F45 Training Holdings Inc. (NYSE:FXLV) Q4 2021 Earnings Conference Call March 14, 2022 8:30 AM ET
Bruce Williams – Managing Director
Adam Gilchrist – Chief Executive Officer
Chris Payne – Chief Financial Officer
Conference Call Participants
John Hornbuckle – Guggenheim Partners
Randy Connick – Jefferies
Max Rakhlenko – Cowen & Company
Jonathan Komp – Baird
Paul Golding – Macquarie
John Ivankoe – JPMorgan
Hello and welcome to the F45 Training Holdings Inc. Fourth Quarter and Fiscal 2021 Earnings Call. My name is Lauren, and I will be coordinating your call today. [Operator Instructions]
I will now hand you over to your host, Bruce Williams, Managing Director of Investor Relations to begin. Bruce, please go ahead.
Good morning, everyone, and thank you for joining the call to discuss F45 Training’s fourth 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’s 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 can 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 in our earnings release and in our soon to be filed annual report on Form 10-K for the year ended December 31, 2021. 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 earnings release.
Now, I would like to turn the call over to Adam.
Thank you, Bruce. I was asked two trivial questions about F45 recently. Strangely, I didn’t know the answer to ADA [ph] and I anecdotally thought I would share this with you folks. The two questions asked were, how long did it take McDonald’s to get to the franchise size, we took eight years to get to? The answer, it took McDonald’s 15 years to get to the same size it took F45, which was eight years.
The second question, which I also didn’t know the answer to, was how long did it take Starbucks to reach the same number of units that F45 has? The answer, it took Starbucks 27 years to get to the same unit size it took F45, which again, has been eight years. Being the fastest growing franchise in history is a proud metric for myself and our staff. However, I echo this point at the end of this presentation, this business is just the beginning.
Moving on to the fourth quarter results, for both the fourth quarter, and the full year we continued to execute on our business and growth strategies that have enabled F45 to become the fastest growing fitness franchise in the world, as well as the number one ranked boutique fitness brand according to Entrepreneur Magazine.
During the fourth quarter, we continued to demonstrate strong franchise sales, including additional multi-unit deals, and continued strength in new studio openings and equipment pack deliveries. In the fourth quarter, we sold 290 net new franchises and ended the quarter with 3301 total franchises sold, a 47% increase compared to the prior year. We also opened 131 net new studios globally and ended the quarter with 1749 total studios, a 22% increase versus the prior year period.
During the fourth quarter, we continued to experience strong performance across our studio network. Same-store sales increased 6% globally and 53% in the United States during the quarter. For the full year same-store sales increased 12% globally and 42% in the United States. System wide sales increased 27% to $114 million during the quarter and 36% to $410 million for the full year. In the United States system wide sales increased 95% to $50 million and 96% to $167 million for the fourth quarter and full year respectively.
Global system wide visits increased 7% to approximately $7 million during the quarter and 31% to approximately $27 million for the full year. In the United States. system wide visits increased 50% to approximately $3 million and 103% to approximately $11 million for the fourth quarter and full year respectively.
We ended the quarter with 92% of our studios open globally and 97% of our studios open in the U.S. and as of today 96% of our studios are open globally and nearly 100% of our studios are open in the U.S. We are very encouraged by the continued sequential improvements in studio performance with our key performance indicators exceeding pre-pandemic levels in the U.S., which is our most significant growth market, representing one third of our long-term global TAM.
Regarding our business outside the U.S., I am pleased to report that studios in Australia and rest of world have experienced a similar strong recovery, as government mandated restrictions are slowly being lifted. In particular, as government mandated restrictions in Australia have eased over the last several weeks, we’ve seen rapid uplift in our Australian studio performances, with AUVs quickly returning to pre-pandemic levels.
For the full year, we delivered strong results despite the continued challenges from COVID and supply chain disruptions. During the year, we successfully managed through these challenges by doing what was best for our franchisees and our members, which is continuing to deliver the world’s best workout and changing people’s lives by training in our unique communities.
Over the course of 2021, we sold 1057 net franchises supported by strong demand from multi-unit franchises and we worked with our franchisees to open 312 new studios. This execution allowed for us to generate revenue growth of 63% compared to the prior period, and deliver strong adjusted EBITDA margins of 39%. We ended the quarter with a robust balance sheet consisting of a strong cash position, zero funded debt and an undrawn revolver.
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 unique approach to fitness continues to drive interest in our business, from both franchise partners, and of course new members. During the second half of the year, we introduced six new pieces of equipment, and over 500 new exercises. Looking ahead, we have plans to introduce 1000s of additional workouts over the next several years.
Our continually growing exercise database, which consists of over 8000 unique movements across our fitness modality serves as the backbone of the best-in-class fitness programming and support our mission to offer the world’s best workout. Coupled with our highly scalable franchise model, we have a truly portable concept that thrives globally.
