Hello. And welcome to the F45 Training Holdings Q3 2021 Earnings Call. My name is Lauren, and I will be coordinating your call today. I will now hand you over to your host Bruce Williams, Managing Director to begin. Bruce, please go ahead..

Good morning, everyone. And thank you for joining the call to discuss F45 Training’s third quarter results, which we released this morning and can be found on the Investor Relations section of our website at f45training.com. Today’s call will be hosted by Chief Executive Officer, Adam Gilchrist; and Chief Financial Officer, Chris Payne.

Before we get started, I want to remind everyone that the management’s remarks on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on the current management expectations.

These may include, without limitations, predictions, expectations, targets or estimates, including regarding our anticipated financial performance and the actual results could different materially from those mentioned.

These forward-looking statements also involve substantial risks and uncertainties, some of which may be outside of our control that could cause the actual results to differ materially from those expressed in or implied by such statements. These factors and uncertainties, among others, are discussed in our filings with the SEC.

We encourage you to review these filings for a discussion of these factors, including our quarterly report on Form 10-Q and in our earnings release. You should not place undue reliance on these forward-looking statements. We speak only as of today and we undertake no obligation to update or revise them for any new information.

This call will also contain certain non-GAAP financial measures, which we believe are useful supplemental measures that assist in evaluating our ability to generate earnings, provide consistency and comparability with our past performance and facilitate period-to-period comparisons of our core operating results and the results of peer companies.

Reconciliations of these non-GAAP measures to the most comparable GAAP measures and definitions of these indicators are included in our quarterly report on Form 10-Q and in our earnings release. Now, I would like to turn the call over to Adam..

Thank you, Bruce. And thanks everyone for joining us today to review our third quarter results. We are very pleased to report strong third quarter results. Notably, we continue to execute on our growth strategy, demonstrated by strong new franchise sales, including additional multi-unit deals and continued strength in new studio openings.

Additionally, we saw encouraging sequential improvements in studio performance with visitation and average unit volumes exceeding pre-pandemic levels in the U.S., which is our most significant growth market. Our Rest of World studio has experienced similar recovery as government mandated restrictions were lifted.

I am also very pleased that as government mandated restrictions in Australia have eased over the last few weeks, we have seen a rapid uplift in our Australian studio performances. As you know, we have a differentiated approach to fitness firmly rooted in the three pillars of our DNA, innovation, motivation, and of course, results.

This differentiated approach to fitness continues to drive interest in our business both from potential franchise partners and new members, and as a result of our global studio footprint and brand awareness, we continue to grow at a rapid pace. In the third quarter we sold 210 net new franchises and ended the quarter with 3,011 franchises sold.

We also opened 63 net new studios globally and ended the quarter with 1,618 total studios, an 18% increase versus the prior year. We are well on our way to achieving over four new goals of franchises sold and studio openings, demonstrating the strong continued interest from franchisees to open new F45 studios.

Moreover, we are encouraged by the strong franchise pipeline of approximately 1,400 sold, but not yet open studios. As I have said before, a significant portion of these sold but unopened studios are comprised of very experienced, well-capitalized, multi-unit franchisees.

Now, I will turn it over to Chris to go over our financial results and then I will spend some time discussing our growth strategy..

Thanks, Adam, and good morning, everyone. I will begin by reviewing the details of our third quarter results and then provide our current outlook for full fiscal year 2021. Total revenue increased 24% to $27 million from $23 million in the prior year.

Global system-wide sales, which reflect the total revenue generated by our franchise network increased 33%, driven by 17% increase in visits globally.

In the third quarter global same-store sales increased 6%, as COVID related studio closures in Australia partly offset significant strength in the U.S., where same-store sales decreased increased by 67%.

As Adam mentioned, we had strong sales pace in the quarter with 210 net sales, bringing our total franchise results to 3,011 as of 30 September, 2021. We also had strong net studio openings, with 63 opened in the quarter, bringing our total studios to 1,618 as at 30 September, 2021.

Regarding our segment trends in the quarter, in the U.S., where virtually all of our studios were opened, we saw a significant recovery in studio performance and demand trends. Revenues increased 55% year-over-year to $15.3 million. The number of visits increased by 115% year-over-year and surpassed $3 million for the first time ever.

We are pleased to report that AUVs continue to recover and exceed pre-pandemic levels during the quarter, a trend which has continued Q4 today. Finally, in the quarter, we had 87 net franchise sales and 30 net new openings. As of September 30, 2021, we had 1,466 total franchises sold and 596 total studios in the U.S.

In Australia, however, approximately 60% of our studio network was closed during the quarter due to COVID 19 mandated lockdowns. In addition, during this studio closure period, we raised franchise and related monthly fees. As such, revenues in Australia declined 26% to $6.6 million and visits were down 34% year-over-year.

