Xponential Health (XPOF) This fall 2022 Earnings Name Transcript

Xponential Health (XPOF -0.55%)
This fall 2022 Earnings Name
Mar 02, 2023, 4:30 p.m. ET

Contents:

• Ready Remarks
• Questions and Solutions
• Name Individuals

Ready Remarks:

Operator

Greetings. Welcome to Xponential Health Inc. fourth quarter and financial 12 months 2022 earnings convention name. Right now, all contributors are in a listen-only mode.

A short question-and-answer session will comply with the formal presentation. [Operator Instructions] As a reminder, this convention is being recorded. It’s now my pleasure to introduce to your host, Kimberly Esterkin from investor relations. Thanks, and chances are you’ll start.

Kimberly Esterkin — Investor Relations

Thanks, operator. Good afternoon, and thanks all for becoming a member of our convention name to debate Xponential Health’ 4 quarter and full 12 months 2022 monetary outcomes. I’m joined by Anthony Geisler, chief government officer; Sarah Luna, president; and John Meloun, chief monetary officer. A recording of this name can be posted on the traders part of our web site at investor.xponential.com.

We remind you that in this convention name, we’ll make sure forward-looking statements, together with discussions of our enterprise outlook and monetary projections. These forward-looking statements are primarily based on administration’s present expectations and contain dangers and uncertainties that would trigger our precise outcomes to vary materially from such expectations. For a extra detailed description of those dangers and uncertainties, please seek advice from our latest and subsequent filings with the SEC. We assume no obligation to replace the knowledge offered on right now’s name.

As well as, we can be discussing sure non-GAAP monetary measurements on this convention name. We use non-GAAP measures as a result of we imagine they supply helpful details about our working efficiency that must be thought-about by traders along with the GAAP measures that we offer. A reconciliation of those non-GAAP measures to comparable GAAP measures is included within the earnings launch that was issued earlier right now previous to this name. Please additionally word that each one numbers reported in right now’s ready remarks seek advice from world figures, until in any other case famous.

I’ll now flip the decision over to Anthony Geisler, chief government officer of Xponential Health.

Anthony Geisler — Chief Government Officer

Thanks, Kimberly, and good afternoon, everybody. We respect you becoming a member of our fourth quarter earnings convention name. I will start right now’s dialogue with an outline of our quarterly efficiency and operational highlights. Sarah will then communicate additional about our progress towards our core development methods.

John will conclude with a evaluate of our fourth quarter financials and supply our 2023 outlook. As can be evident from the outcomes we mentioned right now, 2022 was one other profitable 12 months for Xponential. For the 12 months, we achieved double-digit development throughout North America memberships, same-store gross sales, and AUVs, all of that are consultant of the truth that boutique health is taken into account essential, not discretionary spend by studio members. The demand for our choices is demonstrated by our North American studios, producing over 1 billion in systemwide gross sales in 2022.

We’re particularly inspired by the truth that our mature studio cohorts nonetheless exhibit robust same-store gross sales development and have a profile that is much like our youthful studios. For the complete 12 months, North American studios over three years outdated comped at 25% same-store gross sales development, and extra lately, within the fourth quarter of 2022, North American studios over three years outdated comped at 18% same-store gross sales development. Whereas we do anticipate this share to return down over time as development profiles normalize, we’re inspired to see this stage of efficiency. It’s clear from these numbers that every 12 months Xponential continues to lift the bar on its operational efficiency and ship on its monetary outcomes.

And 2022 was no exception. Collectively, now we have constructed a resilient enterprise. And I wish to thank each one in every of our franchisees and staff. All of your arduous work has enabled Xponential to succeed in report annual outcomes and to proceed to ship on its mission to make boutique health accessible to everybody.

I had the chance to fulfill with a lot of our franchisees this previous December at our Annual Franchise Conference in Las Vegas. Over 2,000 enthusiastic attendees gathered to share greatest practices and talk about revolutionary methods to advertise the expansion of our manufacturers. We’re seeing this pleasure bolstered within the momentum we’re already experiencing in early 2023. As the most important boutique health franchisor globally, with franchisees working over 2,600 studios, now we have grown our studio footprint by 24% 12 months over 12 months.

We now have a mix of franchise, grasp franchise, and worldwide license agreements in place in 16 international locations and can proceed to develop our footprint globally. Turning to our membership efficiency, whole members throughout North America elevated by roughly 32% 12 months over 12 months in 2022 to a complete of 590,000. This momentum in membership development has carried into 2023. And within the month of January, we formally surpassed 600,000 North American members, with almost 90% of those clients on reoccurring membership packages.

These figures are consultant of the long-term development of a passionate, loyal buyer base. As our membership base has grown, so too have visits to our studios. North American studio visits for the 12 months ending in December 2022 elevated by 32% 12 months over 12 months, reaching a complete of 39.2 million. Elevated utilization at studios resulted in report North American systemwide gross sales.

North American systemwide gross sales elevated 46% in 2022 and surpassed 1 billion annual gross sales for the primary time in Xponential’s historical past. We imagine that our studios quarterly run fee common unit volumes or quarterly AUVs finally provide essentially the most direct measure of the well being of our franchise system. We ended 2022 with fourth quarter run fee North American AUVs of 522,000, up from 446,000 in This fall of 2021. This represents the tenth straight quarter of AUV development.

Whereas we do not know most AUV potential, we all know that our studios have loads of capability so as to add extra members and lessons. The robust same-store gross sales exhibited by even our extra mature cohorts that I mentioned earlier make us assured in our studios’ development prospects. Turning to income. For the 12 months, we posted web income of roughly $245 million, a rise of 58% 12 months over 12 months.

Adjusted EBITDA for 2022 totaled $74.3 million or 30.3% of income, a rise of 172% from $27.3 million or 17.6% of income within the prior-year interval. With that as a background, let’s flip to our strategic development areas. I will talk about the primary three levers of our development plan after which flip the decision over to Sarah to debate the fourth. Let’s start with growing our franchise studio base.

We ended This fall with 2641 world open studios opening 156 web new studios within the fourth quarter alone. For the complete 12 months, we opened 511 web new studios globally or a brand new studio opening roughly each 17 hours. We additionally skilled robust demand for our franchise licenses, promoting 257 licenses globally in This fall, bringing whole bought licenses to five,450. In North America, now we have nearly 2,000 licenses bought and contractually obligated to open, providing us multiyear visibility into our development.

Needless to say over time, as we proceed to promote by primed geographic territories in every of our present manufacturers, we’d ultimately want to amass one other model to keep up this elevated run fee of license gross sales. Turning to our second development driver: increasing internationally. On the worldwide entrance, now we have over 1,000 studios obligated to be opened, and we proceed to achieve traction. In November, we introduced a grasp franchise settlement in Portugal to license Membership Pilates studios.

Then in December, we introduced a grasp franchise settlement in Japan for our Rumble and AKT manufacturers to open a minimal of 100 new studios throughout each manufacturers. As a reminder, our MFAs are structured to supply Xponential with high-margin circulation by, on condition that we require minimal incremental SGA to assist MFA development. Our third key development driver is to develop margins and drive free money circulation conversion. As our enterprise continues to develop, we’re more and more reaping the advantages of our asset-light, scalable working mannequin, offering us with constant and rising margin efficiency.

We’re particularly happy with the place our adjusted EBITDA margins ended for the 12 months. We proceed to anticipate our adjusted EBITDA margins to develop into the 35% to 39% vary in 2023, and we stay on observe to attain our adjusted EBITDA margin goal of 40% in 2024. Our boutique in-studio choices are precisely what customers post-pandemic are gravitating towards. Shoppers have shifted their curiosity towards smaller lessons that supply neighborhood and leisure in a protected, wholesome setting.

Our members come to our studios not solely to work out, but in addition to socialize with each other in studio employees. It is this sense of neighborhood that makes our studio membership so sticky and why the considered giving up one studio membership equates with additionally giving up a neighborhood and a life-style, persons are simply not keen to make that trade-off. Moreover, as our manufacturers and neighborhood proceed to develop, we’re more and more capitalizing on alternatives to have interaction with customers far past simply the bodily studio house. As Sarah will talk about shortly, our B2B XPLUS and XPASS choices are nice examples of how we’re more and more participating with our customers in a extra holistic omnichannel manner.

With that, I will cross the decision on to Sarah to debate our fourth and closing development driver, growing our same-store gross sales and UVs.