As we look forward to 2022, we could not be more excited about the opportunities ahead of us. We are seeing that as COVID-19 restrictions are being lifted, people are as excited as ever to experience in-person fitness, with returning to their local studio, or experiencing in-person fitness for the very first time. This is evidenced by our customer engagement metrics, which continue to strengthen with average visits per week increasing to above pre-pandemic visits of 2.7 to now over three visits per week. In addition, we continue to be encouraged by the strong franchise pipeline of over 1500 sold franchises, as at 12/31/2021, but not yet open.
As I’ve said before, a significant portion of these sold, but unopened studios are comprised of very experienced and well capitalized multiunit franchisees which I’ll talk about further. As we’ve discussed in the past, we’ve taken and will continue to take strategic proactive measures with respect to our supply chain. To that end, we recently announced that we have secured 1200 equipment packs for delivery in 2022. As a result, we remain confident in our ability to satisfy the robust demand from franchisees for new F45 Studios.
With that, I’ll turn it over to Chris to go over our financial results and then I’ll provide an update on our growth strategy.
Thanks, Adam, and thank you all for taking the time to speak with us today. I’m thrilled by our fantastic fourth quarter and fiscal year results and I could not be more excited about the opportunities going forward for F45. I’ll start off by reiterating the attractiveness of that business model and then I’ll walk you through our fourth quarter and fiscal year results. I will then provide our fiscal year 2022 guidance and then turn it back over to Adam.
Starting with the attractiveness of our business model, we believe that the highly visible and reoccurring nature of our revenue streams is an invaluable asset to our business model. These reoccurring contracted revenue streams are driven by our existing global franchise footprint and increase with every additional franchise sale we make. The reoccurring revenue, paired with our asset light business model, results in strong profitability and cash flow generation.
As I have said before, the majority of F45’s revenue is derived from contractual agreements with our franchisees that dictates our monthly franchise fee and sale of equipment to our franchisee. In the case of our monthly franchise fees our agreements typically ensure we receive a minimum fee with a variable component that allows us to capture upside from well performing units. As a result, we are pleased that the global AUV has continued to accelerate and in the U.S. trailing four week AUVs are above pre-pandemic levels. As AUVs continue to increase, we will continue to drive strong recurring revenue by capturing royalty upside. This in turn will result in stronger profitability and cash flow generation.
Following up on a point Adam raised, I would like to highlight that we recently increased our purchases of equipment packs to secure the delivery of approximately 1200 world packs, which we believe will provide sufficient stock to achieve our targets. Additionally, bulk purchases of equipment enable us to save or mitigate cost increases on manufacturing and logistics, which in particular is important given the inflationary environment.
Since acceleration of world pack purchases reflects the strong continued demand from new franchisees and their expectations around the future opening pace of our solid but not yet open franchises. As well as our ability to leverage our strong balance sheet and manufacturing relationships to secure inventories despite ongoing supply chain challenges across industries. As a reminder, we recognize revenue from equipment sales upon delivery, which is generally between six and eight months from the execution of our franchise agreements.
Now turning to our fourth quarter and full year results. Fourth quarter total revenues increased 243% to $62 million, which was principally driven by a significant increase in world pack deliveries, as our franchisees prepared to open new studios in 2022. Additionally, most of our network was able to operate without disruptions, with most COVID-19 restrictions relaxing towards the end of 2021 despite the increase of cases globally. For the full year total revenues increased 63% to a record $134 million.
Fourth quarter franchise revenues increased 68% to $21.5 million. The increase was driven by an increase in our global studio base, which increased by 1057 to 2244 as of 31 December 2020 to 3301 as of December 31, 20 21. In addition, the increase in franchise revenues was supported by strong positive same-store sales, in particular in the United States, and fewer COVID-19 related fee credits provided to our customers. For the full year, franchise revenues increased 40% to $73.7 million.
As Adam noted, global systemized sales increased 27% to $140 million in the fourth quarter with global same-store sales increasing 6% for the same period. We are pleased that the U.S. same-store sales increased 42% during the quarter as the U.S. market, which is our largest and fastest growing market continues to recover from the pandemic. These results were partially offset by the results in Australia and ROW which were partially impacted by COVID related restrictions during the quarter.
For the full year, global same-store sales increased 12% and system wide sales increased 36% to $410 million driven by 96% growth in the U.S. In the fourth quarter, global system wide visits increased 7% driven by 50% growth in U.S. visits. Lower visitation in Australia partially offset the global system wide visits in the fourth quarter. Again, this was driven by increased COVID-19 restrictions in Australia, as well as select ROW markets, such as Canada and the UK, where studio traffic was challenged due to COVID restrictions.
For the full year system wide visits increased 31% led by 103% growth in the U.S. visits. Fourth quarter equipment revenues increased 667% to $40.4 million from the prior year period and increased 99% from the fourth quarter of 2019. The increase was primarily driven by the delivery of over 300 world packs during the quarter. For the full year, equipment revenues increased 103% to $60.3 million. Geographically, fourth quarter U.S. revenues increased 291% to $47.1 million, driven by strong world pack deliveries and modest contribution from accelerating AUVs, resulting in higher royalties.