Despite the challenging backdrop during the quarter, we are encouraged by the recovery that has occurred since quarter end. As of today, approximately 80% of the country have now been vaccinated. Most of the COVID restrictions have been lifted and nearly all of our studios arriving to reopen.

Since reopening we are really encouraged by the rapid recovery with the number of visits already tracking to pre-COVID levels. We have also resumed billing and collecting our normal franchise fee, which we have previously waived due to the government mandated restrictions.

Finally, despite these restrictions, we continue to sell an open studio in the quarter. We have 15 net franchised sales and five net studio openings. As of September 30, 2021, we had 800 total franchises sold and 663 total studios in Australia.

Revenues and visits in Rest of World continue to improve, accelerated by studio openings and rapid recovery in visits. Canada, the largest region in our RoW segment, is almost completely reopened and is performing above its pre-COVID-19 levels, on a system-wide sales and a visitation basis.

Rest of World revenues in the third quarter were up 63% to $5.3 million. In the quarter, we had 108 net franchise sales and 28 net studio openings. As of September 30, 2021, we had 745 total franchises sold and 399 total studios in our RoW segment.

Moving on to the components of our revenue, franchise revenue was $18.5 million, an increase of 32% from $14 million in the prior year period. The increase in franchise revenue of approximately $4.5 million was driven by the increase in establishment and other franchise related fees in the United States and Rest of World.

This was partially offset by studio closures, including the 1 million of white franchise and marketing fees related to the temporary studio closures in Australia. By region, revenue increased 78% in the United States, declined 30% in Australia and increased 83% in Rest of World compared to the prior year period.

Equipment revenue increased 10% to $8.7 million from $7.9 million. This year-over-year increase was primarily driven by increased sales of equipment, which more than offset the approximately $3 million negative impact related to the delivery delays of our World Pack to certain studios.

Regionally, equipment revenue increased 16% in the United States, declined 17% in Australia and increased 41% in Rest of World. Like many other companies across industry, our supply chain has been disrupted by COVID 19 and related global supply chain delays.

As a result, equipment deliveries were impacted by port congestion and transportation delays beyond our control. Fortunately, due to our proactive approach towards supply chain management, we had the required equipment and merchandise stock to meet our anticipated demand.

Additionally, we have already secured additional manufacturing and production capacity in our factories in China and we continue to actively engage with our shipping partners to manage our equipment deliveries to the best of our ability.

Moving on to gross profit, gross profit increased $19.8 million, compared to $14.7 million in the third quarter last year. Gross profit margin was 72.8% in the third quarter, up 580 basis points for the same period last year. This reflects a higher mix of franchise segment revenues in the quarter.

SG&A for the quarter was $110.6 million, compared to $10.1 million a year ago. This increase in SG&A expense was primarily due to significant one-time expenses, including approximately $86 million in stock-based compensation due to the IPO-related equity awards to certain employees and the acceleration of RSUs related to the company’s IPO.

Excluding these one-time expenses, SG&A increased approximately $5 million from the prior year, reflecting our investment in our global workforce, global brand marketing efforts and other growth initiatives. Adjusted EBITDA increased 38% to $10.1 million from $7.4 million in Q3 2020.

Adjusted EBITDA margin was 37.2% in the third quarter versus 33.5% in the prior year period. This increase in EBITDA margin reflects the revenue mix shift I mentioned earlier. Net interest expense was $41.9 million, compared to $500,000 in the third quarter last year.

The increase was due to higher interest expense related to the increased borrowings and one-time charges related to the write-off of $23.7 million and unamortized debt discount on the convertible note and interest payments related to the early termination of our subordinated credit agreement.

With the debt repayment transactions behind us, we expect net interest expense to be immaterial going forward. Turning to balance sheet, we ended the quarter with approximately $52.6 million of cash and cash equivalents and no debt outstanding.

This compares to $29 million of cash and equivalents, and $243 million of total debt outstanding in the prior year period. As I discussed last quarter, I am really pleased with our current capital structure and the flexibility it gives us in the face of lingering impacts of COVID-19.

Our credit facility provides for a $90 million commitment, of which $88.5 million is available.

Combined with that capital light model and a proven ability to generate significant free cash flow, we feel very comfortable with our current capital structure and we are excited about the opportunities to invest in the business going forward, such as our recently announced acquisition of Vive Active, which Adam will discuss in a few minutes.

Now moving on to guidance, with the pace of franchise sales and studio opening tracking ahead of our prior outlook, we are raising the low end of our guidance ranges with franchise sales and studio openings. We now expect full year new net franchises sold 830 to 850, compared to our prior range of 800 to 850.

Full year net studio openings of 240 to 260, compared to prior range of 220 to 260. As we have discussed in the past, we continue to have very good visibility into our studio opening pipeline for the next few years.