Sarah Luna — President

Thanks, Anthony. Within the fourth quarter, not solely did we proceed to drive robust in-studio efficiency, however as Anthony simply talked about, we additionally additional established Xponential’s omnichannel health providing. All year long, we welcome quite a few B2B companions whereas additionally enhancing our XPASS and XPLUS choices. The success of our omnichannel health expertise, which helps drive extra clients into our studios, is obvious in our rising visits.

For the complete 12 months, North America visitation charges grew 32% over 2021. This momentum, as Anthony famous, has continued into the brand new 12 months with our North America membership base now exceeding 600,000 in January. So, let’s talk about how we proceed to attach with our members. Elevated retention and decreased churn, all of that are important to rising our same-store gross sales and AUVs.

I will start with XPASS providing, which offers our members frictionless entry to all 10 of our manufacturers on a single-recurring month-to-month membership platform. XPASS serves as a lead generator for our franchisees to drive in-studio memberships. In 2022, 17% of XPASS North America members had by no means interacted with Xponential manufacturers prior to buying an XPASS membership. As well as, 64% of XPASS North American members had been inactive earlier than buying an XPASS membership.

We’re wanting ahead to driving continued development within the XPASS membership in 2023. We’re additionally connecting with our members just about by XPLUS, our health on-demand digital choices. 2022 marked the primary full 12 months of XPLUS. And on the finish of the 12 months, we had over 117,000 subscribers.

Importantly, of those subscribers, many additionally maintain in-studio memberships. XPLUS strives for retention and engagement by offering subscribers the power to work out anytime, anyplace. With 72% of health membership homeowners, in accordance with ClubIntel, providing on-demand and live-stream exercises, we perceive the necessity to proceed to spend money on our XPLUS platform. We’re always creating new content material for XPLUS platform and are providing on lululemon Studio.

And we’re excited to see this digital channel translate into elevated consciousness for our manufacturers and studio choices. Talking of partnerships, the third leg of our omnichannel providing is our B2B partnerships, which allow our manufacturers to succeed in a fair broader demographic. As I famous beforehand, we welcomed quite a few B2B companions in 2022, starting from lululemon Studio and Optum Well being, a division of UnitedHealth to Aktiv Options and Princess Cruises, The Worldwide Well being, Racquet and Sportsclub Affiliation, or IHRSA, experiences that there are 15 million American adults who’re presently in Aktiv. So, discovering distinctive methods to attach our manufacturers to those people stays one in every of our core areas of focus.

Our development in B2B partnerships has continued in 2023 with LG, Territory Meals, and ONE Manufacturers now all on board. We’re significantly enthusiastic about XPLUS’ new partnership with LG introduced on the Shopper Electronics Present in Las Vegas this January. Underneath the partnership, LG Televisions will function an utility offering entry to our full XPLUS library, serving to us attain hundreds of thousands of customers globally. Xponential’s partnership with LG is one other instance of our holistic strategy to health, participating with our customers and elevating consciousness for our manufacturers far past the bodily studio areas.

Total, every of our B2B partnerships aligns with our long-term strategic purpose of becoming a member of forces with industry-leading firms that may develop the attain of our manufacturers, drive buyer results in franchisees for free of charge, and make our boutique health providing much more sticky. 2022 was an thrilling 12 months for Xponential’s omnichannel health providing and 2023 is proving to be simply as energizing. Thanks once more to your time. I will now flip the decision over to John to debate our fourth quarter outcomes and 2023 outlook.

John Meloun — Chief Monetary Officer

Thanks, Sarah. It is nice to talk with everybody to debate Xponential’s fourth quarter 2022 outcomes. Fourth quarter North America Systemwide gross sales of $294.1 million had been up 38% 12 months over 12 months. The expansion in North American systemwide gross sales was largely pushed by our present base of open studios that proceed to amass new members, complemented by 375 web new North American studios that opened in 2022.

On a consolidated foundation, income for the fourth quarter was $71.3 million, up 44% 12 months over 12 months. All 5 of the elements that make up income grew throughout the quarter. Franchise income was $32.2 million, up 40% 12 months over 12 months. This development was primarily pushed by a rise in royalty income as member visits and related systemwide gross sales are at all-time highs and amortized income from franchise license gross sales continued to extend as we open extra studios domestically and promote extra franchise licenses internationally.

Tools income was 11.5 million, up 64% 12 months over 12 months. This enhance in tools income continues to be pushed primarily by larger volumes of worldwide tools installs. Merchandise income was $8 million, up 22% 12 months over 12 months. The rise throughout the quarter was primarily pushed by the upper variety of studios working and elevated foot site visitors when in comparison with the prior 12 months.

Franchise advertising and marketing fund income of 5.8 million was up 42% 12 months over 12 months, primarily as a consequence of robust systemwide gross sales and common unit quantity development. Lastly, the opposite service income was 13.8 million, up 57% from the prior-year interval, primarily as a consequence of rebates pushed from processing of studio-level systemwide gross sales, vendor sponsorships for our annual franchise convention, income from our B2B partnerships, and income generated by quickly owned transmission studios. Turning to our working bills. Price of product income had been 12.3 million, up 32% 12 months over 12 months.

The rise was pushed by larger tools installations for brand spanking new studio openings and merchandise revenues within the interval. Price of franchise and repair income had been 4.9 million, up 18% 12 months over 12 months. The rise continued to be pushed by amortized commissions related to franchise license gross sales on a better base of open studios. Promoting, common and administrative bills of 34.7 million had been up 6% 12 months over 12 months.

As a share of income, SG&A bills had been 49% of income within the fourth quarter, down from 66% within the prior-year interval. As projected on our third quarter 2022 name, our annual franchise conference added roughly 4.5 million in sequential bills, which had been largely offset by sponsorship revenues from the occasion that introduced the web expense right down to 0.9 million for the fourth quarter. As well as, as I famous on prior calls, prices associated to quickly owned transition studios are included in our SGA for the fourth quarter. We proceed to optimize working prices for these studios and to search out new homeowners for them as we have performed prior to now.

Depreciation and amortization expense was $4.1 million, a rise of 23% from the prior-year interval. Advertising fund bills had been $4.6 million, up 23% 12 months over 12 months, pushed by elevated nationwide advertising and marketing spend afforded by larger advertising and marketing fund revenues due to larger systemwide gross sales. Acquisition and transaction bills had been $8.2 million, primarily associated to the noncash contingent consideration as a part of our acquisition of Rumble. As I famous on prior earnings calls, the Rumble contingent consideration is pushed by our share worth we marked to market at every quarter and accrue for the earnout.

We recorded web lack of $0.4 million within the fourth quarter in comparison with a web lack of $29.8 million within the prior-year interval. The rise was the results of 14.9 million of upper general profitability, a $14.2 million lower in noncash contingent consideration, primarily associated to the Rumble acquisition, and a $0.4 million lower in noncash equity-based compensation expense. We proceed to imagine that adjusted web revenue is a extra helpful option to measure the efficiency of our enterprise. A reconciliation of web revenue to adjusted web revenue is offered in our earnings press launch.

Adjusted web revenue for the fourth quarter was $6.8 million, which excludes $8.2 million change in truthful worth of noncash contingent consideration and a $1.1 million legal responsibility lower associated to the fourth quarter remeasurement of the corporate’s tax receivable settlement legal responsibility. Adjusted EBITDA was $22.2 million within the fourth quarter in comparison with $8.6 million within the prior-year interval. Adjusted EBITDA margin grew to 31% within the fourth quarter in comparison with 17% within the prior-year interval. As a reminder, our 2023 outlook anticipates adjusted EBITDA margins reaching the 35% to 39% vary, and we anticipate this quantity to develop to 40% in 2024.

Turning to the steadiness sheet. As of December thirty first, 2022, money, money equivalents, and restricted money had been $37.4 million, up from the $21.3 million as of December 31, 2021. Complete long-term debt was $137.7 million as of December 31, 2022, in comparison with $133.2 million as of December 31, 2021. We proceed to search for methods to simplify our capital construction and have made progress already within the first quarter.

In January, we introduced the repurchase of 85,340 shares of convertible most well-liked inventory at a worth of $22.7 per share, which previous to the repurchase would have been convertible into 5.9 million shares of Class A standard inventory. As well as, we lately accomplished a secondary providing of 5 million shares, which closed on February 10, 2023, adopted by a greenshoe execution for a further 0.75 million shares. The promoting shareholders included Snapdragon Capital Companions, which is managed by Mark Grabowski, the chairman of our board; and our CEO, Anthony Geisler. Xponential Health didn’t obtain any proceeds from this sale and our CEO stays Xponential’s largest particular person shareholder.