Australia revenues increase 426% to $3.8 million, due to a greater percentage of studios not subject to COVID-19 restrictions and an increase in equipment deliveries to studios compared to the prior period. Rest of world revenues increased 107% to $10.9 million accelerated by studio openings, as well as an increase in equipment deliveries to studios compared to the prior period.
During the quarter, globally we sold 290 franchise and opened 131 studios on a net basis. For the full year, globally we sold 1067 net franchises and opened 312 new studios for a total of 749 studios globally. As of December 31, 20 21, we had 1552 franchises sold but not yet opened with the highest concentration with over 1000 in the U.S. market. The majority of these sold but not yet opened studios are attributed to our well capitalized multiunit franchise partners.
For additional context, the global average net franchises sold per month increased to 88, well ahead of the 2020 average of 29 per month. In the U.S. the average net franchises sold per month increased to 65, ahead of the 2020 average of 10 per month. In addition, approximately 65% of our franchises sold were owned by multiunit franchisees, up from approximately 52% as of December 31, 2020 and 40% as of December 31, 2019, which highlights the strong market demand for multiunit franchise opportunities.
Moving on to gross profit, gross profit increased $44.8 million compared to $9.4 million in the fourth quarter last year. Gross profit margin was 72.4% compared to 52.1% from the fourth quarter of last year. Improvements in the gross margins reflect the greater mix of higher margin franchise segment revenues in the quarter, as well as year-over-year improvements in equipment margins. The increase in equipment margins was primarily driven by volume based rebate from one of our suppliers in the fourth quarter, but related to the full year equipment delivery volume.
For the full year gross profit was $100.1 million compared to $52.7 million in 2020 and gross profit margin was 74.7% compared to 64% in the prior year. SG&A for the quarter was $36.8 million compared to $26.1 million a year ago. The increase in SG&A expenses was primarily due to the one-time expenses including stock-based compensation, relocation expenses related to the corporate headquarter move to Austin, Texas, as well as transaction and legal fees.
Excluding one-time costs SG&A increased due to investment in personnel and infrastructure to support our growth and increase marketing investments. For the full year, SG&A expenses increased over 200%, reflecting one-time public company costs, increased marketing costs and other strategic growth investments. Additionally, I would add that during the height of the pandemic during 2020, F45 had taken significant cost reduction measures, which impacts a year-over-year comparison.
Adjusted EBITDA increased 376% to $25.9 million from $5.5 million in Q4 2020. Adjusted EBITDA margin was 42% in the fourth quarter versus 30.2% in the prior year period. The increased price in adjusted EBITDA margin reflects the gross margin improvement mentioned earlier. For the full year, adjusted EBITDA increased over 100% to $52 million compared to $25.4 million for 2020. Adjusted EBITDA margins increased almost 800 basis points to 38.8% compared to 30.9% in the prior year.
Net interest expense was $198,000, compared to $8.1 million in the fourth quarter last year, reflecting the significant debt pay down that occurred concurrent with our IPO in July 2021. For the full year, net interest expense was $59.3 million compared to $9.4 million in 2020. This increase was primarily related to the write off debt discount and penalties we discussed last quarter.
Turning to the balance sheet, we ended the year with approximately $42 million of cash and cash equivalents and no debt outstanding. As of today, we have partially drawn on our revolver as part of the bulk purchase of equipment I discussed earlier. Our capital structure remains strong and we believe this provides a strategic flexibility to fund our growth priority. We may invest in several strategic initiatives and as a result, we are comfortable with our current liquidity and revolver capacity. Our credit facility provides for $90 million commitment with an additional $35 million accordion of which $54 million is available as of today.
To that end, we will continue to invest in growth of our modalities such as FS8, Malibu Crew, and Avalon House and our acquired brand Vive Active. In addition to SG&A expenditures necessary to make these modalities as successful as F45, which is reflected in our financial targets and guidance, we will invest in capital to open a limited number of company owned stores, primarily in the U.S. for these modalities. These company-owned stores will be critical to demonstrating proof-of-concept and driving the overall growth of these modalities.
Finally, we’ll look opportunistically to acquire a limited number of existing F45 studios. We believe that establishing a small company on portfolio of studios across modalities will be of strategic importance and drive strong return on invested capital.
Now moving on to guidance, assuming no significant worsening of the pandemic or increased risks related to geopolitical uncertainties, that materially impacts performance, we expect full year net franchises solid of approximately 1000, full year net initial studio openings of approximately 1000. We expect the cadence of those openings to be weighted towards the back off of the year. Full year revenues between $265 million and $275 million and full year adjusted EBITDA between $90 million and $100 million.
As a reminder, a reconciliation of non-GAAP measures to the most comparable GAAP measure and definitions of these indicators are included in our quarterly report from our 10-K and in our earnings release.
I’ll now turn the call back over to Adam.