We are very pleased with the pace and visibility of our franchisee pipeline, with over 3,000 franchises sold to-date, approximately half of which are open studios. The other half represents more than 1,400 sold, but not yet opened studios, a significant portion of which are part of multi-unit deals with well-capitalized franchisee groups.

These studios are contractually obligated to open and we continue to have high confidence in our partner’s ability to do so in a timely manner. While there remains considerable uncertainty regarding the global supply chain backdrop and delays at major shipping ports, the company maintains its financial outlook for the year.

This is based on the assumption that there is no change from the current estimated delivery dates for equipment and merchandise provided by our third-party logistics partners, as well as no significant worsening of COVID-19 pandemic, that the materially impacts performance, including prolonged studio closures or mandated operational restrictions.

We continue to expect full year revenue between $132 million and $137 million. Full year adjusted EBITDA between $50 million and $52 million. As a reminder, a reconciliation of non-GAAP measures to the most comparable GAAP measures and definitions of these indicators are included in our quarterly report from our 10-Q and in our earnings release.

I will now turn the call back over to Adam..

Great. Thank you, Chris. I will now spend some time discussing our growth opportunities and strategies. First, I am really excited by some of the organizational initiatives we have continued to execute upon during the past quarter.

Starting with our teams, we have invested in and developed additional infrastructure to allow for more seamless training of new franchisees and for the onboarding of new trainers. On the real estate front, we believe that our partnership with CBRE will reduce the time from when a new franchise is sold to win that studio opens its doors.

Historically, let’s talk about nine months for our standard franchisees to open a studio. However, due to our partnership with CBRE, as well as continuing improvements in the internal onboarding process, we believe we can significantly reduce that lead time.

We are also excited that our larger multi-unit franchise groups are already taking advantage of these resources and attracting to their opening targets. Now, turning to the white space starting with the U.S., we continue to believe that there is significant long-term opportunity to meaningfully expand our franchise footprint.

As Chris already mentioned, as of September 30, 2021, we had 1,466 franchises sold and 596 total studios in the United States. Based on our white space analysis and our internal estimates, we continue to believe there is long-term studio potential for us to open over 7,000 studios in the U.S.

This does not include the meaningful long-term white space potential related to either our other F45 verticals such as corporate, college and military studios or other fitness modalities such as FS8, Malibu Crew, Avalon House and Vive Active, which I will discuss in more detail in a few moments. Outside our core markets of the U.S.

and Australia, we have already demonstrated the portability of our brand and franchise model in almost 70 countries. We have designed our studios to be easily deployed in both developed and emerging markets and to drive continued growth in both underpenetrated existing markets and new markets.

Based on our global white space analysis, we continue to see long-term potential for approximately 16,000 studios outside the U.S. Now what gives us that confidence in these long-term targets? We have three significant drivers that will enable us to achieve our ambitious goals.

One, multi-unit franchises; two, expansion into institutional channels; and three, new concepts targeting additional demographics. Starting with multi-unit franchises, we continue to see strong market demand for multi-unit franchise opportunities.

Our multi-unit operator partners range from existing franchise partners who are looking to expand their studio footprint to well-capitalized institutional partners. Currently, most of our franchisees are independent owner-operators to manage a single location.

Going forward, we will continue to drive new franchise sales and new studio openings with larger well-capitalized multi-unit franchise groups. In the third quarter, we added 155 multi-unit owner operator franchises across three multi-unit franchise groups.

And as of September 30, 2021, approximately 65% of our franchises sold were owned by multi-unit franchisees and that’s up from approximately 40% as of the end of 2019. During Q3, we executed two significant multi-unit deals driving growth in our Rest of World segment.

Regarding the first deal, we have a great partner in Europe, which alone will open up 75 studios in Spain, Switzerland, Italy, Germany, Holland, Denmark, Luxembourg, Liechtenstein and Austria. Regarding the second deal, we have once again partnered with one of our highest performing existing multi-unit franchisees to open 15 new studios in the U.K.

over the next two years. This particular group already has 30 operational studios in Australia and the U.K., and has demonstrated the ability to rapidly scale in a very short period of time.

Moving on to opportunities to expand into new channels, we are actively pursuing potential opportunities to partner with major universities, high schools, corporations, military facilities and bases and hospitality operators.

We currently have 30 studios located in major university campuses in the U.S., including Stanford University of Southern California and the University of Texas. In October 2021, we expanded our college offerings to Purdue University in Indiana, where we are excited to join the big ten conference.

Moving on, we are proud to be serving active duty and veteran communities in the United States, having opened an F45 studio on the Marine Corps Air Station Miramar Base in California this year. We became the first third-party fitness business on a military base.

We are excited about the long-term potential of this partnership as we continue to expand our footprint to other military bases and government facilities in the U.S. and around the world.

