a lower AUV, but they still make money because I mentioned the franchisees working in their studio. They're making their take home there. Not all franchisees want $1 million AUV. Not all of them want to work that hard. So you do have franchisees that get to a level. They're comfortable with the income that they make at that studio and hence well performed how they want to perform. You look at the 2023 cohort of Pure Barre franchisees, the average franchise in Pure Barre pre did about 30,000 a month. So they're running about a -- low -- high 300s, mid-200s kind of AUV. When you look at the cohort of 2023, franchisees are doing $40,000 a month in month 3 versus the original Pure Barre members, our franchisees are near 7 and doing $30,000 a month, very different operating model because they're still making money at low or high 300s or low 300s, I should say, versus the semi-absentee model, where they're running at more like the rest of our brands. So you do see higher performance in the later cohorts post COVID in a lot of our brands, not just Pure Barre, but all our brands. They're performing higher and better. The cost structure really hasn't changed that much. You do when you buy, you sign a lease, rent does escalate over time. That's very normal, but it hasn't really changed that much. All the other expenses, marketing is what you decide to spend. The other is a minimum amount of marketing, but it's not -- it doesn't change drastically pre and post COVID. Your insurance hasn't changed that much. So when you really look at all those other expenses, they're very -- they're more fixed than variable. But the AUV performance, I can say, has gotten drastically better. The strength of the scale brands that we went through, which generated 94% of our system-wide sales. Every single one of them CycleBar to Pure Barre are doing better than they did pre-COVID and better than they did in 2021. 2023 is our strongest cohort in the company's history.

Perfect. If I could just squeeze a really quick one in. Sort of that one slide suggests the LOIs and signed leases that Club Pilates is the fastest growing brand despite it being the most mature. You said there is a 75% increase in sort of your TAM opportunity there. Maybe just sort of talk about that a bit more, what sort of informed that large increase in the TAM opportunity in Club Pilates and how do you see that trending.

Who wants that one? Go forward, Sarah.

Sure. So yes, what we see in terms of the increase of TAM is that as more customers -- as Anthony mentioned this, as more customers are knowing about Club Pilates and Club Pilates becoming a household name that we're then able to go back into that local market and see how many people are actually doing Pilates, where are they coming from, what neighborhoods are they being developed out of and then we're able to find that exact customer base. There are more customers like that in neighboring neighborhoods. And then we come with additional territories that we're then able to sell. Our Club Pilates franchisees are 6 vessel and love the concepts and a lot of them bought in early 2015, '16, '17 with 3 units development in territories. So that they're at the end of the development schedule, a lot of them are looking for the opportunity to continue to develop additional studios. So when we come with 200 or 300 new licenses, they're able to -- we go to our current franchise partners, and they now develop within their territory. I know that there's not going to be any sort of cannibalization, but it's net new customers. We're also seeing that there's new residences that have popped up in the last 8 years and just different things that will allow us to tap into the customer base. But more importantly that more people are aware of Pilates and they're able to come into the studios as well. So we'll see that across each of our brands as the modality increases, the brand awareness increases as population increases as well.

[indiscernible] Is there a correlation between the brands or banners with limited class capacity and those if like significant class capacity? Because in theory, you can like charge more and maybe have a higher revenue per class. And then if there is a correlation there, will they -- like will you guys or should you alter maybe royalties or any of the fees charge maybe do you close that gap in the performance of maybe underperforming versus shorter performing brands.

I don't address directly. You're right. So you're talking more like demand-based royalty based off of performance. I mean industry standard is in that 6% to 7% range. Some of our more scaled brands have performed very well. We've moved that up to 8%. At the end of the day, a franchisee only pays a percentage of the top line they make. So if they're not doing $900,000 AUVs, they're not paying that much in royalties. We do pricing for consumers on a demand base when you use the XPASS. So a consumer can still approach our business and get a good value proposition by going to off times and less popular classes. If they're going on Wednesday at noon versus Monday at 5, they have that ability to do that. So we do have an opportunity for consumers to use us on more of a demand based. But when it comes to a franchisee and what they pay from a royalties, I mean, they know going in like what the upfront fee is. So we have not talked about any sort of demand based royalty at the franchise level.

And I can just add just a little bit more. So we actually have 5 pricing tiers across each of the brands. So you asked about capacity and pricing but really comes down to the individual operator and how well that individual operator is operating their business. So really, it's irrelevant, which brand it is. But if they're creating demand and they've got a limited supply, we're constantly ratcheting up their pricing. So we've got national sales directors in every single team. We have all the dashboards of the reporting and we're constantly looking at closing ratios as well as lead flow that's coming in to understand whether or not we can take price at that individual studio.