Great, thank you, Chris. First, I’m excited to share some color regarding various initiatives and appointments we executed upon during the first quarter. Last month, we announced the appointment of Gunnar Peterson as Chief of Athletics. Having built a career around training champion athletes and Hollywood stars, such as Tom Brady, Kevin Love, and the Kardashians, Gunnar is a true legend in the professional sports and fitness industry and someone we have long admired. He is going to be an invaluable asset to our business, and I couldn’t be more excited to have him on board.
Now I’d like to take some time to discuss our long-term opportunity and growth outlook. Starting with the whitespace in the U.S., we continue to believe that there is significant long-term opportunity to meaningfully expand our franchise studio footprint. As Chris already mentioned, as of December 31, 20 21, we had 1130 franchises sold with 654 total studios in the United States. Based on our whitespace analysis, and our internal estimates, we continue to believe there is long-term studio potential for there to be over 7000 F45 studios in the U.S.
What gives us additional confidence to achieve our long-term goals, is the real estate opportunities that have emerged over the course of the pandemic. Since the onset of the pandemic, IHRSA estimates that 25% of all fitness facilities have closed in the U.S., allowing us opportunities to secure highly attractive real estate locations for all of our new franchisees. Importantly, the 7000 studio TAM figure does not include the meaningful long-term whitespace potential related to our other F45 channels, including military and colleges.
Outside our core markets of the U.S. and Australia, we have certainly demonstrated the portability of our brand and franchise model with over 788 franchises sold, and over 442 total studios in almost 70 countries. Since day one, our franchise model was purpose built around scalability. What exactly does this mean was very simple. We make our studios simple to open, and simple to operate. This allows franchisees to spend more of their time growing their business by opening potentially more studios. Looking ahead, we intend to continue to grow our footprint with existing as well as new franchisees in both developed and emerging markets.
Turning to demand for new franchises, we continue to see strong market demand from both existing and new multiunit franchisees. Our multiunit franchise partners range from existing franchisees who are looking to expand their studio footprint to well capitalized institutional partners seeking to build studio footprints of scale.
During the fourth quarter, we added 160 multiunit owned or operator franchises across three multiunit franchise groups. As of December 31, 2021, approximately 65% of our franchises sold were owned by multiunit franchisees, which is up from approximately 40% as of the end of 2019. Going forward, we will continue to drive new franchise sales and new studio openings with larger, well capitalized multiunit franchise groups.
On the real estate side, we have leveraged our partnerships with CBRE to establish a new optimized real estate strategy that has created and will continue to create value for us and our franchisees by identifying and negotiating leases in a streamlined manner. As of today, CBRE has helped identify over 1500 prospective new locations, which provides significant efficiencies in driving new studio openings, and reducing the time a studio takes from closing on a franchise agreement to opening.
Lastly, we continue to execute on our mission to offer our franchisees an incredible business opportunity and offer our members the world’s best workout every single day. We are only just getting started and we’re looking forward to sharing many more exciting developments with you folks in the future.
With that, I would like to open it up for Q&A.
Thank you. [Operator Instructions] Our first question comes from John Hornbuckle from Guggenheim Partners. John, please go ahead.
So, let me start with one for Adam, maybe, speak to as the now that we’re post-COVID as the brand awareness has gotten better, how you think about — how the studios are performing, relative to the AUV ramp, right? So the past two, let’s say, 400,000 to 450,000 of annual AUV, how are we progressing to that, and then what year do you think we get to that level? And then secondly when you think about pricing, I think you guys have always felt that your pricing the service exactly, right. Is there any room for a little bit sharper pricing to drive more member adoption or you really don’t want to go down that path?
Yes, thanks, John. Two, really good questions. What we’re seeing at the moment with regard to AUV ramp back to the 450 gross AUV per annum is that we’re moving back to the pre-pandemic zip code of call it three years. So for us we obviously do everything we can to support our franchisees with regard to membership, sales growth, but as I mentioned, just earlier in the call, we still aren’t yet back to 100% with regard to see those up, and we’re over 90%, but we are seeing visitation being greater than it was pre-pandemic, and for us, I would argue that that is probably one of the most important metrics that we have. So, in summary, we believe that we’ll be back to pre-pandemic levels of a full ramp of call it three years, with profitability being achieved within six months.
The second part to your question, which is, should we potentially consider easing the membership fee to be able to attract, to be able to attract great volume of members, the answer is absolutely not. We’ve seen some catastrophic mistakes with some of our peers, where they’ve gone down to $30 or $20 a week, and what that then does is obviously grows your membership base. However, what happens is that you’re stuck in a situation where you have so many people that are booking in to a class at a certain time, you can’t facilitate all those requested training sessions. An example of that would be if we signed 1000 members in a location, Monday morning is our busiest morning. We only have 27 spots available at 6 AM. So it actually becomes counterproductive, because you have membership backlash, because they can’t book in a time to train.
So we’ve always believed that the right, the right number of members is somewhere between 200 and 300, depending on the size of your classes, because we can’t stretch a class size from 27 up to 36 people. But more importantly, we’re only targeting 200 to 300 people out of a population demographic of 35,000. So we always have believed that there’s a lot of science that goes into our mapping tool where we provide exclusive territories, we always believe that there are enough people to be able to service that sort of 300 membership base.
