Q3 2019 Earnings Call

All lines have been placed on mute to prevent any background noise. After the prepared remarks, we will have a question and answer a period instructions will be given at that time.

Today's call is being recorded.

Thank you at this time I'd like to hand, the call over to Austin <unk>.

That's really Shannon. Please go ahead ma'am.

Thank you and good morning, everyone I'd like to welcome you to drive Shack third quarter 2019 earnings call. Joining me here today or was it in our chairman of the board and inquiry or Chief Executive Officer, and President David Here really our Chief Financial Officer, we have posted an investor supplement on our website, which we encourage you to download.

I have not already done so I would like to point out that certain remarks made today will include forward looking statements.

Actual results may differ materially from those considered by these statements. We encourage you to review this gamers in our press release and Investor supplement interview the risks factors contained in our annual and quarterly reports filed with the FCC now I would like to turn the call over to us.

Great. Thanks, Austin, just a real briefly to introduce the called I'm sure that many of you saw the announced yesterday that they can they has decided to retire from the company as we announced in our last call can have taken to leave of absence, whose dealing with lots of personal challenges and whatnot as life and health related stuff and so we took some time on.

Often.

The ended that purity concluded the right thing do was to go ahead and retire move on and we think can for his Oh. His leadership, while he was here and think he gave us a great platform to build off folks feel extremely fortunate that we have in house, so a great replacement oh that personalities.

The Santa.

And it was a more chief of staff at a new fortress energy for the year prior to joining here. She got a lot of direct exposure to our company as we went through an IPO process. So she saw a lot of the the aspect to the public company stuff that were things that you need to going on her her experiences and in background.

Prior to that though and I didn't need me falling and she was the she's executive a top golf from 2013 to 2018, she oversaw both national International operations.

Was the overlap loved the opening over 20 top golf locations globally, including the flagship venue on Las Vegas was assets.

So she has obviously tremendous experience about this in between the direct personal experience in exposure had tour and the time and she is working with us at new fortress and what I've seen here I feel like we're very very fortunate to have are in place here and I think frankly, the success of the businesses had and this has been a terrific quarter now without stealing the Thunder I'll pass it over there is no part.

Part of a function of both her and her team issues are somewhere around there. So we got a majority of.

Thanks, so much less after that introduction I'm really actually very excited and honored to be stepping into the CEO role here and I know that I along with the others. It this organization certainly which can the best in his retirement with that I want to say good morning to everyone and thank you for joining dry shacks third quarter earnings call, we have quite a bit to talk about today after it.

Very busy and productive quarter, we feel really great about the quarter and where our business is headed so first I'm going to start with the short summary of our third quarter highlights and then I'll discuss updates across the business.

Well, then handed over to David to take their financial targets and capital plan.

Burst, taking a look at our third quarter highlights we're thrilled to share that we have successfully opened our new generation 2.0 vineyards in Raleigh, Richmond, and west Com enable significantly outperformed expectations, beating our projected revenue plan by approximately 21% when speak more to that shortly.

In addition to the opening of these three core stores. We've also made significant strides in the development of our new entertainment experience the urban box and are working towards our goal with opening three of these venues by the end of 2020.

Finally, as we look at the traditional golf arm of our business. They continue to perform incredibly well growing our players club membership base by 6% as compared to Q3 of last year.

So moving on page three of the supplement now, which really showcases the exceptional results, we achieved across our new store openings.

Since reporting last quarter, we successfully opened our generation two point of any is the first opening was in Raleigh on August 20, Threerd Raleigh was followed shortly thereafter by Richmond on September 20, <unk> and lastly, we opened West Palm Beach on October 18th since last Friday, we have a cheap yet revenues at $6.5 million.

Beating our plan by approximately 21% and sending us on the path to exceed our Q4 revenue targets.

We're on pace to achieve an average EBITDA at 46 million at each of these venues with yields of 10% to 15% and 2020 of which we couldn't be more excited for for it.