And a very quick follow-up. Just in terms of the lower performance studios, very clear you guys have the playbook that you rely on. In terms of lifting some of those less reforming, is that altering that playbook a little bit? I guess, what kind of changes have you made or plans that you guys have come up with to joint performance?

Yes. I mean one of the changes we've made or strategy shifts that we've had is the team run by a gentleman named Nasrat, a 9-person team that was running our transition studios. So as we have been selling those down and as we sell them down to zero, we're keeping that team, and we're going to use that team as like a strike force sort of Tiger team. They'll be working with underperforming studios across the network. There are opportunities at Club Pilates, for instance, right? You have franchisees that are sitting in a $900,000 AUV market that are choosing to operate at $400,000, $500,000, and they have 3 units, right? Like I've got 3 units. I'm making a few hundred thousand dollars a year, and I'm enjoying the level at which I'm working for the dollars that I'm getting. But we know that they could be generating higher AUVs, right? So using those teams to kind of work across all brands at stores that may be underperforming because underperforming could me, you're doing $600,000, $700,000 in a market that's doing $1.2 million, right? And so it's not always that something is underperforming because people are at $300,000 AUV or whatever it might be. So it really is kind of recognizing what are those opportunities are for somebody that could be performing better. And how do we use guys like [indiscernible] and stuff to drive marketing in those areas to lower CAC or CPL or those kind of things and just drive more attrition. So there's a lot of things strategically. Like when Gary went and spoke, he's not new to the franchisees. He was a guest speaker, the convention last year for 2,000 people and he was the highest rated guest speaker we've had for Marcus Lemonis or Magic Johnson or any of these other people that we've had over time. And his message is kind of direct messaging and how smart he is, as you guys saw when he speaks. He speaks at some theoretical crazy level, right? Where you just kind of like, oh, either he's crazy or he really gets it, and it's the latter given its -- given what's left, right? And so franchisees really got that last December and the comments we got back from franchisees and everything was amazing. And so then having the opportunity franchisees are very engaged. So when we announced that yesterday, I got tons of messages, right? So it's doing things like that, that reengages franchisees to market right, so that it does improve their AUV. It gets them like you talked about, like set it and forget it. A lot of our franchisees do that, even though they're using our vendors. They're like, okay, this is my ad versus my social media thing, and I just kind of do that. And why should I change the lead flow comes in, I'll go focus somewhere else in my life. But bringing in some like Gary to shake it up, right? They're like, okay, I need to reassess my marketing, right? I need to refresh my marketing. And so that will happen at studios that are doing $2 million a year, right? That doesn't mean that they're fully efficiently performing even though their AUV could be 3x the company AUV.

All right. And back here, Jon Komp from Baird. Thanks to you all for hosting here. I want to ask 2 questions. First one, just thinking about the incremental profitability getting to 47% EBITDA margin, flowing through at a very high rate. All those metrics would be certainly best-in-class among your peers. So could you just talk about how much conservatism you baked into that outlook? Is there any risk that so to speak, you're squeezing the orange too much in terms of the profitability of the system that you're getting as a franchisor?

Yes. So baked into those projections assumes nothing different than we do today, right? So a lot of the margin expansion is coming from growing the business. AUVs, as those continue to climb, higher royalties, it's 100% margin. Hence, looking at the revenue mix today just by opening studios, and then performing, we just get our fair share of the royalty. So that's where a significant amount of the margin flow through is coming from. Menu layering your international growth, which again, it's virtually 100% margin because the MFA is bearing all the costs. So from an SG&A perspective, I don't invest anything to open up 200, 300 studios in Japan. That's what the MFA is doing. I just get my margins here. So from a conservatism standpoint, those who know me, like I've always been conservative in my outlook, in my guidance. We want to over perform and -- under promise and over perform. That's kind of been my mantra. That's how I forecast. I don't feel like we're anything within the projections we provided is squeezing the orange too much because we haven't changed anything from what we're doing today and the model is working because we continue to see margin expand. So.

Great. And then just one follow-up, if I could. Just a discussion around same-store sales, John, could you talk a little bit more about the glide path that you mentioned going forward? And then not to commit any chart crime here, but I think it's Slide 18, your chart of active paying memberships looks like it's flatlined in recent months. So could you maybe just address the trends that you're seeing in the business on a real-time basis?