Let’s now talk about our outlook for 2023. Based mostly on present enterprise situations and our expectations as of the date of this name, we’re initiating steering for the present 12 months as follows. We anticipate 2023 world web new studio openings to be within the vary of 540 to 560. This vary represents the very best variety of studio openings in our firm’s historical past and an 8% enhance on the midpoint over 2022.

We undertaking North America systemwide gross sales to vary from $1.34 billion to $1.35 billion, or a 30% enhance on the midpoint from the prior 12 months and the very best North America systemwide gross sales in our historical past. Complete 2023 income is anticipated to be between $285 million to $295 million, and 18% year-over-year enhance on the midpoint of our guided vary. Adjusted EBITDA is anticipated to vary from $101 million to $105 million, a 39% year-over-year enhance on the midpoint of our guided vary. This vary interprets into roughly a 35.5% adjusted EBITDA margin on the midpoint.

When it comes to capital expenditures, we anticipate roughly $10 million to $12 million for the 12 months or 4% of income on the midpoint. Going ahead, capital expenditures can be primarily centered on the BFT integration, XPASS and XPLUS new options, and upkeep on different know-how investments to assist our digital choices. For the complete 12 months, our tax fee is anticipated to be mid to excessive single digits. Share rely for functions of earnings per share calculation to be 32.3 million and $1.9 million in quarterly dividends to be paid associated to our convertible most well-liked inventory.

A full rationalization of our share rely calculation and related professional forma EPS and adjusted EPS calculations may be discovered within the tables in the back of our earnings press launch, in addition to our company construction and capitalization FAQ on our investor web site. Thanks once more to your time right now and your assist of Xponential. We sit up for talking with you on our subsequent earnings name. We’ll now open the decision for questions.

Operator.

Questions & Solutions:

Operator

Thanks. We’ll now be conducting a question-and-answer session. [Operator instructions] One second, please, whereas we pause for questions. We take the primary query from the lineup.

Randy Konik with Jefferies. Please go forward.

Randy Konik — Jefferies — Analyst

Yeah. Thanks loads, and good afternoon, guys. How are you?

Anthony Geisler — Chief Government Officer

Good. Thanks. Howdy, Randy.

Randy Konik — Jefferies — Analyst

Thanks, guys. I assume, I’ve quite a few questions. I simply wish to first assault your worldwide prospects since you gave us some views. You talked about, I believe, 1,000 models on the app to open over time within the worldwide market.

It looks like franchisee demand is off the charts there. Perhaps give us a reminder of schooling round the place was worldwide, for example, a few years in the past. And we all know it is in 16 international locations right now. You gave us nice colour on the grasp franchise settlement strategy.

So, perhaps body out the place we had been a few years in the past after which the place you assume we is perhaps with worldwide, for example, about 5 years from now when it comes to potential variety of international locations and form of the TAM you form of see for the Remainder of World as a result of it seems to be fairly highly effective from right here.

Anthony Geisler — Chief Government Officer

Thanks, Randy. Recognize it. Yeah. I imply, previous to, name it, pre-COVID for a straightforward time-frame previous to the BFT acquisition, you recognize, worldwide was, clearly, not what it was for us right now.

Thus, a giant portion of that BFT acquisition was to get a much bigger worldwide footprint that we might form of spring from. After which additionally, after all, with BFT not having numerous areas within the U.S., it gave us, you recognize, full alternative to scale the home market but in addition develop the worldwide market. And that is why, you recognize, that deal was a, you recognize, a double nice deal for what we had been attempting to do. And so, from there, we have been springing ahead.

Additionally, in 2019, we planted numerous seeds within the floor internationally however did not have numerous openings. And naturally, with COVID, we form of took a few years off as all people was figuring every part out globally. So, you are form of seeing a few issues occurring. One, you recognize, the acquisition of BFT and its enlargement in primarily APAC, but in addition the U.Okay.

and different areas. And you then’re seeing the seeds that we planted pre-COVID that ought to have come out in, you recognize, ’21, ’22 and even ’20, ’21, ’22, you are seeing these begin to occur in ’22 and ’23. So, our openings, you recognize, in 2021 was 90-10, home. They had been 75-25 in 2022.

We anticipate that to be fairly near the identical in 2023. And as we get into, you recognize, ’24 and ’25 and later years, we predict it’s going to most likely develop to an general form of 703-0 cut up, finally. So, you recognize, and naturally, as we reiterated earlier than, mentioned earlier than, the worldwide footprint for us, on condition that we get, you recognize, 30%, 40%, typically 50% of the revenues and not one of the SG&A and the money that comes over will get handled as money with none amortization over time like we’d have within the U.S. It’s really incremental to EBITDA margin as effectively.

Randy Konik — Jefferies — Analyst

It was very useful. So, if now we have a worldwide development form of story, I believe one factor that we at all times get from traders, they’re on the lookout for tales with pricing energy in a world the place pricing energy appears to be eroding for a lot of client discretionary enterprise fashions. So, are you able to give us some views round your ideas on the totally different levers you have got at your disposal from, for example, class pricing, royalty fee, charges, and so forth.? Perhaps give some perspective there on the totally different levers you have got at your disposal to form of proceed to have that pricing energy in your toolkit past simply the great member development that you simply’re seeing and site visitors and utilization development that you simply’re seeing on the core.

John Meloun — Chief Monetary Officer

Yeah. Randy, I will take that one. Imply, once you take a look at the highest line, clearly, the size of the enterprise, you recognize, once you take a look at a few of the charges like on royalty, you recognize, we usually cost a 7% charge throughout our portfolio. Membership Pilates right now has been moved as much as 8% as manufacturers will get a bigger scale as AUVs proceed to climb.

It provides us the power on future openings to contemplate perhaps, you recognize, transferring from a 7% to an 8% royalty. So, now we have a little bit little bit of pricing energy there. If you discuss different scale gadgets, issues like our tech charge, you recognize, these grow to be opportunistic within the sense that they grow to be considerably revenue facilities as we open increasingly studios. So, they will drive larger margin pass-through to the enterprise.

On an opex standpoint, we have checked out numerous alternatives already and we proceed to discover, you recognize, how will we drive extra margin out of issues like tools and merchandise, you recognize, giving pricing energy. So, with the ability to return to distributors and ask for reductions primarily based on quantity commitments. And we have performed that with Membership Pilates. We have performed that with CycleBar.

, StretchLab is one other alternative as we proceed to open up excessive volumes there we might take a look at. When you consider a few of our different distributors, too, given our scale, the B2B alternative has been actually nice for us as a result of we do have so many distribution factors throughout the U.S. It is what do you layer on prime of this huge community that now we have on a home footprint and ultimately, you recognize, we will take into account that on the worldwide international locations like Australia, the place they’ve a substantial variety of models. However we have performed a very good job to date of making partnerships with the lululemons of the world, the C4 beverage firms of the world, the place we will now begin placing them into our studios to drive larger margins.

So, we have checked out all areas of the provision chain. We proceed to take a look at that. , we introduced quite a few new partnerships associated to LG on this name the place, you recognize, that is one other alternative for us to make use of our scale and our capacity to drive quantity to generate larger margins.

Randy Konik — Jefferies — Analyst

Very useful. Thanks, guys.

Operator

Thanks. We take the subsequent query from the road of Brian Harbour with Morgan Stanley. Please go forward.

Brian Harbour — Morgan Stanley — Analyst

Yeah. Good afternoon. Thanks, guys. , John, you had stated simply on the 2023 outlook, it is a couple of 35.5% EBITDA margin on the midpoint.

However then I believe there was additionally a remark, you recognize, might get to 35% to 39% in 2023. I assume, the query is simply, you recognize, what might drive some upside to that? What would allow you to maybe do higher than that on EBITDA margins?

John Meloun — Chief Monetary Officer

Yeah. The biggest contribution to the margin enlargement that we’ll notice is royalties, proper? We had actually robust AUV development in 2022. The momentum to date into 2023 could be very promising. So, for us, you recognize, the extra studios we get open, the extra our set up base continues to exceed expectations.