Number two, we are the Ferrari of training and we want people to respect that. But more importantly, when you’re paying $66 per week, what you find is that these members want to get value out of that particular service, and turn up more frequently. If you’re paying $2.50 a week, and using that as an example where Planet has a great business, you’re not as motivated as in a comparison where you’re paying sort of 3000 a year. So I suppose that’s the second key point that we enjoy being the Ferrari of training. We believe the people would cherish the service and more importantly, we want people to get results as per our slogan, team training, life changing, we want to change people’s lives and to do that, they do need to turn up more than two and a half, three times per week. John, I hope that answers your question.
Yes, that’s very good. And then just Secondly, right, in terms of the cadence of openings, and then I thought my view would have been the 1Q would be the highest number of openings, because of all the equipment deliveries in the fourth quarter. Is that not true? Are some of those openings going to be pushed back into the 2Q or later in the year, just curious about the cadence?
Yes, it’s a really good question again. Typically, when we deliver a world and equipment/world pack, the opening period is far longer than three months. So what we typically find is a fit out can take anywhere between three and nine months. So the simple answer to that question is we anticipate we’ll see that cohort really opening up through Q2, Q3 this year. I’m sure you can appreciate the fact that you don’t receive a world pack and open that afternoon. You’ve got to do a fit out and the city has to come and approve the site and then we obviously go out and do all that checks to make sure that the studio is compliant.
So there’s quite a number of steps involved in getting the studio open. And that’s one of the areas of focus that we have working with CBRE to obviously compress that backlog period from nine months to six months from the time a franchisee signs an FTD to the time, a franchisee opens. But a long winded answer, so I apologize, John, but the simple answer is it’s typically four to five months after they receive a world pack.
Okay, thank you.
[Operator Instructions] Our next question comes from Randy Connick from Jefferies. Randy, please go ahead.
Great, thanks guys. I guess question around what you’re seeing around awareness levels. And then, one thing I’ve noticed being in northeast part of the United States is, there’s a number of people that just have not heard of the concept yet, classes are always packed. So I’m just curious, when you look to John’s question and follow up there, have you looked into what AUVs look like relative to when you compare what awareness levels are in a particular region? Because it seems like as there’s a massive amount of opportunity to grow those AUVs as you build that awareness, beyond just growing unit bases to increase density in a particular market. So I’m just curious of any work you’ve done around analyzing that AUV relative to awareness levels in a particular region of the United States? Thanks, guys.
Yes, it’s a great question again Randy. I know, I think it sort of goes without saying that as you build brand awareness and top of mind awareness from that standpoint, your AUVs will grow because you’ve got more membership inquiry, and you typically will convert anywhere between 7 and 8 out of 10 folks that do a two week trial. So in areas where we have had tremendous amounts of exposure, the best example I have is obviously Australia, you’ll find that when people discuss fitness, in the same sentence will be F45. With regard to the size of the U.S., it goes without saying that with over 330 million 340 million folks here, it’s a very large population and very large economy and it’s a very large task to be able to be a household name.
What we do internally to try to continue to accelerate awareness is partner with great folks. And, we talk about the likes of our Wahlberg effect. When we brought mark on board, we had this huge impact across and especially speaking in California, we had this huge wave of inquiry for not just members, but also people wanting to inquire about buying a franchise. And what we’re doing at the moment is, we have more of a micro cockroach marketing campaign, with lots of smaller influences.
So as we continue to grow our awareness in key markets, Northeast is an excellent example, we do believe that the AUVs will grow. However, one thing to point out is the fact that there is a ceiling on members. We can’t go and sign 7000 members, like a Planet Fitness, we can’t sign 10,000 members, like at Planet Fitness. But what we can do, and what we’ve done extremely successfully in the past, is support our franchisees in opening up a second territory, a second franchise in a territory. So that’s how we see our growth, continuing to move forward as awareness grows.
We have an extremely sophisticated and well thought out marketing plan. I sit back and I think that our marketing to date has probably been on par with great, great, great businesses like Nikes of the world, where we’re replicating their influence model by trying to build that awareness. And truth be told, I spent the weekend with Beckham, who’s opening up his first location, his first F45 in London in two weeks. And the simple narrative was Adam, this is the world’s best workout. And this is coming from a global, this is not just an athlete, global ambassador, who’s extremely excited, but more importantly putting his money behind the business and the opening. So again, simple answer, yes we do believe AUVs will grow as awareness grows. Secondly, we’re doing everything in our power to continue to grow that top of mind awareness. And lastly, we think that we need to continue to replicate what great organizations like Nike and Adidas have done in the past.
Great, helpful. And then Chris, I guess my last question is, did you give the CapEx number that you anticipate for 2022, and then on the well packs, the 1200 you secured obviously gives you a great line of sight to get the openings you need to get done that you say you’re going to get done in 2022, just curious on how you guys think about for the next few years, how do you strategically want to think about securing your well packs so you’re going to kind of do the same thing where you buy them well in advance of the openings for the following year, just kind of curious on how you want to stage your well pack, your purchases, and so on and so forth going forward into the out years? Thanks, guys.