We are also excited to share that we are in advanced discussions with third-party investors to establish a new lending partnership aimed at providing attractive financing solution to military personnel who would like to own and operate a new F45 franchise.

We already have a strong pipeline consisting of over 50 veterans who have been pre-qualified to become franchisees and who will be ideal candidates for this new financing partnership. Looking ahead, we believe there is significant opportunity to attract members of the military community to F45, and more importantly as new franchisees.

Approximately 200,000 veterans are discharged from the military each year, many of whom then go on to enter into the private sector. We are deeply excited at that opportunity to partner with these proven leaders. We will share updates on this initiative in the months to come.

Moving onto the hospitality sector; last week we became the first third-party boutique fitness business to open a studio on a cruise ship. As we unveiled the new F45 studio during the maiden U.S. voyage of the award winning celebrity Apex.

This was made possible due to our partnership with OneSpaWorld, which is the number one spa and wellness provider at seafood industry leaders including Celebrity, Norwegian and Carnival.

As occupancy rates in the industry recover to pre-pandemic levels of approximately 30 million passengers per year, we are excited about the long-term potential of this channel as a brand awareness, as well as a franchisee and member acquisition vehicle. Finally, we are also looking at new target demographics.

We believe there is significant opportunity to leverage new workout concepts that enable us to target a broader range of consumers.

As discussed on our last call, early this year, we launched a new fitness concept in Australia called FS8, which integrates three popular methods in the health and fitness industry by remixing pilates, yoga and time to create a new dynamic workout style.

We continue to see very strong demand from existing and new franchise partners to open and operate FS8 studios. We currently have nine open FS8 studios in Australia and are on track to end the year with over 115 franchises sold which are included in the franchises sold and open studio counts.

We are proud to have additional concepts in development, including Malibu Crew, which is a functional fitness studio targeting men over the age of 50, and Avalon House, a studio sanctuary for women of a similar age. We plan to open our first Malibu Crew and Avalon House locations in Florida early next year.

As company-owned flagship, these studios will provide us with firsthand visibility into studio operations, which will allow us to perfect these new concepts and optimize member experience, as we seek to grow these concepts through franchise sales. Finally, we are proud to welcome Vive Active to the F45 family.

On Monday, we announced the acquisition of Vive, which we expect to close during the fourth quarter. We are extremely excited about the acquisition, because we believe it is one of the hottest new fitness concepts in Australia.

Vive is an engaging, plays-focused workout that can be experienced both in studio and online through Vive Stream and At-Home platforms. What else makes us so excited about Vive? It’s very simple.

They have created an amazing differentiated customer experience and have extremely strong customer engagement, driven by a unique multi-sensory and train-led experience and an organic influence of strategy.

Vive currently offers five different workout options for its customers, ranging from circuit workouts to stretch-orientated workouts, with classes lasting about 50 minutes.

Importantly, Vive generates extremely strong unit level economics and we look forward to exploiting this large global TAM by opening several hundred franchise locations, while leveraging the Vive management team to selectively open company-owned units.

Additionally, we have already received a multi-unit commitment from an existing franchise group to expand Vive in the U.S. In closing, I would like to thank you all for your time and your continued interest in F45. We continue to execute on our vision to create the world’s best workout every single day across the F45 training platform.

We are only just getting started and we are looking forward to sharing many more exciting developments across the company in the future, driven by our dedicated team members, franchise partners and customers. With that, I would like to open it up for Q&A..

Of course. Our first question comes from the line of John Heinbockel from Guggenheim. John, please proceed..

Thanks. So, Adam and Chris, maybe start with, given the importance of opening studios, your visibility, because you talked about that and your ability to get your arms around what the franchises are doing, what their plans are timing is, as you look out, I don’t know three months, six months, nine months.

How do you guys go about doing that and ensuring that they are on track and maybe the role that CBRE plays in that as well?.

Hi, John. Adam Gilchrist here. Excellent question.

Initially when I was looking at obviously trying to create a platform of efficiency, what became very evident was the importance of being able to obviously follow people through, but more importantly, follow these folks through a journey where we can assist them in getting their studio open and obviously, try to calibrate these folks into being great marketing operators.

So what we did is we created a technology platform called F45 Playbook. This Playbook is a process where the individual franchisee has to go through 50 different steps to be able to open up their franchise. Every step of the way, they have to upload information to our Playbook to progress into the next phase of their opening process.

So an excellent example would be, if they enter into a letter of intent to lease a property, then that has to be uploaded to our Playbook and our customer support team have to approve it.

We look for critical metrics when people are going out looking for leases, including what the TI might be, what the period of the lease might be, if there’s various demolition clauses. As we move through the process, the visibility for us is excellent, because we, A, a system with CBRE in going and sourcing a location.