Yes. The same store sales, so early on, we thought mid-teens as kind of what we thought. I was assuming at the beginning of this year. We had a really strong Q1. I think there is a little bit of, again, comping off of the end of the COVID. Going forward, I think you'll continue to see mid-teens kind of through the end of this year. Then all start to taper off a little bit as you get into the first half of 2024. Mid- to high single digits late 2024. I mean Anthony have a friendly banter back and forth, but he's determined to prove me wrong, and I hope he does as the studios continue to mature. Again, it's really tough because when you're seeing your older mature studios still comping 15%, 20%, like that's -- it's really encouraging. And again, as the studios are coming online, they're coming on at much higher AUV. So it's like how much more can they comp when they're already starting where Studios years ago had to get to. But I do think at all over time, you'll see probably more of a mid-teens, you'll start and get to the double digits, then you'll get to the high single digits by the end of next year. I think you had a follow-up question. I'm sorry, on the...

Just after any membership, have you seen any change in recent months in the introductory?

No. When you look at the -- we track tons and tons of KPIs, Andreas. She's worked with us for a long time, and she's obsessive about it. You see on a per studio per member basis, it's the highest spend. You do see a little bit of softness, as we mentioned in our last earnings call during summer months, that's seasonal, that kind of always happens. But it usually covers in September when people come back from vacation and kids get back into school, they get back into their regular kind of daily lives. September becomes a strong month for us. So we have not seen any declines in member as we head into the second half.

Randy Konik from Jefferies. I guess, John, going back to the AUV assumptions over the next few years in the model here. How do you think about the scale -- the contribution from the scaled brands versus the growth brands? Just give us because I think a lot of questions are going to come from the growth businesses and where are they going to go, let's say, 3 to 5 years from now? So it would be really helpful to get your perspective on how those -- kind of where are they sitting today? Where are they going to ramp? Where is that going to come from? I guess, Anthony, getting your perspective on your assessment of the portfolio, some brands are going to be amazing like Club Pilates, some less so. So I'd just love to get your perspective on how you think about future portfolio construction? When would you ever get rid of a brand and why? And then lastly, for Sarah. Just give us your perspective on international. There's a lot of demand coming through across multiple countries across all over the place different continents. So just give us what's going on there? Why is it just accelerating? That would be very helpful as well.

Go left right? You want to start?

You are the boss.

No. You go..

The question was on AUV -- so when you think about the AUV contribution, I mean, Club Pilates has been continued to be one of the larger brands we opened on a consistent basis, StretchLab as well. For Rumble and BFT have -- those are brands we sold a lot of Anthony showed on his slide, a lot of leases, a lot of LOIs are starting to come from that area. It takes time to kind of mold that in it. Typically, when you buy a brand. By the time you get your FTD filed by the time you start selling licenses, by time they go find their leases, by time they get open, there's like this cycle that has to kind of happen. It's starting to happen. So you're starting to see more BFTs and Rumble enter the market this year as they get open, you'll see more next year. But I honestly think probably 2025 is where you're really starting to see those brands really start playing a much larger role as the size of our portfolio. StretchLab is -- we sold a lot of them. We're opening a lot of them. YogaSix, we sold a lot of them, we're opening a lot Club Pilates continues to be strong. So to kind of dilute down the scale brands by starting to see more presence of the growth brands. It's probably going to take another year to 2 years. But as Anthony kind of talked to the AUVs and as I mentioned, those brands are starting 500. So we feel really good about not only the scale brands doing that. As I even mentioned, Pure Barre in this recent cohort or entering are, if you took a month 3 and AUV did it. It's already in the 400s. So I feel really good about the growth brands coming into the portfolio as we get more and more open. I think it will be actually a positive benefit to the AUV.