Yes, thanks, Randy. We were not actually disclosing the CapEx guidance for the year. But specifically as it relates to well packs, you’re quite right, we’ve gone out and we’ve secured the entire year’s well pack volumes, about 1200 well packs, and that just gives us a strong level of confidence on ensuring that we have all of the stock on hand to meet this contracted demand that we have this year. We did tap the revolver to purchase that equipment. So that’s all been paid for an audit and it’s all in production, a lot of it’s already arrived, there’s more on the water. So it’s, we’ve secured 2022.
Looking forward, we’ll obviously continue to assess the supply chain landscape. But it’s our expectation that just to ensure that we have adequate levels of stock on hand, we’ll probably always have material six to 12 months worth of contracted demand in our warehouses in our in our strategic locations.
Very helpful. Thanks, guys.
Our next question comes from Max Rakhlenko from Cowen & Company. Max, please go ahead.
Great, thanks a lot. So Adam, maybe the first one for you, but can you provide any additional details around the large multiunit deals that you signed in 4Q? And then for 2022, what do you think the mix will be between large versus smaller deals? Thank you.
Yes, I think it’s a good question. We see the business accelerating with highly sophisticated, well capitalized investors. That’s my first point. The second point that I’ll make is, it’s actually easier to operate a portfolio of F45 that’s greater than 10. And by that, I mean, you can actually establish a small head office. You can have efficiencies with membership sales, marketing. So, really, what we’re trying to do is to continue to assist smaller franchisees. When I say small franchisees, I mean, with fewer multiunit numbers in their portfolio with an exit. So we’re seeing a potential portfolio of roll ups over the next 24 months. And I would expect this year that we will continue to accelerate forward with larger portfolio owners that require somewhere between 20 and 100 franchises each.
If you look at Q4, again, the major transaction that we completed last year was with Club Franchise Group that was completed prior to Q4 and that was for a portfolio of 350 locations. In Q4, we had no major transactions with regard to portfolio acquisitions of over 50 franchises. The way I would look forward though is, I think the average franchisee across the group will own 20 franchises. That’s sort of the zip code that I anticipate. And I’ll pause there and let Chris add any additional color if he has some as well. But again, I hope that goes a long way to answering your question.
Yes Adam, I think the only point I would add is that over 80% of our existing multiunit franchise base has increased with more studios in their portfolio. So we’re expected to [indiscernible] in the detail.
Great, that’s very helpful. And then just big picture with the environment now normalizing curious if the business is scaling, similar to how you previously thought it would or is it still just a little bit too early to tell? Thanks, guys.
Sorry, my phone just broke up. Do you mind repeating that question, my apologies.
Yes, sure. Just curious if the business is now scaling similar to how you thought it would be pre prior to the IPO or is it still too early to tell?
Yes, I think I mean, we were saying we’re not announcing Q1’s sales, but we’re being blown over with the level of interest that we have. And I suppose we believe internally that the high level of confidence is coming off the back of the IPO, because we would argue that we would have the strongest balance sheet in this fitness ecosystem, in comparison to our peers. As Chris mentioned, we had zero debt at the end of Q4. We have tapped our revolver, however, to acquire equipment, so that’s just a timing question. So there’s a tremendous amount of confidence coming from private equity, family office, and sophisticated entrepreneurs flying into our network. And they’re saying that we’ve operated a fiscally conservative business by also balancing this breakneck speed growth. So the answer to your question is, we have unprecedented amounts of franchisee inquiry.
To Randy’s question, we’re doing everything in our power to continue to grow awareness. And lastly, we do believe it comes down to the fact that we had a very successful IPO. It was over four and a half times subscribed where we were able to relieve all of our debt, and continue to prove that we are an extremely fiscally responsible business. And like I said, to echo the point, yet balanced with obviously this breakneck growth we have.
Our next question comes from Jonathan Komp from Baird. Johnson, please go ahead.
Yes, hi. Thank you. Good morning. Chris, can I ask when you look at the fourth quarter, the franchise gross profit performance stands out? Could you just highlight maybe some of the factors that contributed to the strength there? And then when you look at the 2022 total guidance, it looks like the EBITDA margin in total could come back a bit. So could you just highlight first the fourth quarter and then 2022, what you’re expecting for factors that would impact the overall EBITDA margin?
Hi John, how are you? Yes, sure, the gross margins were really impressive in Q4. We had, there’s a couple of factors there. We have standardized if we’re just looking at equipment, we’ve standardized our equipment margins across regions, and we’re going to continue to do that. That’s been an initiative that we’ve undertaken throughout the year. In addition to that, we did have a manufacturing rebate based on a volume metric that we hit the triggered rebate with an equipment provider.
