Q3 2020 Drive Shack Inc Earnings Call

Ladies and gentlemen, this is the operator, Jamie converts is scheduled to begin momentarily.

Until that time your lines will again be placed on music hold.

Thank you for your patience.

[music].

Good morning, My name is Brandy and I will be your conference operator today.

At this time I would like to cover one to the drive Shack third quarter 2020 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the prepared remarks, there will be a question and answer session instruct.

Instructions will be given at that time.

Today's call is being recorded.

At this time I would like to hand, the call over to Kelly Buck Horne head of Investor Relations Mr. Buck Horne you may begin.

Thank you Brandy and good morning, everyone I would like to welcome you to drive Shack third quarter 2020 earnings call. Joining me today is chief Executive Officer, Hana, Corey and Chief Financial Officer, Mike Nichols.

We have posted an investor supplement on our IR website, and we encourage you to download it now if you have not done so already.

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 the disclaimers in our press release and Investor supplement and to review the risk factors contained in our annual and quarterly reports filed with the FCC with that.

I would like to now turn the call over to Hannah.

Thanks, Kelly good morning, everyone. Thanks for joining us today before we get going I'd like to introduce you all to a couple of people Weve recently added to the team first is Mike Nichols, our new CFO, we're really happy to have Mike on board I know, he's going to add quite a bit of knowledge and experience to the team.

Also here as you've heard is Kelly Buck Horne, our newly appointed head of Investor Relations Kelly brings a lot of great experience with her most recently running investor relations for JC. Penney. We've also recently added check Smith who's come onboard as our new head of HR for both drive Shack and American golf all of these individuals bring a great deal of experience and knowledge to the team and we are.

Really happy to have them with us.

So Q3 was a pivotal quarter for our company not only from a people perspective, but also from a business standpoint. It was the first quarter. Since March that are of course isn't bad news with the exception of Orlando, We're open for a full quarter or.

Our company performed very well in Q3 with total revenue of 66 million down only 11% to Q3 of 2019, driven mainly by a decline in event revenue.

We delivered on completing one of our major strategic funding goals with the celebrate your San Joaquin for 33.6 million in net cash proceeds. This brought our current liquidity as of 10 31 to 44 million and this has given us the ability to restart other strategic initiatives that were previously on hold as it relates to development and operations.

I'm also pleased to announce that we are on a path to reopen Orlando with the target date of December.

So turning to the deck at first trip and he is on page four on the American golf side of our business. We now own one course leased 34 and manage 25 on the entertainment golf side. We currently operate four drive shack the news in Orlando, Raleigh, Richmond, and West Palm Beach, we are committed to leases in New Orleans, and Randall silence.

<unk> Entertainment golf in use and in Dallas, and Charlotte for a pottery benyus dish.

Additionally, we have developed a pipeline of over 60 targets that we are exploring for future pottery been yes.

I'll go into more detail on our plan for pottery shortly.

Turning to page five now and as we've navigated through the Cobi 19 disruption, it's clear that we've emerged as an industry leader in our space.

19, really brought about a shift in consumer preference for outdoor activities that have very limited overlap with other guests.

Well, we provided both drive shack, Andy G.C. is outdoor open air format, and partitioned suite style base at our drive shack facilities.

Oh, So American golf courses have natural limited encores guest guest overlap. This is let us to really outrank, our competitors by offering something that is both the physical activity and social distancing. So people have really been able to get to our been using golf courses and feel that they can do so safely.

Turning to page six I want to discuss how we've executed our growth priorities and then you cobot environment.

As a reminder for the majority of Q2 substantially all of our been using courses were closed we reported having only 12 million of unrestricted cash on hand as of July 31st as a response to the Cobi crisis, we focused on two broad reaching measures to really get us through cobot, which were to focus on preserving and generating liquidity and then I'd be.

And able to re stabilize the business in order to carry out our future business plan.

The first of these measures with all about preserving and generating liquidity, which we have successfully accomplished and continue to maintain since the closures in March we took a very thoughtful but a very aggressive approach when implementing measures to preserve liquidity.

Over the last five months, we work diligently to identify ways to reduce spending without sacrificing our ability to operate or been used safely and effectively we.

We significantly reduced expenses and capital expenditures and focused on lowering our fixed costs lowering field fixed labor costs across agency and drive shack by around 40% versus Q3 of last year.

As mentioned, we also closed the sale of.

Rancho in October, which generated approximately 34 million of net cash proceeds.

So then the second response measure was to re stabilize our business adjusting to current environment to the current environment and positioning ourselves to execute our growth priorities we.

We focused on advancing critical path deliverables for new venue openings like our financing plan, which our new CFO Mike is developing.

At the venue level, we continue to focus on innovative ways to drive traffic and increase revenue. This increase includes launching single day reservations, along with new event packages and promotions, which I'll discuss in greater detail shortly.

As a result of these actions taken over the last several months, we believe that we're poised to advance our plans for growth and 2021.