B we have visibility on the letter of intent with respect to leasing properties. C, we get all of the leases sent to us and have to be approved by us, then we go out with those folks and provide third-party operators that also assist them in getting CD approvals, and then, lastly, completing the construction phase.

So what that really means is really on a daily basis we are aware of where these folks are up to. With regard to this great relationship we have with the CBRE, what we are really trying to achieve is an ability to express or compress that timeframe by providing a franchisee with an already approved location in their franchise territory.

So how that would play out in the case studies? Right now we have CBRE looking and scouring over 2,000 locations.

We currently have a major multi-unit owner that has got over 100 letters of intent that we are -- so we are really seeing that relationship enable us to bring forward that backlog period that, to be quite frank, has always been nine months from the time somebody signs pre-pandemic to when they open and we are trying to achieve a period where someone walks in, they love the experience of an F45, enter into a franchise agreement with us, but we deliver them an already approved property.

So it’s a very important question, you asked. But I think what we have identified is the fact that the visibility is crucial, because that enables Chris and his finance team to have such confidence with all of the earnings with not just this year, but going into next year..

Great. And maybe as a follow up, right, could you talked about supply chain challenges, which is true for everybody. I think that the plan right is to open a great number of studios, particularly in the U.S. the early part of 2022, right, probably, the first quarter into the second quarter. There is a lot of that product in the U.S.

today that in the order magnitude, like, is half of it here, two-thirds of it here or is that still to come from overseas over the next month or two?.

Yeah. Again, incredibly important question for the success of obviously our revenue and earnings, what we have been doing since the IPO is making sure that instead of paying one quarter ahead, we are looking at this business paying two to three quarters ahead and that is a situation where the supply chain is extremely challenging.

If people in this industry aren’t talking about it, then there’s something wrong within their business, because they don’t have a lot of manufacturing happening. But we are seeing a lot our challenges over the last eight weeks sort of lighten up.

We have seen obviously the largest port we bring our equipment into, which is Long Beach accelerating with all their three deals with all of the transport. So as we sit here today, we have most of the equipment for this quarter here right now.

We are waiting on two more deliveries for this quarter and for Q1 next year we are hoping best case scenario that comes in the first four weeks of Q1 and then we will be right ahead of the game with respect to well tax, we describe them as well tax being about one quarter to two quarters minimum in advance.

And the importance of that is because we want to bring that that backlog period of nine months realistically down to three months or four months. So we really want to be able to have everything in advance for at least two to three quarters in summary..

Thank you very much..

Yeah..

Our next question comes from the line of Jonathan Komp from Baird. Jonathan, please proceed..

Yeah. Hi. Thank you. I want to follow up a bit on the last question, but when I step back and look at this year, you raised the low end of your target for franchises sold to 830 to 850.

Could you maybe just give us more perspective, how much of that you sort of think are larger maybe chunkier deals that we shouldn’t expect to continue and is there opportunity as you look into 2022 to maintain or grow the number of unit openings, given some of that new initiatives, sorry, not unit openings, but the units sold? Just want to hear your thoughts on how to think about directionally heading into next year..

Yeah. I will take this one, Adam. So, hi, John. Good to chat. In regards to our multi-unit deals, yes, we have a very strong pipeline as you know these sophisticated investors larger groups that are looking to take out portfolios of F45s. We do also have a very healthy pipeline of our regular way single to five unit multi-unit deals.

So we are expecting that in the fullness of time that we will be closing a mix of both multi-unit larger deal and also continuing our regular sales..

Yeah. If I can just also add one point on to that, Chris.

We have been not inundated but we have had probably somewhere between 40 and 60 inquiries from PR firms and because of the large amount of inquiry, we have actually outsourced the negotiations and created a process with an investment bank and we mentioned those folks on our last call to assist us in going through and channeling these great sophisticated investors into the F45 network.

So we are feeling really good about the fact that there is an extremely large pipeline and as we continue to mature with the rest of the franchise community, we believe that that space will continue to grow over the next two years to three years..

Okay. That’s really helpful. And then maybe a broader question around profitability, you are obviously seeing a strong recovery this year. If I were to ask maybe relative to some of the external expectations, I see estimates for 2022 and the EBITDA base to get closer to $100 million next year on an adjusted basis.

And I just want to ask sort of your comfort in sort of those external expectations and in your mind as you look forward what the key profitability levers are for 2022?.

Yeah. There’s probably a few different parts to that answer So, I will dive in that’s the first, which is the sales pipeline and what’s interesting is the fact that we have never had more inquiries than this particular quarter that we are talking about.

What we are looking at continuing to do is get more sophisticated with our marketing, so we can continue to drive inquiries. As we have mentioned in the past, 2% of our inquiries convert to becoming a franchisee. And this is also tied in with the level of success we have with various influences.