Yes. As far as the brands that we have versus scale or growth brands in the portfolio, there's -- you can look at brands like AKT, for instance, and say, okay, it's a dance modality. Most men don't want to go do a dance, right? Some women feel like they have to know how to dance before they show up to dance, right? So you have some headwind just in those modalities, and we're aware of that, right? And so if you look at the business sometime and it's 4-wall life and you say, "Hey. Well, there's 2,500 or 25 of them open against 900 Club Pilates like, why do you bother?" Well, when you look at it, there's 4 people that run the brand like we discussed. And so if you said, okay, we shut that brand down. You save $500,000 -- $400,000 or $500,000 of payroll. That's it. The office doesn't get any smaller back in accounting doesn't get laid off, like it doesn't work like that, right? And so the shared services stay the same, just like we're leveraging shared services for margin to increase going forward. If you did something, you would save the payroll of the 4 people there, right? But AKT makes millions of dollars from lululemon, right? And so I can cover my annual overhead for 6 years at AKT of lululemon, right? So do I want to shut that down, right? It's one of the #1 brands for lululemon or Google Voice or Google Play or Princess Cruises or all these other places that particular brand lives digitally, right? Or you look at row houses, almost 100 open, right? Those are still contributing. So is my 4-ish percent payroll at Row House were saying, oh, well, that just did 100, and we want to keep things that are at 900, right? And so things work in phases. And you have to remember, like we bought row house for $1 million, right? It's not -- we've got StretchLife for $650,000. So these are not $200 million acquisitions that we're trying to drive. And so where we really look at it is kind of from a labor perspective, like I would look at the team at AKT or the team at Row House or a team has Stride, okay, do I feel like there's a different modality that's out there that, a, we can go buy and I can grow and I would repurpose that labor, right? Because labor is the hardest thing to find, right? And this is why I talked about we hire people kind of in the second or third position at brands, and we grow those people's careers, right? For every president that we have today, there's somebody behind them, right? Everybody has creative titles, but it used to be like a President, a Vice President, you knew kind of who was there. So we have a first in command and a second in command that's being groomed and that first in command is either going to go out and start a new brand for us or go up in the expo level to kind of support the overall brand. So if a brand is not doing well, we're fine if it's not making money. But people pretend like AKT cost $10 million a year to run. It's bringing in $1 million that's negative $9 million, and we just want to keep it. It's not -- that's not how the economics work. They take up 4 phones, 4 cubicles like it's not -- this isn't -- it's not massive. And so I look at it from a perspective of, can I repurpose that labor into something that will be more accretive sort of on the M&A side. But they live in different worlds. AKT is in Mexico now, and those people pay money. And so there's all these different places where we see it holistically and some people just focus on a certain brand and how many open stores there are an AUV like that's the whole world and it's just not for us. So.

International, so we have really launched our international strategy, I would say, around 2017, so the formation of Xponential Fitness and at that time had Club Pilates and CycleBar in some of the emerging brands as well. We hired a Chief Development and International Officer, John Kirsch, who had done it before for any time fitness and other brands. And so really, he was out there pitching Club Pilates because that was the 1 that had the most proven concept domestically and it's a long lead cycle. So it takes several months to get out there, find the best operator, get them to feel confident about bringing a domestic brand into an international market. So you planned at a ton of different seeds and actually sold a handful of masters into COVID. And we got into COVID, and they all said, okay, we're just going to water the seeds. We're going to look at real estate, but we're going to kind of wait and see, especially as every country kind of handled COVID very differently. But they were ready to go as soon as all the mandates lifted. They were able then to just go out and start to ramp up franchise for sale, get their leases signed, things like that. But in the meantime, we were buying additional brands and scaling the brands that we currently have. So over the last couple of years, we've now had the portfolio of the 10 brands and the masters have been able to see our growth and see the way that we've scaled and developed each of the 10. So that now they're coming back and they're in their initial growth phase, they're going, I like Rumble and StretchLab will be a perfect complement and let's go ahead and open that alongside our Club Pilates and some of our other brands. So as they're gaining confidence, they've built out their teams. They're starting to now see how they can leverage their back office to support multiple brands and they're learning their market in boutique fitness. And it's relatively -- it's a simple concept at the end of the day. It's a small footprint, low labor model. So as they're getting skilled at driving one brand, it just makes sense to plug in the second and the third and continue to scale like we have.

Warren Cheng from Evercore ISI. First question is for John. We really appreciate the additional detail, gave on AUV by brand, StretchLab and Club Pilates clearly stand out as really good cash flow engines for your franchisee base. If we look at it on a 4-wall basis -- sorry, that upside down -- if we look at it on a 4-wall basis, -- sorry for the webcast, guys. Well, if we look at -- yes, on a 4-wall basis, are the 4 walls for those 2 concepts significantly higher than the base? And can you give us a sense for how the 4-wall range is outside if we exclude those 2 banners?

So your question is, is the operating expense for the 4-wall differ for Club Pilates and StretchLab given their higher AUV?

So -- because the AUVs are so much higher for those 2 concepts thus the 4-wall margins kind of reflect the same thing? Are you significantly higher than the base?