, 2022, 25%, same-store gross sales, you recognize, excessive teenagers in This fall. , to date in Q1, we’re seeing that carry into the 12 months. So, we have taken form of a conservative strategy on same-store gross sales in our fashions given the macro and never having, you recognize, a crystal ball to see what it seems to be like within the second half of this 12 months. But when studios proceed to carry out similarly as they did in 2022, you recognize, that 100% royalty margin flows proper to the underside line.

So once more, taking a watch-and-see strategy, offering the very best outlook now we have with the knowledge now we have proper now for 2023. However, you recognize, top-line development pushed by royalties, some B2B alternatives could possibly be useful for us, too, in 2023 as we begin to signal extra offers on that entrance, which carry usually very excessive margins, worldwide enterprise persevering with to develop forward of expectations. , as Anthony simply talked about, these are all actually robust, high-margin pass-through top-line gadgets that would circulation to the underside line to push revenues into the, you recognize, the excessive 30. And the identical feedback apply for 2024 as when you consider how do you get to 40-plus margin, once more, it is simply rising that set up base, you recognize, executing on these B2B alternatives and persevering with to, you recognize, add extra studios each domestically and internationally.

Brian Harbour — Morgan Stanley — Analyst

OK, nice. Thanks. Sarah, something extra you can say about simply the XPASS at this level when it comes to, you recognize, out of that member account, what number of of these are XPASS members? How a lot do you assume that is benefiting at this level from a income and EBITDA perspective?

Sarah Luna — President

Yeah. What we’re persevering with to see on the XPASS is that it’s driving nice consciousness throughout the broader ecosystem. Tax was down. We’re driving incremental leads into the system, buying model new clients into Xponential and all of the manufacturers that we have not seen earlier than.

So, it is continued to function the best way that we have anticipated it will. We can be creating a brand new app and gamification platform that can drive even higher consciousness in 2023. However to date, we’re not seeing, you recognize, that it is an enormous income driver into the system.

Brian Harbour — Morgan Stanley — Analyst

Thanks.

Operator

Thanks. We’ll take the subsequent query from the road of Alex Perry with Financial institution of America. Please go forward.

Alex Perry — Financial institution of America Merrill Lynch — Analyst

Hello, thanks for taking my questions, and congrats on one other robust quarter. I assume, simply first, so the systemwide gross sales steering at plus 30, whole rev information at 18%. I assume that will type of indicate that perhaps franchise income development must be larger than tools income as your type of new studio opening cadence is, you recognize, 8%. I assume first is, is that proper? And will we assume type of tools rev development in keeping with your openings? Or will or not it’s extra vital when you’re opening extra equipment-intensive manufacturers? After which simply as a follow-up to the final query that was requested, the excessive teenagers, same-store gross sales development type of quarter thus far, what’s been the important thing driver there? Is that largely very robust January member development versus final 12 months? Thanks.

John Meloun — Chief Monetary Officer

Yeah. Thanks, Alex. I will take this one. If you take a look at 2022, tools income is roughly about 18% of the entire income we derived.

, form of transferring into 2023, we’ll nonetheless be in a really excessive, heavy development section. So, you will see numerous tools installs, which we acknowledge that income on the time we do the set up, which is simply a few weeks earlier than research opens. My expectation round 2023 is that it will roughly be, you recognize, round 20% of our whole income for 2023. If you take a look at franchise income, the most important element of that clearly is royalties, which made up about 30% of the entire franchise income line.

It will be barely larger in 2023, the royalties as a % of the entire franchise income. So, you will proceed to see tools income be a big portion of the entire income as a % for the approaching years as a result of we’re on this high-growth section with numerous new installations and new openings occurring. After which with reference to your remark round same-store gross sales or systemwide gross sales, 95% of the expansion in systemwide gross sales is coming from new members. You keep in mind when a member indicators up at a studio, they, in essence, lock of their month-to-month fee until they cancel and are available again, almost certainly as a result of we’re always taking worth as studios, you recognize, have increasingly members and there is much less and fewer capability within the studio, we elevate worth.

So, it is a provide and demand-type pricing. So, 95% of the expansion within the final 4 quarters has been us signing up extra members per studio. 5 % is worth. So, now we have alternative to proceed to take worth as we elevate it within the studios, which you do day by day.

However majority of the expansion is coming from the truth that we’re buying increasingly members in our studios.

Alex Perry — Financial institution of America Merrill Lynch — Analyst

That is extremely useful. After which I assume simply my second query is, what’s the proper SG&A run fee to be utilizing? I believe it was working a bit larger final 12 months as a consequence of extra corporate-run transition studios. Are you going to type of downsize that? Like is the proper run fee to be utilizing is like low 30 hundreds of thousands, or the place ought to we be there? Thanks.

John Meloun — Chief Monetary Officer

Yeah. So, in 2022, it ran roughly, excluding stock-based comp expense or equity-based compensation expense, it ran roughly about 41% of income. In 2023, the target is to clearly get SG&A more in-depth to being extra environment friendly in line as a result of we can’t have as many prices associated to a few of the switch studios. So, I’d assume round 35%, 36% is the optimum level for us in 2023 that can drive right down to.

My expectation is, is Q1 and Q2 will barely be above that 36% and it will drive into the decrease 30 seconds as we get into Q3 and This fall. So, you will see form of a ramp down. The typical 12 months can be about 35% to 36% on common, excluding stock-based comp.

Alex Perry — Financial institution of America Merrill Lynch — Analyst

That is extremely useful. Better of luck going ahead.

John Meloun — Chief Monetary Officer

Thanks, Alex.

Operator

Thanks. We’ll take the subsequent query from the road of John Heinbockel with Guggenheim Companions. Please go forward.

John Heinbockel — Guggenheim Companions — Analyst

Hey. Are you able to guys discuss to — simply remind us, proper, when you consider members per studio and significantly, proper, how they open up. What are the outliers, proper, when it comes to, you recognize, which manufacturers, you recognize, will usually begin with extra members versus much less? After which I believe if I take a look at your pipeline for ’23, I imply, it is pretty broad-based, however is there any massive distinction when it comes to ’23 openings by model versus ’22? , we’ll be seeing, you recognize, extra StretchLabs, you recognize, which is a reasonably large pipeline.

Anthony Geisler — Chief Government Officer

Yeah. I believe you will see StretchLab. You may see Membership Pilates nonetheless. You may see Rumble and BFT.

Clearly, Rumble and BFT coming from the latest gross sales of these manufacturers as a result of they’re the latest manufacturers, they’re essentially the most white house. So, we begin to promote these. We began promoting Rumble earlier than BFT. So, we’ll begin opening extra Rumbles earlier than we begin opening extra BTFs.

, you see fairly an honest backlog at StretchLab, about 500 models. In order that’s why there’s numerous these to open. After which with Membership Pilates, often because that model is doing so effectively, there’s nonetheless just a few hundred of these to open.

John Heinbockel — Guggenheim Companions — Analyst

OK. Perhaps as a comply with to that, proper, since you talked about capability. So, if you consider perhaps you take a look at throughout manufacturers — and I do know they’re totally different, proper, when it comes to capability. However once you take a look at the very best AUV studios, you recognize, and you consider the place you’ll be able to add capability, proper, as a result of in some circumstances you’ll be able to’t add capability to these lessons.

So, you’d have so as to add extra lessons, however you do not wish to add throughout the center of the day, proper? So, you recognize, when you consider the place you’ll be able to choose up capability, the place would that be do you assume?

Operator

I am sorry, however that is the operator. We appear to have misplaced the road of the administration. Kindly keep linked, girls and gents. We’ll reconnect with administration.

Thanks. Thanks for patiently holding, girls and gents. Now we have the administration line again within the convention. John, chances are you’ll please go forward and ask your query once more.

Thanks.

John Heinbockel — Guggenheim Companions — Analyst

Yeah, no, no. It was a follow-up to the prior one, which was when you consider including capability. If you take a look at your highest AUV studios, the place do you assume the chance is so as to add capability, proper. As a result of I believe it is troublesome, proper, so as to add capability to particular person lessons.

So, you are excited about including extra lessons adjoining to what your schedule seems to be like right now. Is that truthful?

Anthony Geisler — Chief Government Officer

Yeah. Did you get to listen to my reply to the primary query on the openings for 2023?

John Heinbockel — Guggenheim Companions — Analyst

I received part of it, however perhaps half of it.