I would argue that one of the biggest influences on the planet is David Beckham, who we have secured as a great partner, incredible ambassador for our style of work out where we are actually filming David all of next week. So, we are really excited about being able to launch all of that marketing -- all those marketing assets into the U.K. and Europe.

But in addition, you have to have a high degree of visibility on what your backlog is. This is really important, especially with the multi-unit owners.

So, if you consider our F45 Playbook platform, where we can see how many letters of intent have been signed, how many leases have been executed, how many approvals are in city, we have tremendous visibility and to be perfectly honest. We haven’t changed that F45 Playbook really since our inception.

It was well thought out from day one, but again it gives us that critical, I suppose, visibility on openings. And look, there are challenges with supply chain, but on a daily basis, we are really seeing that whole environment improving.

And again, it’s just not one step in the process, there’s many, but probably one of the most important aspects was the fact that our manufacturers in China have actually never slowed down and during the pandemic. I will echo the point from our previous roadshow discussion during the IPO. They were only closed for two weeks.

So for us, what that really demonstrated, was that we have tremendous suppliers of our equipment in China and these challenges that we are having with the lack of containers in circulation is really freeing up. So, again, it’s a long winded answer and I will let Chris dive in and I will answer the second part on the backlog as well..

Yeah. Just to reiterate a couple of points there. John, we have a high degree of visibility over our backlog as Adam has clearly articulated.

And the other important point there in regards to the backlog is that over half the backlog of these large multi-unit operators with contractual opening dates and terms, they are very well capitalized and from what we are seeing they are moving ahead of pace. So we have got a high degree of confidence..

Okay. That’s really helpful. Thank you, both..

Our next question comes from the line of Max Rakhlenko from Cowen & Company. Max, please go ahead..

Great. Thanks a lot, guys. So maybe switching gears a little bit. Nice comps in the U.S. What can you share about reopening trends in the country if there’s anything to call out by region or studios that have been open all longer versus maybe some of the more recent openings? Thank you..

Yeah. Great question and thanks again for your time. We -- look we firmly believe we have the world’s best workout, and that is underpinned and underscored by the incredible numbers that I am about to share with you.

Last quarter, we had 3 million visits to our F45 studios in the U.S., that is an incredible achievement of ours to go through the 3 million. But more importantly for us is the inverted relationship between churn and visitation. Visitation now is over 2.7 times per week on average, which is better than pre-pandemic.

So the key indicators for us are really important and I will let Chris dive in on same store sales growth and our AUVs, which are also outperforming pre-pandemic levels as well..

Yeah. Look on system-wide sales and same-store sales the growth in the U.S. was really pleasing. On a same-store sales basis we reported that 67% -- they are up 67% for our U.S. segment, 6% overall globally.

But you have to appreciate that that included Australia, which got 60% of our Australian network was closed for Q3, so that had a negative a same-store sales impact.

But what’s really pleasing about the Australian sector is that over 90% of the studios are open and operational right now, and they are just ramping back to pre-COVID levels in a matter of weeks.

So we are really pleased with how the business is trending and recovering and then those studios that have been open the longest, they are getting back to outperforming their pre-COVID numbers in a matter of a few weeks..

Great. That’s very helpful. And then just a quick one, but how would you assess your digital capabilities? Is there anything in the works on the app and what do you view as the opportunities to continue to merge the physical with digital at F45? Thank you and best regards..

Yeah. I mean, it’s a great question. We think it’s an extremely important part of our business to continue to grow our digital platform. As we sit here today, we have over a 1 million people on our platform called F45 Challenge. We continue to invest heavily in that.

And one of the areas that we like to talk about is the fact that this is really a supplement to a membership at F45.

We certainly don’t believe that at-home workouts will go back to pandemic levels and the reason we say that is, and we have -- I have been in this fitness space a long time, I was fortunate enough to go to a school on a scholarship where back when I was training the biggest brand name and you guys would remember this was Jane Fonda.

So these at-home workouts are certainly not new to both the fitness community or to the general public. We think it’s critical to continue to invest in that side of the business.

However, it’s like, this conversation I have with a lot of folks since we were able to go back to restaurants, when was the last time you had a Zoom dinner party with your friends? And the answer to that, when I have asked it in the past is never.

So we see a lot of folks really enjoying communities, getting back to a workout, which quite frankly, if you have a choice of doing a workout where we have over 6,000 exercises in our exercise encyclopedia or stay at home on a bike where there’s only two things you can do on a bike, which is sit in the saddle or get out of it or get on a treadmill where there’s two things you can do, which is you can walk or run.

We believe that innovation, which is one of the three key pillars, will continue to drive people into our communities. More importantly, with the innovation and obviously with all of our communities, you have got to have a workout that gets great results.