And in addition to that, we also franchise, core franchise revenue was a higher mix of total franchise revenue as was stated previously in prior quarters with giving our franchisees a little bit more time to restart their membership, their post open membership marketing. So that represents core franchise revenue represented a higher mix of overall franchise revenue, which has a higher margin.
In regards to 2022 to EBITDA margin, we have a higher percentage of franchise revenue, which equals higher margins, plus we’re protecting that equipment margin. So I actually think we are we are investing, yes, sorry.
And sorry, just to clarify, are you expecting here, are you expecting the total EBIT — adjusted EBITDA margin to improve or decline and just trying to clarify your expectations there and what would impact that?
Yes, we are obviously investing in some of our new modalities and getting them off the ground. You know, it is our expectation that our EBITDA margins will be up into the 40% range over time. I understand that the guidance is implying that that margin may be slightly lower, but we’re very comfortable with where we’ve set the guidance and we’re very comfortable that we’ve had a really strong year where we’ve outperformed on all of our metrics. And we’re confident that in 2022 we will at a minimum hit these guidance targets.
Yes, that’s really helpful. Thanks for clarifying. And then one other question on 2022, if I look at 2021, you had nice positive adjusted EBITDA, but you had a fairly sizable operating cash outflow. How should we think about that in 2022 in your ability to generate operating cash?
So yes, 2021 obviously had a lot of COVID related fee relief that was obviously one big area that we supported our franchisees throughout what was a difficult period, but the pleasing thing is there that now we’re out the other side of it, all of our franchisees are back at their pre-pandemic levels and performing well. We obviously had a lot of costs associated with our IPO as well, and going public and getting that done in a relatively quick timeframe. So there were factors there that were obviously truly one time that increased our cash outflows through 2021. We think 2022 is going to be a much more normalized state. And we’re very — we love that, our business spins off a ton of free cash flow and we’re looking forward to putting that capital to work this year.
Okay, understood. Thank you.
Our next question comes from Paul Golding from Macquarie. Paul, please go ahead.
Good morning. Thanks so much and congrats on the quarter. I wanted to first drill down a bit more on the equipment margin opportunities here, just the preorder volume on world packs, I wanted to see if you could give some color relative to the 42% gross margin this year, 47% gross margin in 2019, how the cost of inputs rising versus your preorders may be shaking out if it’s not specific, maybe directionally given, I would expect some marginal leverage there in ordering all these world packs ahead of time?
And then secondly, just wanted to see if there was any color you could give, I think out of I think you were giving some color on this earlier in terms of the runway on institutional franchisee opportunity or multiunit franchisee opportunity? I just wanted to see if there’s any color you could give on what your broker is saying in terms of runway for these large institutional units sales, 100 units plus is that one year’s worth or several years worth and then how you see that, given your average commentary was around 20 franchises per owner, and you’ve been doing deals much bigger than that. Thanks so much.
Well, I’ll take the first part of the question, and then I’ll hand it over to Adam to answer the second part. So in regards to world pack, obviously ordering in bulk enables us to realize some cost savings. We’re now fitting three world packs into two containers, which is really defraying some of that cost increase. So and ordering in such bulk from our equipment manufacturers enables us to get as we received this year a rebate and we’re expecting a rebate if we hit certain volume metrics again in 2022.
I think the other point is, we are adding new pieces of equipment to our world pack every year and our price, we will be implementing some price increases on our world pack and we will be protecting that margin. So it’s not reduced beyond where it is today. We will maintain a 40% to 50% margin across our geographies moving forward in the future. So we’re not expecting our world pack margins will increase, sorry decrease and we will ensure that we’re protecting that world pack margin with pricing if required.
Thanks, Chris. And to the second part of your question Paul, we have been working with a very large number of private equity and family offices and we had [indiscernible] be appointed to assist us in that process. And as I’ve mentioned in the past, we’ve been very, very cautious about who we bring on board with regard to buying large portfolios. The performance of our network is really the clutch between our success and failure. So what we are doing is juggling this explosive growth with regard to how many portfolio sales we wish to make. I anticipate F45, probably completing and closing on two major portfolios this year that are greater than a hundred. We have over 20 discussions and term sheets being negotiated at the moment. So we’re being very cautious because we believe that the right, zip code is in that sort of 20 range. And we want highly, really competitive, sophisticated yet experienced operators owning these.
So in some cases you can get well capitalized, sophisticated investors aiming to buy $100 million worth of these studios. However, they may not have a tremendous amount of experience. So really it’s a balancing act between those three criteria. And what we’re seeing at the moment is a tremendous amount of inquiry from our existing network of extremely successful franchisees, wishing to increase the number of units that they currently own. So moving forward I think there’s probably three parts to this answer. It will only really, we’re only really bring in another two may be maximum three major portfolio owners to run parallel with Club Franchise Group that owns 350 [ph].
Number two, I suspect we will see a tremendous amount of growth internally from our current network to increase their multiunit ownership. And then lastly, as I mentioned, demands has never been greater in this business than before. So there’s probably, there’s three key takeaways and I hope that answers your question, Paul.