As a reminder, Orlando has served as our beta site. It successfully allowed us to test our technology and product offerings, especially ahead of these 2019 binney openings.

In late September we made the decision to temporarily closed Orlando in order to retrofit the venue at 2.0 enhancements.

Most notably we integrate attract men are exclusive provider ball tracking technology.

Track men combined abrasive made to our proprietary gaming platform will provide a more consistent engaging guest experience, which we believe will result in extended visit times and an increase to spend per visit in Orlando.

Well, we're thrilled by the success of our new stores. Thus far we are also continuously looking for ways to enhance our beanies based on learnings and guest feedback.

We're currently in the process of developing new games for the role that for rollout beginning in Q4 up this year. The guest feedback so far regarding the games has been really positive yes, it's shown exceptional interest for less traditional golf games I'm like Monster Hunt and shock, which we focus on developing more at which we will focus on developing more out in the near term by 20.

He 20, our goal is to debut more games like this every quarter.

Another update you should expect to see by the end of Q1 2020, as a new food and beverage menu, we're going to be focusing on offering more items that are made in house, including some healthier options. We're looking at the data that we had around what are what items. Our guests are buying and using that helped guide to decisions, we're making to reduce the menu size.

Narrowing the number of items on the menu, where it's going to help ensure consistent high quality execution broadcast.

And lastly, we are working very diligently to get online reservations rolled out by the ended Q2 2020. This one card hope to alleviate long wait times never guests are experiencing in our new venues due to their popularity.

Moving to the next day to the supplement to page five I want to spend to meet you minutes talking about our urban box experience, which we first spoke about last quarter I.

I drive Shack, a key priority has been and we'll continue to be innovation.

Urban box focus will be to provide a social INTECH enhanced mini golf experience with really exceptional food and beverage.

We're taking the same expertise we've used to develop our core stores and are planning to smaller indoor location across more than 50 potential markets in the United States.

These are ideal for densely populated and highly trafficked urban locations, where one of our core stores would not fit.

The urban box will significantly increase our store good growth potential due to the vast availability of retail space shorter development timelines and less capital rest.

Since the last call, we've really focused on four key deliverables as it pertains to the urban box all of which are underway.

First we needed to identify and secured technology for ball tracking an automatic scoring.

Second we wanted to get our architects and of course designers identified and focused on helping to determine the binney format lay out in five.

Third we needed to identify potential real estate and to create test fit and lastly, we wanted to selected name and get started on the trade Mac trademark registration process.

So because of the hard work of our talented team all four of these deliverables are well underway and we expect to have three then he's opened by the end of next year.

As we talk about our development I went to point out that our strategy is to continue opening our core 70 to 90, plus Bay drive shack facilities, while simultaneously developing an opening or a big box locations.

We already have the for previously mentioned core drive shack locations in Orlando, Florida, Raleigh, North Carolina, Richmond, Virginia, and West Palm Beach, Florida.

As we completed the builds of each of these things we had our construction teams work hand in hand, with our openings team in order to ensure a clean handoff, we've really made it a priority to ensure both about both our operations and development teams are stocked it experienced players and to do so we feel both teams with veterans from other leading multi unit businesses. This really played a critical role and.

Successive these getting these venues as Ben.

We also have where we've also committed to four additional beneath New Orleans broke ground earlier this year and plan for 2020 opening Chicago, which is planned for 2021 opening in Newport Beach in Manhattan, which are both expected to open in 2022 the map on page six in the supplement illustrates both the markets that we are already N.

As well as the markets, we are considering for either the urban box or a course store across the U.S.

As a number of contracts under negotiation keep growing we will continue to announce new deals at their signed.

[noise] since joining the drive shack team I've, often asked what differentiates us from the competition and I want to spend a minute talking about that now.

We think about the success of our new Corbin used to debut of the urban box along with the success of our traditional golf business in AG C.

It is very clear that drive shack has especially differentiated offering as compared to the competition for a few reasons.