Anthony Geisler — Chief Government Officer

All proper. So, I believe in a nutshell, I used to be saying that in 2023, you will notice StretchLab, Membership Pilates, Rumble, and BFT. After which, you recognize, once you take a look at these manufacturers throughout, clearly, Rumble and BFT can be opening as a result of we bought Rumbles and BFTs beforehand. After which StretchLab, now we have a couple of 500-store backlog.

CP, we have got just a few hundred retailer backlog. And we’re pushing on them, you recognize, the CP model to make it possible for we deal with the terminations shortly in order that we ensure we’re staying on schedule with these. However then, I believe, you had a follow-up query to that, in addition to far as 2022. And what we noticed, did you get the reply to that one?

John Heinbockel — Guggenheim Companions — Analyst

No. No.

Anthony Geisler — Chief Government Officer

OK. So, 2022 was, as a 12 months, was our greatest cohort of openings and studios ramping once you take a look at the ramp curves. When the staff got here again and stated, “Hey, 2022 is the very best 12 months ever,” I used to be like, “That is actually nice. However let us take a look at it quarter over quarter.” And so, we did.

This fall beat three, beat two, beat one. So now we’re seeing 2022 is form of the very best 12 months in firm historical past and the very best ramps we’re really seeing quarter over quarter. It will get higher and higher and higher during this final Q.

John Heinbockel — Guggenheim Companions — Analyst

OK. Thanks.

Anthony Geisler — Chief Government Officer

All proper. After which, John, did you wish to reply the follow-up query that he had?

John Meloun — Chief Monetary Officer

Effectively, you had talked about members and, you recognize, usually the best way we mannequin the form of the as design curve is, the expectation is that now we have someplace between like 275 to 300 members within the first 12 months, and that grows to love 375 to 400 by 12 months 2. If you take a look at the system as an entire, given how younger it’s and the variety of studios we simply open, I believe you are asking a query of like how will we proceed to see development there, what’s the expectation? And there’s nonetheless a good quantity of capability left within the set up base for us to proceed so as to add new members and develop AUVs. We nonetheless have the chance to take worth as we add new members as effectively. There’s loads of alternative for margin enlargement primarily based on us persevering with so as to add extra members per studio, which we proceed to set report each quarter.

John Heinbockel — Guggenheim Companions — Analyst

OK. Thanks, guys.

Operator

Thanks. We’ll take the subsequent query from the road of Warren Cheng with Evercore ISI. Please go forward.

Warren Cheng — Evercore ISI — Analyst

Hey, guys. Very spectacular end result right here in a extremely robust setting. I had a query on the brand new studio openings steering. So clearly, actually robust momentum there primarily based in your steering.

However I used to be curious in regards to the extent to which macro headwinds like inflation or these longer building timelines or larger rates of interest are affecting your franchisees of their open plans right here. And whether or not a few of that is embedded in that 540 to 560 quantity. And what are the largest components that brought on you to swing, you recognize, throughout that low finish to the excessive finish of that vary?

Anthony Geisler — Chief Government Officer

Yeah. So, the one, the one headwind that we actually have, I imply, clearly, there’s macro headwinds, there’s some traction, there’s all these form of issues. And even confronted with these headwinds, the corporate is elevating steering on its openings 12 months over 12 months into these headwinds. Financing is just not a difficulty for us.

So, that hasn’t been a headwind. However at all times for us, it is discovering the very best areas after which negotiating the very best leases for our franchisees, long-term well being, and worth of the enterprise. So, you recognize, I had stated beforehand form of publicly that, sure, you can open much more, however you then run into the chance of placing them in worse areas or having franchisees put in hurt’s manner by signing worse leases. And so, you recognize, we do not have a few of the macro headwinds like air con models or these huge buildouts of 20,000, 30,000, 40,000 sq. toes.

You have to keep in mind we’re constructing 1500 to 2000 sq. toes. We’re utilizing no matter air con was already sitting on the roof when it was a sandwich store or a motorcycle store or an ice cream retailer or no matter it was earlier than us. , we make it possible for it has air con, and we ensure the air con works. However outdoors of that, we do not have a sure particular air con spec that we’d like.

So, we’re not going through the headwinds that some others are, sadly, within the health {industry}, proper, as a result of it is robust. It is one thing you do not management. However financing hasn’t been a difficulty. Discovering nice areas, clearly, hasn’t been a difficulty.

But in addition as effectively, there’s not numerous retailers that I’ve heard of which might be opening 500-plus areas. So, we are also doing an incredible job final 12 months at 511 and doing manner higher, you recognize, than we even would have performed this final 12 months. And so, you recognize, there’s small field items. There will not be, you recognize, huge buildouts.

There’s not main building that we do. It is actually form of modifying the earlier use that was there into our use. And in some manufacturers like StretchLab or Membership Pilates, it truly is only a rectangular field with no partitions and a single lavatory within the again. So, it isn’t main building.

So, the development half is low price.

Warren Cheng — Evercore ISI — Analyst

That is actually helpful colour. After which my follow-up, I wished to ask in regards to the B2B partnerships. So, you’ve got performed a reasonably wide selection right here within the final 12 months, and it looks like the tempo of partnerships is choosing up a little bit bit. Are there sure channels which might be essentially the most fruitful for buyer acquisition? And in addition, has there been any considered migrating a few of these partnerships into some form of subscription or charge or financial sharing perhaps over time, perhaps for a few of your larger engagement channels?

Anthony Geisler — Chief Government Officer

Yeah. So, I imply, look, we talked about it, that this B2B partnership piece or model entry or company partnerships or regardless of the time period is that folks want to use, on the finish of the day, we’re teaming up and partnering with different nice firms to actually exploit the Xponential title and its manufacturers to ship what I prefer to name to damaging tact, which is the place manufacturers really pay us to ship clients into our studios. So, you see that with lululemon and Princess and LG and all of the totally different offers that we’re doing is absolutely to begin to make Xponential a life-style, well being, and wellness model by itself with the ten manufacturers beneath it and in addition permit us to leverage the opposite belongings. I like to inform the staff that, you recognize, what will we do for a residing? What’s our day job like? We open gyms for a residing.

That is our day job. However then, what do you do on evenings and weekends, proper? Like, what else can we do with the belongings right here? Effectively, now we have one thing like XPLUS. It is nice. And we will function XPLUS and try to function within the digital house like all people else and try to discover all people for purchasers and drive cap north.

Or we might go and do offers like we did with lululemon the place we receives a commission from them or do offers like we did with Princess the place we receives a commission for them after which our XPLUS finally ends up on, you recognize, the mirror and it finally ends up taking part in on the mirror inside lululemon shops or Nordstrom shops or individuals’s properties. After which they’re in 23,000 staterooms after they’re on a Princess cruise. They go to activate their LG TV after they get residence and it is there, too. So, the thought is to actually meet the shopper in a number of locations wherever we will.

, it will be our purpose that by the point somebody parks at Starbucks to get a espresso within the morning and so they see a Pure Barre signal subsequent door, that they are sick of seeing that model in every single place, proper, as a result of they’ve seen it on a cruise. They’ve seen it on a mirror. They’ve seen it in a lululemon retailer. They’ve seen it from one in every of their insureds, you recognize, sending them commercials or Territory Meals or whoever it is perhaps.

And so, we wish to make it possible for we’re getting numerous these touchpoints on the market to drive buyer acquisition prices down and never simply be smarter than all people else and never simply sit out and compete and bang it out for the, you recognize, the most costly ppc we will however discover different ways in which we will really receives a commission and our franchisees can obtain lead circulation actually freed from price.

Warren Cheng — Evercore ISI — Analyst

Thanks, Anthony. Thanks, John. Nice job. Good luck.

Anthony Geisler — Chief Government Officer

Nice. Thanks.

Operator

Thanks. We take the subsequent query from the road of Jeff Van Sinderen with B. Riley. Please go forward.

Jeff Van Sinderen — B. Riley Securities — Analyst

Hello. Sure, hello, everybody. Let me add my congratulations. For 2023, did you say what’s baked into your steering or what you are concentrating on for gross sales of recent franchise licenses? After which I assume, how is the evolving macroeconomic backdrop factored into that focus on?

John Meloun — Chief Monetary Officer

Yeah. Regarding the license gross sales, I imply, once you take a look at what we did in 2022, we did 1,000 licenses, about 250 on common 1 / 4. , as we glance ahead into 2024, we do not — sorry, 2023, we do not information on license gross sales, however now we have form of offered some forward-looking view that, you recognize, we proceed to promote by the out there stock that is on the market or white house that is on the market. So, we proceed to try this.