Yes. So the 4-wall margins in those brands is higher. So Club Pilates $800,000, $900,000 AUV, they're doing much better than 25% to 30% margin, unless they're really running an inefficient operating model probably with labor. But yes, they're definitely doing much higher margins at that level. StretchLab is a little bit different model in the sense that it's one-on-one stretching. So if you're performing at a much higher AUV, there's probably a lot of throughput going through your studio as far as consumers and you need to have more reflexologists managing that additional load. The intent of that 4-wall is to say, listen, if you're going to get to a breakeven level, you should not have 7 people working at your front desk. If you do, it's your own fault why you're not making money because you don't need that many people standing route. So the -- as the business scales, there is some variable expense that gets added into the studio. The 2 main ones you'll think of is going to be labor and your royalties, obviously, more sales, more royalties, but more people coming into your studios, more classes, you're going to need more instructor, more classes, which means more instructor dollars then potentially more people at the front us to manage the throughput. So you do add some expense, but it's not like your margins to grade because your AVs are going up to actually get better.

So if we exclude those 2, can you give us a sense for the range of 4-walls for the other banners?

The range of 4 walls for the other banners from an AUV perspective or margin?

Margin.

Yes. So I mean as you saw on the screen, the cohorts that post-COVID, they're included in those cohorts. So you take those out, and the AUVs were provided, they're still doing close to $300,000 or $400,000 AUV. So they are making money. And at that once you get above that average $360,000 and again, you got to look at where they are from a DMA perspective, they're making money. The interesting thing about the 4-wall and I think a lot of people like to focus on each brand independently, as Anthony mentioned, there are franchisees in Club Pilates that do $400,000 AUVs. There's a bell curve. It just depends on whether or not you're choosing to be a franchisee who participates in the daily operation of your studio versus not. And every single one of our brands has a bell curve. Club Pilates SKUs weight at the far right, you look at like a YogaSix and StretchLab, -- it's a little bit more of a normal bell curve. In that bell curve, it really depends on what market you're in and the kind of labor model you're deploying within there. But you look at franchisees who've been operating at a $350,000 or $400,000 AUV, and they've been operating for 3 or 4 years. Those are probably franchisees that are actively participating in their studio, happy with their take home and they're not willing to spend 300 hours a week doing marketing because they're happy with what they're making. So it does depend on the franchisee. It does depend on the market, and it does depend on whether or not they're operating their studio or if they're in a semi-absentee model.

And I just have a follow-up for Sarah. Very exciting announcement on Gympass this morning. Are there any benchmarks we can use to think about how impactful that can be fulfilling some of the excess inventory versus what you've done yourself with XPASS.

Yes. I mean, obviously, we have the data from Gympass and what they've done in some of our competitor gyms and various networks. So they did provide that data to us and it was compelling. We obviously won't know exactly how that will perform within our individual studios, but we know what we have in terms of excess capacity. Those customers will be able to book 7 days in advance of a class actually happening. But we were most excited about is it's a net new customer. So about 90% of those customers are currently inactive. And so when they show up at work and their coworkers are working out, now they have this great benefit that's actually supplemented by their employer. It makes them a stickier employee and a happier employee, but then also they're going to work out with other employees as well. So for us, it's just filling up those last spots within the class. Those are going to be the most profitable spots within the studio because they've already paid for the rent and utilities and the light on the music to be playing. All of that is happening regardless of them showing up. So filling spot 10 and 11 is going to be where we start to see even greater profit for the franchise partner. So more to come as we launch the partnership, but we know kind of opportunities that we have and be able to take that [indiscernible] right now is what we're capturing. So now tap into their 2 million subscribers and put them through our studios.

We have time for one more question.

Jeff Van Sinderen from B. Riley. Just as a follow-up to that, are there other platforms you might get on similar to Gympass like maybe ClassPass or?

So we're already on ClassPass actually, and we have over 900 studios that are on the ClassPass application. We'll have more that will be joining the application over the next couple of months as well. Those are really your big players. There are some that are international. But really domestically, we've got huge healthcare partners with ASH and Optum, ClassPass and now GymPass. So those are going to be the biggest players in the space.

Okay. And then just one more if I could squeeze it in for Anthony. Just wondering in terms of your latest thought process around acquiring other brands at this point. Would you acquire something that's already kind of more scaled? Or would you lean towards something that has more growth potential? Maybe just touch on that.

Both, right? We're trying to create EBITDA margin and scale things that make sense. And so if something has 20 locations, and we feel like we can scale it, much like a BFT, right? It's not only domestic. BFT was existing out in APAC, and we bought it there, and then we're scaling it domestically. So we're looking globally at M&A. And so it's either a scaled opportunity or it's something out there that is upsize that is heavily discounted today that we feel like we can course correct and still be a great deal for shareholders, we'll do that. So it will fit into that 1,500 to 2,000 square foot box. It will be franchised, it will be all those kinds of things. But we can look at things that are at scale or things that are yet to be scaled. All right. Thank you.