As I touched on earlier, we are the exclusive entertainment golf partner Trochmann. The accuracy of track Man's radar based technology is unrivaled and we are actively looking at ways to incorporate their tech across our golf platform, including our traditional golf courses.

Mcmanus used by 90% of P.J., two approaches and works with some of the world's largest broadcast companies, including the golf channel in U.S.P. Then they also work with top equipment manufacturers, including Callaway tailor made entitled list.

We've incorporated try enhanced truck man gaming software that allows our gas the opportunity to play virtual versions of real golf courses that exist around the world alongside these trochmann games, we continue to innovate our own games with our proprietary gaming software.

This allows us quite a bit of flexibility not only around modification, but also creation of new games, allowing us to build gains relatively easy based on what guests want guests want and what is on trend.

Our gaming software has been designed to consistently refresh update and rollout new games, which we believe will be a key driver of year over year same store sales growth in the future.

I've discussed we're launching the new product innovation with the urban box, which is an already proven concept in Europe and one we're really excited about.

We're also the only company to offer a truly integrated traditional and entertainment golf proposition, we have unique ability to take over existing ranges in courses and then manage and operate the property through our traditional golf arm until drive shack is ready to break ground.

Additionally, through egcs relationships with local municipalities and government, we have access to real estate that others may not.

Finally players club, which is agencies public subscription program continues to grow their membership base and it's a leading do subscription model in the golf industry.

Before I turn it over to David I, just want to take a moment to think all of our hardworking exceptional associates in managers across our big news and the corporate office as well as the folks trying to traditional golf business at age you see.

They are really the motor of this business and I'm. So proud to be a part of this team we really have to not be more excited about what's to come and with that cured David Hemmerle.

Thanks, Anna and I'm on page eight for those of you following on the supplement.

So its fantasize, we're really excited about the initial results of our Gen 2.0 vendors because they're right on track to achieve our target economics and Mr. review those for our core venues and that's the traditional drive sucks up into a 90 day plus.

We are expecting development costs of $25 million to $40 million with site level EBITDA of four to 7 million and development yield to 10% to 20%.

For our urban box products were expecting development costs of six to 10 million site level EBITDA of two to 3 million and development yield to 25% to 35%.

The urban box development yields are higher given the cost to build is driven by smaller size and our ability to go and into existing spaces, which often come with kind of inside.

Those lower build costs combined with strong topline revenue potential and strong margins.

Well deliver higher development yields relative to the Corbin.

Moving onto page nine we're very excited about the prospects for the growth of our entertainment golf business, our current business plan.

Includes a development plan that gets achieved 30 units by 2022.

We plan to scale, our core drive shack business by one to four yet venues per year with urban box targeting three venues next year 2020, and wrapping up faster seven to 10 units in 2021 beyond in terms of the cost of development that will be between 350, and 375 million and we expect to fund.

This with existing cash on hand.

That and our ability to monetize our two remaining own courses, which we estimate have value between 45 and $65 million.

Moving on to page Sun.

You know when things, we we've talked about in the last few called is our transformation of our business from a traditional golf business to an entertainment golf business.

As mentioned, we've achieved our goal of selling 24 of our 26 owned golf courses for $170 million and that's been used to fund the growth of our entertainment business and as you know, we opened or let our first entertainment golf and Orlando in April 2018, and the three Gen. Two units this year as you look good.

Ford.

Between 2020 in 2022, the expansion of our entertainment golf business will be very rapid going from eight units to 30 by 2022 that will lead to a total company revenue of approximately 570 million.

Colors, and a mix of revenue of two thirds entertainment golf and one third traditional golf and that transformation.

Yes.

Moving onto page 11.

As we think about our the value potential for the business in 2022, we estimate an EBITDA of 95 million based upon the revenues I just discussed that is broken into our core drive shack business estimated 10 new units.

Approximately 5 million fruit per store.

Our targeted 20 urban boxes by 2022 at approximately two and a half million.