So we would argue that we get great results, that’s what people really want to achieve when they start to get involved in that style of training whether it’s at-home or here and we believe that it is the world’s best workout.

And that’s why we are very conscious of the fact that it’s important, but it’s certainly not one of our three key pillars that’s going to continue to make us extremely successful into the future..

Our next question comes from the line of John Ivankoe from JPMorgan. Please go ahead, John..

Hi. Thank you. Two very quick ones and then I guess another question. Can you talk about I guess the difference between visits in system sales? I mean, obviously, I think, there’s a pretty big difference between the two, system sales up 33%, visits up 17%.

I guess is a lot of that just market mix or is the average, I guess, price per visit up 16% is those numbers might imply..

It’s -- John, it’s got more to do with membership re-engagement coming out of the periods of closure. So, obviously, in Australia that I will talk about a specific trend there be that system-wide sales were only down 17%, but given the closures, visits were down 35%.

So I think that kind of highlights that point that coming out of a period of closure, we expect the two system-wide sales and visits are going to start to align a little bit more closely..

Okay. All right. Yeah. It’s -- and hey, guys, listen, I am sorry, maybe I am just completely confusing these numbers. But that gap of 16 points is not small, but I mean, can you, I am sorry, I just didn’t understand kind of the answer to the question.

So what would be that gap and why would it converge? I mean, I think, just in terms of, I would think that two would be actually very related to each other and it wouldn’t be such a wide gap.

Is it something like people sign up for a month and just don’t come as many times in that month and that’s why there’s a difference between system sales and visits, as I guess you guys reported?.

Yeah. Hey, John..

…or maybe I am just misunderstanding something?.

Yeah. I might be misunderstanding the question, too, so I apologize. But what I will do is just provide 30 seconds of color on sort of the typical membership profile. So we do enter into monthly membership contracts with all of our members. We offer it whether it would be one month, three months or six month contracts.

Visitation is extremely important for us, because if they are paying $66 per week and they turn up 6 times or 7 times a week, they are getting a workout that’s only costing roughly $10 a workout.

So what’s important for us is, A, getting people into the studio because we are a premium product in comparison to our peers where you folks have probably had a lot of time talking to some of our peers and we are probably on average where -- somewhere between 20% and 30% higher than some of them.

So, visitation is crucial, they can turn off as frequently as they want. Number two, we have had challenges in Australia with regard to being able to operate at full capacity within a studio. So, that’s the second element that we need to just sort of provide a bit of color on.

But we are allowed to train depending on the jurisdiction one person per 4 square meters or one person per 8 square meters. So, this is a really challenging I suppose stepping stone to regions getting reopened. In regard to same-store sales though, we have better same-store sales in Australia with lower visitation numbers and lower engagements.

So, what that is saying is we are able to turn up the price of our membership piece. So, hopefully, that last piece answers your question, which is we have fewer members coming in, but we are able to charge a premium price on top of what we were pre-pandemic..

Okay. Yeah. Listen, we were in an inflationary environment for everything. So, I mean, yeah, I guess, yeah, that would be expected. The second question is actually a balance sheet question is on inventory actually went from $6.4 million in the second quarter to $17.2 million in the third quarter. I assume that those are equipment packages.

Does that mean you actually have those landed in, when it goes on your balance sheet as inventory, does that mean, you have just simply written a check to someone in China or how they actually landed in country and ready to go, and I guess, when I look at that total inventory number of $17.2 million, how many World Packs, I guess, would that reflect, that you would have ready to put it in the stores?.

Yeah.

John, so what that increase that you are highlighting that that’s specifically related to us, for instance, as Adam said, post-IPO we started advanced ordering all of our equipment to give us that visibility on equipment deliveries and our ability to be able to deliver the equipment to our franchisees in accordance with their agreements, so that inventory is inventory that’s in our control.

So it’s at port here in the U.S..

Okay. All right. Yeah. And I can calculate in how many packages that is. And then the third point, I think, Jonathan Komp asked the question on EBITDA, but I’d like to ask the question on units. I mean as you have a nine-month lead time.

I mean, you kind of have a view of total system development? I know this is kind of an important question in terms of the number of stores being opened maybe first half of 2022 versus second half 2022.

Is there any change in the numbers that we previously talked about for fiscal 2022 or is there potentially a shift between first half and second half, as you are starting to have some visibility of what’s going to be opened in the next six months?.

Yeah. We have visibility and we are going to be disclosing those numbers. We are not doing it in this particular call and we wanting to be as cautious as possible, just given the last four weeks to six weeks of supply chain challenges. So, we are now seeing vast improvements in the supply chain.

And like I mentioned, and I will let go the point again, we do have that great visibility across that F45 Playbook platform. So that’s something that we are really excited to do. But we won’t be doing it on this particular call, but it will be coming out..

Okay. Understood. Fair enough. Thanks, guys..