You may naturally see a decline in license gross sales. Manufacturers like BFT and Rumble are nonetheless, you recognize — we’re nonetheless promoting by these manufacturers, given that they are comparatively new. However, you recognize, the stock is diminishing. So, once you take a look at 2023, might you anticipate to see someplace between, you recognize, 600, 700, 800 license gross sales? Yeah, I believe that is a sensible goal for us to maintain pushing ahead.

Worldwide remains to be an enormous alternative. There’s nonetheless numerous white house, worldwide. So, as we proceed to determine new MFAs and the MFAs that now we have put in place for them to promote by their white house, internationally, you recognize, that can proceed to assist maintain us on the high-elevated ranges of license gross sales. Does that reply your query? And in consideration to the macro, too, I ought to reply, like, we have not actually seen a slowdown on macro inflicting individuals to not wish to purchase licenses.

That hasn’t been one of many causes we have seen. It is actually extra about matching a franchisee in a territory the place it is out there.

Jeff Van Sinderen — B. Riley Securities — Analyst

OK, that is useful. After which simply type of as a follow-up to that, I believe this dovetails a little bit bit. Are you able to give us your newest ideas on the way you’re approaching potential acquisitions for 2023, perhaps the way you’re evaluating these? What you are extra keen to go after than not? What you are seeing on the market usually? Is there any shift in multiples that sellers are keen to contemplate issues of that nature?

Anthony Geisler — Chief Government Officer

Yeah, I do not know that there is any huge shift in multiples which might be on the market so far as acquisition goes. And like John stated, you recognize, now we have an honest nonetheless quantity of stock. , promoting 250 franchises 1 / 4. I do not know too many individuals which might be out doing that.

So, even when we had been promoting 150 to 200 1 / 4, that is nonetheless excellent comp in comparison with what else is occurring on the market globally. So, the one actual purpose for us to purchase an eleventh model at this level is that if we’re, you recognize, capturing a serious deal, proper, you recognize, getting some nice offers and nice alternative out there. Or if we wish to choose up that, you recognize, franchise gross sales quantity again as much as 1,000, we might do this with an eleventh model. Not an issue.

, I am at all times in talks with 4 or 5 – 6 totally different potential targets. And so, you recognize, after we’re prepared, you recognize, we’ll be capable to do an acquisition after which, you recognize, simply form of embed that into our present, you recognize, shared providers mannequin and start to promote it.

Jeff Van Sinderen — B. Riley Securities — Analyst

OK, nice. Thanks for taking my questions and continued success.

Anthony Geisler — Chief Government Officer

Thanks.

Operator

Thanks. We take the subsequent query from the road of Jonathan Komp with Baird. Please go forward.

Jonathan Komp — Baird — Analyst

Yeah. Hello. Good afternoon. John, I wish to ask, only a follow-up on the adjusted EBITDA steering.

The very best I can get to is the 37% margin with the ranges you gave. So, I am simply questioning, did you misspeak on the 39%, or are you signaling there could possibly be upside? After which after I take a look at the greenback development for adjusted EBITDA in comparison with the greenback development of income, it seems to be like an implied flow-through charges for the 12 months above 60%. So, I am simply questioning is there something distinctive this 12 months, or is that type of the flow-through fee we should always take into consideration going ahead?

John Meloun — Chief Monetary Officer

Yeah, I imply, the flow-through is coming from royalties. The truth that we opened 500 studios final 12 months, you recognize, these are comparatively decrease AUVs as they ramp to their first, you recognize, form of, you recognize, 380, 000 or 400,000, simply form of vary for that first 12 months as designed. So, when these begin actually form of producing larger ranges of royalties, as they get extra mature, that margin is — it is 100% margin. It flows proper to the underside line.

So, that is the largest space of development you will see in our income line is on the royalty of element. Tools revenues, these carry, you recognize, nearer to a 30% margin. These can be a little bit little bit of a drag to the P&L as we proceed to open increasingly studios that they do not generate north of 35% to 40% margins on tools and merchandise. However royalties are the important thing driver there.

The B2B as effectively, your different service income line. That is very high-margin flow-through. So, you usually see our different service income at 90% plus, you recognize, margin. So, as we proceed to do B2B offers systemwide gross sales develop, we get rebates on processing our systemwide gross sales.

In order that can be a key contributor to the enterprise as effectively. If you discuss margin and the very best do you assume you may get to, once more, we do take a conservative strategy to our steering? We wish to make it possible for we information to a stage that we all know we will obtain. And as we proceed to ship upside, then we might allow you to guys understand how we regulate our steering from there. However at this level, we’re offering that outlook primarily based on right now, given the uncertainty of any macro that hasn’t hit us.

But when there’s a hole second that we do not overcommit on the margin stage.

Jonathan Komp — Baird — Analyst

Yeah, that is useful. So only one extra on the same-store gross sales you are embedding for the 12 months. Ought to we predict roughly near your long-term steering? Or might you simply give any extra perception for the 30% enhance in systemwide gross sales relative to form of a low 20% enhance in models? What bridges the hole between these two?

John Meloun — Chief Monetary Officer

Yeah. So, we did 25% of same-store gross sales in 2022. When you consider 2023, you recognize, what’s the proper manner to take a look at with reference to AUVs? , primarily based on what we’re seeing proper now, it is attention-grabbing as a result of there’s the pre-COVID. We averaged 8% per quarter on common for the 2 years previous to COVID.

You look post-COVID, it looks like studios are ramping at a really fast tempo nonetheless. We did an evaluation on studios which might be 36-plus months in operation, and people comped at 25% final 12 months. So, once you take a look at it in This fall, those self same 36-plus months in operation studios had been, I believe, 17% to 18%. So very robust comps nonetheless even within the aged studios.

I believe a very good form of assumption is, with reference to how it’s best to take a look at AUVs and what the same-store gross sales comp for subsequent 12 months, most likely wanting someplace within the perhaps very low double digits. , I believe 12%, 11$, you recognize, that form of space appears to be aligned with what we’re pondering, you recognize. But when we proceed to see robust efficiency as now we have, then, you recognize, presumably a little bit bit larger than that. However proper now, I believe from an assumption, you recognize, very low double digits might be the best way to consider it.

And I stated that 10%, 11%, 12% vary.

Jonathan Komp — Baird — Analyst

OK. Very useful. Thanks.

Operator

Thanks. We take the subsequent query from the road of Joe Altobello with Raymond James. Please go forward.

Joe Altobello — Raymond James — Analyst

Thanks. Hey, guys. Good afternoon. Type of wish to discuss in regards to the studio development.

You talked about the 540 to 560 you anticipate this 12 months. It seems like, you recognize, that quantity may have a [Inaudible] in entrance of it for the subsequent, you recognize, most likely three or 4 years. And I believe you alluded to this earlier, however at what level do you guys assume you must add a further model to hit that 500 studio goal yearly?

Anthony Geisler — Chief Government Officer

Yeah. I imply, we take a look at it right now, let’s simply say for simple math, you had been at 500 openings a 12 months and now we have about 2,000. As we stated right now, now we have about 2,000 bought, however not open in growth domestically and nearly 1,000 dedicated to, internationally. So, when you take a look at it from a worldwide perspective, you are speaking about 5 to 6 years.

For those who take a look at it domestically on a 75-25 cut up, we’re speaking about opening about 400 models domestically towards 2,000. So, you recognize, about 4 to 5 years right here domestically. So, you recognize, that was our consideration as we glance to an eleventh model. We have already got, you recognize, a few years of runway.

Given the macro, we wished to be conservative and never doubtlessly take some operational danger, you recognize, some implementation and infrastructure danger, and/or, you recognize, potential leverage or money off the steadiness sheet or no matter it is perhaps to do the acquisitions. Our acquisitions are normally pretty comparatively small from a {dollars} or money perspective. However we thought we’re promoting extra franchises to anybody we all know. We’re opening extra shops to anybody we all know.

And we’re executing very effectively. Let’s simply maintain our heads down and proceed to try this into right now’s macro to make it possible for we will ship the steering that we set out. After which if it is a Quarter 2, 3, 4, or no matter it is perhaps, and we have all form of see the pivot level of this macro or we really feel prefer it is not actually going to worsen or no matter it is perhaps, as we get additional into this, we get increasingly visibility, and we wish to go purchase an eleventh model. That is simple cash for us, proper? That is not a giant deal.