With our American golf business estimate at 35 million, which is 190 million in revenues that of course, the EBITDA margin of 15% to 20% and then our SGN a cost we estimate to be approximately 40 million, which is targeted at 5% to 10% of total company revenues.

Given all of that we expect EBITDA of approximately 95 million. If we if we consider the trading multiples of other high Anna or high growth Entertainment multi unit businesses a between 10 and 15 times. We believe there is significant upside to our current share price of approximately two to three times.

With that I will turn call back over to the outbreak.

Thank you at this time, we'll open the call for questions and answers if you'd like to ask a question. Please press Star then the number one on your telephone keypad again, not a star one to ask a question.

Your first question comes from the line of Aaron Heck of JMP Securities.

Good morning, Thanks for taking my questions.

Hi, good morning.

So when I look at the development pipeline maps in the supplement looks like a couple of the future sites that we previously saw their Houston in Portland had been removed from that list.

What caused the sites to be removed anything we should take away from that in terms of for future development.

Hi, I'm, you know of Rollouts changed at all.

Hi, Aaron and its Hana. Thanks, that's a really good question you're right previously we had explored sites and Beaverton, Oregon Stopper, Texas in Bloomington, Minnesota, a these markets are absolutely still under consideration, but the rollout of the urban box format has provided us some additional flexibility in the way that we're able to look at real estate.

So for example regarding the stoppage side, there's actually three competing stores in the Houston I must say, so instead of adding a fourth large format Entertainment. Gol then yeah, we saw an opportunity to be instead, the first indoor putting concept.

And decide we're looking at and Beaver 10, with about 20 minutes away from Portland, ER or urban core and about 15 minutes away from a competitor store. So here are the urban box would provide us with an opportunity to be at the core Portland with more exposure to the guests that we're targeting so really in short we plan on continuing to proceed.

These markets, but we'll look for potential urban box locations instead of the course store locations in those markets in particular in reference to your question about the development timeline and whether we feel that that is going to shift at all and the answer to that is absolutely not we actually expect the development of the urban box.

Experience is rolling out concept to be much faster than the one of the of course stories in the big boxes.

Gotcha, obviously.

Given the numbers you put out there the urban box concepts.

Higher return on investment.

And then allows them to drive shack venue.

If you see some early returns are outsized performance on those 2020 urban box deliveries would it would it be logical.

Rollout more goods venues quicker than ever even talking about now given smaller upfront capital costs and those higher returns.

Yeah, absolutely. So next year again, we're aiming to open three of the urban box stores by the end of next year and we believe that our timeline can actually be much more aggressive and especially given the shorter development times and b and the the cheaper cost to build and also to be available.

Many of the retail real estate across America right now.

Right.

And.

Staying on that entertainment golf side do you think.

There's an opportunity for more urban box type concepts, not just maybe golf related.

But is there other entertainment related box concepts out there that you guys are thinking about or considering and then what do you think about.

This.

Called an ancillary business line outside of the traditional drives Jack.

What do you think these other venues can represent as a percentage of the total company when everything kind of stabilized.

Yeah questions and I think right now where we were definitely right now focused on the golf and the golf Entertainment space, but our goal is to really entertain people and to be the first thing people think about when they are deciding how to spend their time off with their friends and family. So right now we're fulfilling that go through entertainment golf and.

I'll sit through you know agency in traditional golf, but we would certainly can certainly envision a future where offering becomes more diversified and robust.

Speaking to where we are currently we're proactively thinking about how we can roll out and you suite of games every quarter and our intently focused on providing original and and highly engaging games on a regular basis for our guests.

So we definitely do you see a world, where we incorporate additional competitive socializing and entertainment offerings in entertainment and right now in the near term obviously, our focus is on further diversifying and those in the Gulf space through our games in our experience.

Gotcha, and then in terms of.

Financing the growth obviously you guys.

Good job monetizing the golf courses thus far.

Some cash from that.