And look, just on that last point, we have over 600 franchises in our backlog that are highly sophisticated private equity folks or family offices with incredible balance sheets and great operators. So these are folks that are on the ground now CBRE, executing letters of intent and leases. So we are feeling really good about Q1 and Q2.

There won’t be a big I suppose and this might be -- might have been part of your question, there won’t be a big Q4 loading next year, obviously, we have had a pandemic this year. So we are heavily weighted to getting these folks open where they weren’t even operating in most of Asia or Australia.

So hopefully that answers your question that we think it’s going to be fast smoother next year than it is this year..

Unless certainly you will also have almost every company that we cover is back end loaded or even loaded to the fourth quarter. So, yeah, you guys can be even throughout the year, you have definitely achieved something. So congratulations..

Thank you. Our next question comes from the line of George Kelly from ROTH Capital Partners. George, please go ahead..

Hey, everybody. Thanks for taking my questions.

So curious on your -- some of your marketing fees that you gave franchisees a break on during COVID, just wondering if you have been reintroducing those and what the reception has been from franchisees?.

Yeah. Great question. So our marketing fees are designed to assist our studios in accelerating their AUVs. What we have seen is that our studios that are reopening have obviously had three areas of concern. One is, how many people can they actually bring into their studio and are they at capacity.

So we can only train eight or 10 people per class, then it would be counterproductive to ask those folks to pay for marketing, if they are already at full capacity. Number two, we have got folks like our Santa Barbara franchise that are at full capacity without any limitation in a studio.

So, again, it’s an area that we are trying to just be very cautious about reintroducing all the marketing fees because of the challenges. Now the third point I was going to make with their cash flows over the last 18 months. So, obviously, we are wanting these folks to get back to pre-pandemic levels.

Number two, we are going to be reintroducing all of the marketing fees throughout Q4 and into 2022.

But we have been very cautious, but allowing our franchisees to be as successful out of the gate as possible without requiring to pay additional fees for what they might believe to be unnecessary given the fact that they could be operating at a full capacity..

Okay. Understood. Thank you..

And the last point I will make, I will just sort of, I just thought about this as well, but the margin we make on the marketing fees is normal to the point that, it’s not going to have a major bearing on the bottomline. Like, it’s a very, very minimal..

Okay. That is the end of the Q&A session today. I will now hand you back over to the management team for any closing remarks..

Yeah. Firstly, I’d like to thank everybody and it’s such an exciting journey. And I think for us what really excites us about the future is our members coming back in droves greater than pre-pandemic. So that for us is demonstrating the help of our network.

We do believe on a second point that we have the world’s best workout where we underscore that by the fact that we are the only third-party gym on a military base with conversations happening with over 12 military bases right now.

In addition to being the only third-party gym on military bases, training soldiers to be combat ready, we are in some of the greatest institutions in the world be at Stanford, USC, UT. So we are seeing this vertical reopening up with respect to their REC centers coming on board to continue to expand their quality of services and their REC centers.

Also, we announced on our last call that we are now in high schools operating on behalf of various great high school institutions. So, again, why are we excited about that, it demonstrates we are the only third-party gym out in some of these independent verticals.

And the last comment I will make is the fact that we are about to go into a Hilton Hotel and hopefully prove of our concepts that will enable us to continue to scale through that particular vertical. We see our business being fiscally conservative.

We had challenges last year getting through obviously the pandemic and we added some additional debt onto the company last year. But as we sit here today, we have an untapped revolver of $88 million. We have got strong balance sheet with cash. We are being very opportunistic with the investments we are making.

We passed on a lot, but some of our peers have dived into that. And like I said, I think, we are excited about the fact that our product that stands here today we will continue to be able to push -- be pushed out into to a number of these verticals.

If we talk about our adjusted EBITDA margins that improved this quarter in comparison to previous periods, we think that if you look at the strength of our business, there’s probably some key elements.

One is where sort of a carbon fiber lightweight business that provides a great TV technology platform with an incredible athletics department that go out and choreograph all these incredible workouts for our franchisees. So it’s been a great period being a public company. We get excited about having the visibility on our backlog.

We have got lots of folks and TAs that are contacting us that we are working through now to join our family. And like we have said all along, we believe that we can be the world’s biggest franchise system in the future.

Secondly, we believe that we are delivering the most important franchise service in the world, which is getting people fit and healthy.

Thirdly, we want to do it in a physically responsible way where both -- where a very strong business from a balance sheet and cash flow standpoint, but also making sure that our franchisees have got incredible margins. So just to wrap up. Thank you, everybody. We would like to always say that we are available for offline conversations.

Chris and I are happy to take anyone’s calls. And again, thanks, everybody, for their time..

This concludes today’s call. Thank you for joining. You may now disconnect your lines..