, we will do acquisitions from hiya, what’s your title, to we personal you in six weeks. So, you recognize, given that we have got, you recognize, 4 or 5 – 6 present conversations occurring, that window could possibly be even shorter. So, you recognize, for us, it is simply, you recognize, when does alternative strike and when will we really feel we have to go ahead. However even when you take a look at the unit quantity run fee we have been speaking about on franchise gross sales, we’ll nonetheless open sufficient and nonetheless add 150 plus models to our backlog, you recognize, simply this 12 months alone with out an eleventh model.

So, you recognize, in summation, we’re not in a rush to purchase an eleventh model. We do not essentially want an eleventh model for the subsequent few years. However, you recognize, we’ll almost certainly be opportunistic when want be.

Joe Altobello — Raymond James — Analyst

OK. Obtained it. And perhaps on AUVs, clearly, you proceed to make numerous progress there, yeah, north of 500,000 right here within the fourth quarter. May you remind us of what your highest AUV studios are doing right now? Is there something uncommon about these studios, or is it only a matter of time earlier than they type of get to these ranges?

Anthony Geisler — Chief Government Officer

I imply, look, the AUVs range throughout manufacturers, however the ROI and margins form of find yourself being the identical relying on what model you are in. So, one thing like a StretchLab may have larger AUVs, however larger labor prices as a result of it is one on one, one thing like a Pure Barre. We’ll have decrease AUVs, but it surely’s extra of an owner-operator mannequin. So, you’ve got received numerous the homeowners which might be educating class or working within the entrance desk, and so labor is loads much less.

After which, you will have one thing like a Membership Pilates within the center, which may have larger AUVs. However the majority of these franchisees are semi-absentee homeowners, in order that they’re hiring on the entrance desk and hiring for the lessons as effectively. I imply, there’s — once you take a look at type of hig- finish capability of sure issues, I imply, there are membership Pilates which might be doing $1.2 million, $1.3 million, you recognize, out of their containers. And so, you recognize, there’s the power to try this.

, we have talked about Membership Pilates after we purchased it was the AUVs are about 250,000 and so they form of triple above that now. And so, what we like that we’re seeing is the newer manufacturers like Rumble and BFT, even some are YogaSixes which might be opening. They’re form of opening it twice the place Membership Pilates began, proper? And so, we’d like to say that these are going to triple like Membership Pilates. I do not know if that’ll essentially be the case.

However what’s good is that we’re at an all-time firm excessive AUV, and our new shops which might be opening and people new manufacturers are opening at that AUV and better wall manufacturers like Membership Pilates or StretchLab, their particular person AUVs proceed to climb, in addition to we comp 12 months over 12 months on the double digits.

Joe Altobello — Raymond James — Analyst

Yeah, that is the purpose I used to be attempting to get at, is that you simply’re not approaching a ceiling in any respect when it seems to be at AUVs right here. So, OK.

Anthony Geisler — Chief Government Officer

We had 9 quarters of quarter over quarter previous to COVID. We received again a 12 months in the past after seven quarters of climbing again out of COVID. After which since then, we have continued to see it climb. So, in a pre-COVID world, we by no means discovered the highest finish of AUV.

And in a post-COVID world, we’re nonetheless not discovering that prime finish but.

Joe Altobello — Raymond James — Analyst

Good. Thanks, guys.

Operator

Thanks. We take the subsequent query from the road of George Kelly with ROTH MKM Capital Companions. Please go forward.

George Kelly — ROTH Capital Companions — Analyst

Hey, all people. Thanks for taking my questions. First one in your royalty charges. Curious — I assume, two-part query.

Had been there any surprises after you took the speed larger with Membership Pilates? Something form of sudden that you simply noticed? And half two of the query is, do you have got plans this 12 months to lift royalty charges at extra manufacturers?

Anthony Geisler — Chief Government Officer

So, no change at 8%. And keep in mind, after we do these royalty will increase, it is on the openings going ahead. And so, it isn’t retroactive. And so, the those who have already signed their franchise settlement at 7% are locked in at 7%.

The franchise settlement to get signed, and within the growth agreements which might be getting signed after that 8%, actually, it is largely the shops which might be opening after we enhance it, these go to eight%. And so far as issues on manufacturers going from 7 to eight%, we take a look at that very like we take a look at the patron, it is provide and demand primarily based. And so, once you see manufacturers that we’re promoting numerous, that we have opened numerous, we run out of territories, individuals nonetheless are demanding the product, and the merchandise performing very effectively. It permits us to take worth, proper, by a royalty enhance.

However as mentioned earlier than, there are different methods to extend worth to the franchisee apart from growing royalty fee, proper? And so, if an AUV was 500 and also you need a 1% enhance, you can institute a tech charge or one thing that will be $400 or $450 a month, and you’ll just about get that 1% enhance throughout the system. And one thing like that could possibly be retroactive. However we at all times wish to guard the well being of our franchise models. And so, we’re very cautious to ensure we’re not instituting charges, whether or not its royalty fee will increase or every other charges, or growing in any pricing that’s going to place a franchisee in hurt’s manner as a result of at first, we wish to make it possible for now we have form of wholesome, completely satisfied franchisees on the market which might be which might be working for us.

George Kelly — ROTH Capital Companions — Analyst

OK. That is useful. After which second query for me in your steadiness sheet, how snug — how a lot leverage are you snug with? And there is been a good quantity of debate about M&A. Simply curious, you even have a little bit of that convert most well-liked.

I imply, greater than a bit. There’s nonetheless a reasonably large chunk on the market. So simply curious the way you form of steadiness these two makes use of of capital.

John Meloun — Chief Monetary Officer

Yeah. So, I imply, the enterprise proper now’s extremely money circulation constructive. So, we generated money final 12 months. The expectation for the foreseeable future is that the enterprise can be producing numerous liquidity and stack up on the steadiness sheet.

If you take a look at M&A alternatives, it actually is dependent upon the scale. Many of the acquisitions we have performed traditionally are very low. , they do not carry, you recognize, $20 million, $30 million, $50 million, $100 million, a few million bucks. So, we’d be capable to finance many of the acquisitions off the steadiness sheet.

With reference to leverage ratio, we did full the reacquisition of roughly 40% of the popular convert in Q1 of 2023. Proper now, we’re carrying about three and a half instances levered. , we have at all times stated to the road, you recognize, three to 4 instances leverage for us is just not an issue in any respect given how a lot money this enterprise generates. So, you recognize, the reply to that query, might we simply carry three and a half instances, which we’re at proper now? Yeah.

It isn’t a difficulty in any respect to service any debt ranges there. With reference to the popular, there’s about 8 million — or excuse me, 8 million equal Class A shares of most well-liked left. , that has a been a spotlight for me so far as getting that cleaned up. We don’t wish to see these shares get transformed, you recognize, sooner or later as a result of they’re dilutive to us.

And clearly, numerous us are shareholders internally inside the firm. So, we do not need the dilution nor do our shareholders need it. So we’ll proceed to look to leverage, you recognize, the money that now we have on the steadiness sheet and alternatives to retire these shares over time. So, it’s a focus for us.

Now we have talked about different devices, one thing like a securitization which is acquainted to Planet, and we prefer to mannequin ourselves after them. So, you recognize, we might use that as a possibility when a window presents itself as a option to retire the popular. However at this level ahead, snug with our debt ranges, snug with the amount of money that is being generated off the enterprise. And we’ll proceed to look to methods to streamline our capital construction to make it as environment friendly as doable.

George Kelly — ROTH Capital Companions — Analyst

OK. That is useful. Thanks.

Operator

Thanks. We take the subsequent query from the road of Peter Keith with Piper Sandler. Please go forward.

Matt Egger — Piper Sandler — Analyst

Hello, that is Matt Egger on for Peter. Thanks for taking our questions, and congrats on the nice quarter. First off from us, only a query on promoting. We’re interested by the very best promoting mediums to your banners or perhaps what mediums are being utilized essentially the most and dealing the very best.