How would you describe future funding plans between the cash you have right now and whether you'd be looking at dad or some other options in the future I mean, just holistically how would you tell people think about that.

Yeah earn its David Yeah, I think you know we're excited about the growth plans and it is going to require some additional financing other than that core sales. So we're looking at data asked about that as an option. We still do you have.

Two on courses Romanian that we could potentially monetize and as we move forward, we will be generating free cash flow as we move through the business plans. So it'll be a combination, but I would say that we are looking at different that options for I would say the near to medium term.

Gotcha, that's all I got your share at the time and nice quarter.

Thank you so much.

Your next question comes from the line of George Kelly of Imperial capital.

Hi, everyone. Thanks for taking my questions.

Hi, Hi, George.

So I have a few for your first off just start with the Gulf Entertainment venues first for Hanna.

I know you've opened a lot of these of these venues before.

The first few months after a short opens.

Does that give you how much confidence do you have after seeing that sort of opening in the future.

Productivity, if that's right.

Yeah, that's a really good question and it gives us in short a lot of competence, but even before we open the venue, we're really able to understand how successful it will or could be based on very early Preopening result things like.

Our hiring numbers are pre opening event sales and which are essentially events that were selling to corporate and social guests and better pre booking.

And so we have a lot of early indicators before we even opened the doors, but to address your question specifically once we do open there a number of different.

Metrics and and things that we can look out to determine how successful if any will be in the future.

And a lot of those are identified fairly quickly and the ones. We've identified and these last few venues and in Raleigh, Richmond, and West Palm specifically, we have a lot of fade a lot of faith in their ability to to go forward and to be very very successful in part based.

On their current sales and and also because of their consistently strong pipeline as event cells that are.

In the future into next year.

Okay. Okay. That's helpful. And then next question and I don't have the slide deck in front of me So may very well, if I've gone through there but.

Are you only opening one a venue in 2020 and one in 2021 or are there New Orleans, and Chicago or are there other things that you plan on on introducing a in those two years.

Yeah, that's a really good question and yeah I don't think it was outward we in the deck. So you did not miss side and 2020, we will be only opening New Orleans as a core drive shack. So that will open next year, we've already broken ground on that this year and we're really excited that communities really excited to habits and as are we.

We're very excited to be in New Orleans, and in addition to that drive core drive Shack, we will be opening three urban box location.

If you look at 2021, and we have Chicago identified as opening and 2021. We're also looking at additional and possibilities for core drive shacks in that in that here as well as and where our plans are to open.

Anywhere from five to 10 urban boxes.

We expect as we move forward into 2022 in in two years beyond and for our pipeline to only grow.

Okay, Okay and then.

Question about the urban box I'm still unclear.

What it is I mean, I understand it's a golf experience.

The return profile et cetera, but can you just explain briefly you know.

What is I mean is it mostly a restaurant with sort of in area Entertainment concept on the side in a bar and sports bar kind of femur.

Oh this looks like.

Yeah, we were hoping to be able to give and some very specific clarity on that on our next earnings call them or further into the process, but broadly speaking when it when and what I can say right now is that the urban box is really going to be focused on and mini golf and.

And putting experience that brings people together and it's going to be tech enabled so that means you won't have to carry around a score card.

Which allows you the opportunity to freely eat and drink and socialize with your with your friends and family versus worrying about you know if your friend is cheating or who's winning that's all taking care of for Ya and we're going to be hyper focused on food and beverage offering any spaces and are aiming to provide.

And I'm really elevated and differentiated food and beverage offerings.

And so the plan would be George if you were coming with your friends he would.

Maybe come on a Saturday night, you would come in and enjoy the bar and have some food and then play around or to have competitive mini golf said that you could and really engage with with your friends and maybe even better see who win.

Thank you. This concludes today's question and answer session I would now like to turn the call back to often pruitt for any further remarks.

Thank you all for participating in today's conference call and we look forward to updating you after Q4.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.