Yes, thanks so much, Adam. And thanks Chris for the equipment commentary. I guess just a quick follow up to your answer, Adam. Have you seen any interest in institutional franchisees going after the new modalities yet or is it too early to get to that interest?
The answer is we’re not engaging in those conversations yet. That’s my first point. And the reason I say that is we want these new modalities to be as successful as F45. So really what we’re doing is making sure that they’re stress tested, that we have the correct marketing plans in place, and we have the correct results being driven for that membership base that partners into that modality. So really we’re not going to be spending too much time talking about these additional modalities until they have more than 100 franchises open. And then to really zero in on your question, I anticipate us engaging with institutional investors once we have more than a 100 or 200 franchises open in each modality.
Great, thanks so much.
[Operator Instructions] Thank you. Our next question comes from John Ivankoe from JPMorgan. John, please go ahead.
Hi, thank you. In the press release, there was a mention of a change of the definition of franchise open, I think it was as of October 1, 2021. Could you elaborate and I’m sorry if I missed this, could you elaborate specifically how the definition changed?
I can tell you that one. Hi, John. The change related to it was an operational change in that, we can now rely on our CRM to appropriately tag open date. So it was a system efficiency that we’ve been able to realize. So now we are actually tagging the actual open date and it’s exactly the date that the studio opens its stores for operation.
Okay. So in other words, I mean it is open and it’s receiving customers. It just before it was only if it was, I guess, booking $4,500 of revenue a month, now you’re recognizing it basically its grand opening. Correct? Okay, that’s perfect. The credit margins that you alluded to, you alluded to this a couple of times were 60% round numbers in the fourth quarter, how much of that was due that, I guess supplier rebate? I mean, obviously that’s a very high number, to carry forward and I don’t think you’re expecting to carry that number forward.
Yes, John I think the normalized equipment margin is, we’ve always said it’s in that 40% to 50% range. So yes, we finished slightly above for the year at 52.8%. But which was, helped by the rebate. The rebate is based on us hitting certain volume metrics. Obviously we’re now placing large volumes of orders because we’re pulling so much stock forward. And that was a negotiation that commenced in July with our manufacturers and it’s reflective of the full 2021 equipment order volume.
That’s fine. And the final question, I mean, you do have, a young system, but some of your Australia stores are five plus years old. Could you talk about where you guys are in terms of the re-equipped cycle? I mean, is that something that is part of your plan? Are you enforcing that? Should we expect stores at a certain, I guess number of years open to fully re-equip using a new, purchasing a new equipment package at full margin? Just walk us through, I guess that process in Australia firstly and as we think about a couple of years in the model in the U.S. as well.
Hi John, Adam, that’s a good question. We — pre-pandemic we had implemented a refresh process that was mandatory for franchisees. What’s unique about our business, however, is the fact that each piece of equipment has a unique life cycle. So I’ll give you an example. A kettle bell would literally last a nuclear bomb. Like they will last 20 years in comparison to a battle rope, which is 18 months in comparison to a skipping rope, which is 12 months. So what you’ll find is, we have this ongoing refresh process that has all of this equipment being sold at full price. However, because we’ve been through a pandemic, we have been a little bit, we were far more flexible for the last 24-months than what we had anticipated pre-pandemic.
So what, what you’ll have noticed in Australia is the same whether it’s Australia or the U.S. or any of our rest of world countries, is that every franchisee A, is mandated to refresh their equipment, depending on the life cycle, that piece of equipment. B, it will be done at full price with full margin being paid to us; and C, we’re just now re-implementing that mandate, which has been put on pause for the last 24 months. I hope that answers your question there John.
That is the end of the Q&A session today. So I’ll now hand you back over to the management team for any closing remarks.
Yes, thank you very much. Look to all the folks on the call, we’d like to thank you for your time. Like Chris and I have always offered, we’d love to take any of these inquiries offline. We try to make ourselves as available as possible. What’s interesting about this business is the fact that we have excluding two quarters have been growing this business at breakneck speed, like I mentioned in the same breath as being extremely, fiscally responsible.
We’re excited to continue to grow this business because it is extremely portable. We transcend geographies, religions, languages, and we are proving that time and time again by moving into new regions, whether it be the Middle East, Southeast Asia or across, North and South and Central America. With our business, we always put the touch of our success down to the quality of our franchisees and each day we wake up with a mandate to deliver the world’s best workout for those folks and we truly believe we do. There’s a few folks on this call that trains at [ph] F45 two to three times a week, and select F45 over all of our peers and the simple reason and I’ll let this point again is we truly believe it’s the world’s best workout. And again, I’ll just thank you for all of your time and pause for Chris to throw a few comments in if, if he has some.
Yes. I’d just like to echo your comments, Adam and we’re really excited about the year ahead. Thank you for your time today and I’m looking forward to discussing F45 with you later today for those analysts that we’re catching up with after this call and to anyone else, to all the investors out there I’m looking forward to chatting with you over the coming days as well. So thank you very much.
This concludes today’s call. Thank you for joining. You may now disconnect your lines.