Sarah Luna — President

We presently use a number of totally different, you recognize, advertising and marketing initiatives and ways in which we deliver in several leads. Digital advertising and marketing is at all times going to be very robust, however after all, the B2B, because it’s persevering with to ramp, is giving us entry to extra leads inside the studios as effectively. I discussed XPASS earlier, that that is actually serving to from a top-of-the-funnel perspective and driving leads into the system. However lastly, we have performed a very good quantity of labor round website positioning and ensuring that we’re there as clients are beginning to search for health on-line and that we are the first to pop up and actually meet the shopper the place they’re of their health journey, each on-line and in brick and mortar.

Matt Egger — Piper Sandler — Analyst

Nice. After which I assume, on M&A, you talked about — effectively, curious when you’re serious about solely like boutique health manufacturers or would you attain out to different several types of well being and wellness ideas or curious on what you all can be .

Anthony Geisler — Chief Government Officer

Yeah. I imply, when you take a look at the enterprise right now, you recognize, we have performed an incredible job with StretchLab, which is clearly not health and clearly a wellness product. And so, you recognize, when you take a look at the title, H&W Investco, that was the unique title of the corporate that was not tremendous intelligent on well being and wellness funding firms. So, you recognize, from day one, you recognize, we have form of projected this firm to be within the well being and health house.

There are nonetheless a handful of modalities within the health house during which we might purchase and much more so on the wellness aspect. And I believe we have confirmed that we will do an incredible job with one thing like a Membership Pilates within the health house, an incredible job with one thing like StretchLab within the wellness house. And so, I do not assume you will discover us, not less than, for not right now, doing something, and, you recognize, eating places or providers or one thing like that. However I believe something that is a 1,500 to 2,000-square-foot franchise retail field within the well being and wellness house is one thing that’s proper up our alley.

Matt Egger — Piper Sandler — Analyst

Nice. Thanks.

Operator

Thanks. We take the subsequent query from the road of Max Rakhlenko with TD Cowen. Please go forward.

Max Rakhlenko — Cowen and Firm — Analyst

Hey, nice. Thanks loads. First, are you able to communicate to the aggressive setting on the market? Your AUVs means that your franchisees are in wholesome form, however how do you assume the independents are doing on the market, and if the sector is beginning to get extra promotional and aggressive? After which how are you excited about doubtlessly taking part in the offense if the backdrop had been to melt later this 12 months?

John Meloun — Chief Monetary Officer

From a aggressive setting, and we proceed to take market share. I believe once you take a look at the boutique house and also you take a look at our white house, you recognize, we see ourselves with the ability to develop to about roughly 8,000 studios within the U.S. alone. , as we proceed to distribute increasingly of our manufacturers into new markets, we’re educating customers on boutique health and increasing our whole TAM and driving extra member development.

So, on the subject of the aggressive panorama, boutique health has primarily or traditionally been very fragmented. The truth that we’re bringing nationwide manufacturers throughout issues like StressLab, which actually did not exist in a nationwide scale, after which tying all of it along with issues like our XPASS and introducing members in StretchLab or Membership Pilates to those new ideas, I believe we’re rising the boutique health market. If we had been a one-concept-type model, it is very troublesome. If a member joins and leaves, they don’t seem to be usually going to finish again up within the model that they had been already in.

So, we are literally capturing people who find themselves being launched by members in different ideas and seeing us and transferring over. So, you recognize, we have added extra members per studio, and now we have extra members per studio than we have ever had traditionally. We have seen a big development post-COVID. I believe persons are extra conscious of well being and wellness and residing a more healthy way of life given the pandemic and the learnings from that.

So, I believe that reply the primary half. I believe there is a second a part of your query, too. I might need missed. What was the second half?

Max Rakhlenko — Cowen and Firm — Analyst

Oh, simply how would you prefer to play offense?

Anthony Geisler — Chief Government Officer

. [Inaudible] a little bit bit extra or —

John Meloun — Chief Monetary Officer

So, how will we put —

Anthony Geisler — Chief Government Officer

Yeah, I believe that half goes again to what I used to be speaking about earlier than with damaging tact. , we did not wish to — and we began this a couple of 12 months and a half to 2 years in the past. As you recognize, buyer acquisition prices had been rising in boutique health and digital and every part form of throughout the board. We began to determine how can we be good, proper? How can we be scrappy and do issues that different individuals aren’t doing? And this model entry initially was simply offering money to the enterprise throughout COVID.

After which within the post-COVID world, we began how will we implement getting extra eyeballs in entrance of our product, proper, and delivering what I’ve at all times known as damaging tact, you recognize, into our franchise shops, proper? And so, you recognize, that is what you will proceed to see from us, persevering with to see promotional gadgets which might be occurring. , I simply obtained photos from Princess Cruises the place they’re debuting a brand new Porsche on the Porsche Membership of America tomorrow. And it is received an enormous X on the hood for Xponential and all of the manufacturers round it, and XPASS and XPLUS and every part, you recognize, plastered throughout this automotive. That’ll be on the Porsche Membership of America debut with Princess Cruises on it.

So, you recognize, true companions like Princess, after we do these items collectively, and I work with JP, the CEO, there on a regular basis, it is form of like, yeah, now we have our settlement, however we’re companions. And so how will we do issues forwards and backwards to assist one another? And so, you recognize, the thought is to proceed to place Xponential and its manufacturers within the forefront of individuals’s minds and never simply have or not it’s a brick-and-mortar location that, you recognize, is sitting subsequent to a Starbucks and a few grocery anchored middle. And the one manner they’ll know that that house is there’s to go inside or to get a neighborhood digital advert or to get a flier on their doorstep or see in a newspaper. I imply, it is form of — I have been on this enterprise for 20 years and we used to place Wall Road Journal advertisements again within the day, you recognize, as a result of individuals used to get their inventory data from The Wall Road Journal as a result of that was how life went.

Now, they get it on their iPhone or on their iWatch, you recognize, each millisecond. So, you recognize, the world has modified. We alter with it. And we predict that this type of damaging tact idea and this B2B partnership idea is form of the brand new wave of buyer acquisition.

Max Rakhlenko — Cowen and Firm — Analyst

Yeah. No, that is sensible. And also you touched on Princess, however are you able to communicate to how that partnership goes and if we might see doubtlessly an enlargement into extra ships over time?

Anthony Geisler — Chief Government Officer

Yeah. I imply, so far as Princess, we’ll clearly be increasing into all of Princess’ ships as we deliver them into port when it is time applicable to take action and add our brick-and-mortar form of capabilities to the ship, our digital capabilities. , we’re in the course of coaching new instructors to placed on board and all these form of issues. So, it is going to proceed to roll out.

, we’re promoting retail by the cruise ships, so each branded and co-branded retail is out and out there. So, you recognize, persons are in a position to get off the cruise ship and take an XPASS with them after utilizing XPLUS or utilizing our brick and mortar and stroll off with retail from us as effectively. So, like I stated, we’re looking for methods and proceed to execute on ways in which, you recognize, that Xponential turns into a life-style, well being, and wellness platform that we will use and form of all elements of individuals’s lives.

Max Rakhlenko — Cowen and Firm — Analyst

Nice. Thanks loads, guys. Good luck.

Operator

Thanks. Women and gents, now we have reached the tip of the question-and-answer session. And I would like to show the decision again over to Anthony Geisler, CEO, for closing remarks. Over to you, sir.

Anthony Geisler — Chief Government Officer

Thanks. And thanks once more for becoming a member of right now’s earnings name and to your continued assist. I would additionally prefer to acknowledge our whole Xponential health staff and franchisees for his or her robust operational execution within the fourth quarter. And we sit up for seeing lots of you on the upcoming Raymond James, ROTH, BofA, and Citi conferences this month.

And we’ll communicate to you once more in Could on our first quarter name.

Operator

[Operator signoff]

Period: 0 minutes

Name contributors:

Kimberly Esterkin — Investor Relations

Anthony Geisler — Chief Government Officer

Sarah Luna — President

John Meloun — Chief Monetary Officer

Randy Konik — Jefferies — Analyst

Brian Harbour — Morgan Stanley — Analyst

Alex Perry — Financial institution of America Merrill Lynch — Analyst

John Heinbockel — Guggenheim Companions — Analyst

Warren Cheng — Evercore ISI — Analyst

Jeff Van Sinderen — B. Riley Securities — Analyst

Jonathan Komp — Baird — Analyst

Joe Altobello — Raymond James — Analyst

George Kelly — ROTH Capital Companions — Analyst

Matt Egger — Piper Sandler — Analyst

Max Rakhlenko — Cowen and Firm — Analyst

More XPOF analysis

All earnings call transcripts