[noise] after reopening all close courses last quarter. This quarter marked continued momentum for American golf business, which you can see on page eight.

He sees exceptional results highlight the unwavering demand for traditional golf and reinforce it as a top leisure activity in the current environment compared.

Compared to Q3 of last year in Q3 of this year, our public courses saw revenue from greening cart fees up 15%. Despite a reduction in available Tee times and daily fee rounds up 10% on the private side member sales were up 48% and total private rounds were up 25% were really really proud of these results.

Yes.

As far as Q3's produce stronger results in any quarter in 2020 across each category I just mentioned.

On the entertainment golf side of the business. Despite official limitations on being you capacity in group sizes are drive shack in U.S generated 6.2 million of revenue we've.

We've given you both Q1 and Q2 results to look out for comparison on page nine you can really see the upward revenue trend for a drive shack then use across the quarters of this year total.

Total revenue was it 70% of Q1 revenue levels walk in revenue made made up most of this total averaging around 88% of Q1 levels.

Our team has been very focused on creating innovative ways to drive traffic into our menus, which directly contributed to our success. This quarter I'll discuss these initiatives in greater detail later in the presentation.

I want to turn your attention now to the safety standards, we developed across her drive shack. The news on page 10, you said the bald since 'cause it began and we've enhanced our already rigorous safety protocols and have put additional measures in place like the beta Vitor shown on this page in order to make sure that our guests feel safe.

Drive Shack is partially outdoor open air and climate control, which is a notable differentiation for many of our competitors. Unlike traditional bars arcades, our active games give guests the opportunity to get out get moving and be physically active even through co bid we have been able to provide a safe space for social interaction, which has been scarcity in the current environment.

Moving to page 11, now we've had a good number of inquiries asking when Orlando would open and I'm happy to say that day is coming soon and we're targeting an opening date in December as we gear up to reopen we focused on launching initiatives that will increase brand awareness and visits to the menus, along with various revenue driving promotions and events.

We're partnering with a developer of the 17th square mile Master planned city that surrounds our venue to further integrate with the local community we.

We also plan to offer new promotions and experiences, including a game play passed for the local residents live music featuring local artists and new special event packages as well as discounts for Atlanta Airport employees.

We believe that a big key to success in Orlando, we'll be integrating with the community, which we're excited to be able to do now.

We do plan on launching Orlando was similar if not identical promotions that we currently have programmed in our other venues I spoke about driving you didn't revenue in it cobot environment, which we've had recent success doing with one of our latest promotions that you can see outlined on page 12.

Our teams have been hyper focused on developing new offers targeting smaller group gatherings to help drive traffic and generate increased revenue.

We launched our new Czubay package in mid September to encourage smile living bookings across our drive shack locations.

This special lets groups of 10 gas reserve to base and advanced with the food and beverage minimum spend we've.

We've seen very positive results from this promotion so far with event revenue increasing four times since launching the initiative.

Our focus will continue to be on creating new ways to innovate erdman offerings in a cobot environment by focusing on ways to entertain smaller groups safely.

As part of our ongoing efforts to constantly improving the ball. The guest experience. We're very excited to announce that we plan to launch our new online booking platform for single day reservations in December.

To date advanced bookings have only been offered as part of it didn't packages on a call ahead basis and with the Czubay minimum well. These packages have been very successful they don't really solve the need for single base smaller group reservations.

Rolling out reservations will provide a more seamless experience for our guests.

To allow them to have to avoid long wait times.

Also having visibility to our reservation bookings will enhance the predictability of our leap of our labor needs.

Moving to page 14, now in the supplement a big focus for US this quarter has been on innovating new ways for our guests to compete engage.

We're currently developing a new repeatable tournament model for use it all drive shack locations, which will initially launch with two competitions. The dry shampoo ban, which is going to target competitive and more avid golfers then the monster Hunt challenge, which is really geared towards less serious players and non golfer.

We're also any early stages of planning technology that will allow for any new competition between different groups of guests, we really want to offer I guess, new ways to engage socially and competitively by providing new and fun competitive experiences.

So I want to switch gears now to speak in greater detail about are being used in our development plan and first I'd like to talk about the pottery and turning to page 16, we're excited to announce the progress we've made with the pottery. We've included and some high resolution renderings. It no. One has seen publicly before that are in the appendix.

Just to remind everyone. We designed the pottery format for urban cores, where drive Shack, then you wouldn't fit.

This format will expand national store potential due to the vast availability of real estate shorter development times less capital risk and higher development yields despite the disruption and uncertainty cobot has caused we've been extremely focused on advancing the critical path items to keep the pottery. Then he is on track to debut next year.

The Charlotte construction documents are near completion, and we plan to begin the permitting process season in Dallas. The shell building is complete and permitting is underway.

So on page 17, you will see that we outline our full development plan with Beecher been used in New Orleans in Manhattan as well as the two pottery then use we are committed to in Dallas and Charlotte within intention of opening five more pottery and 2021.

At this time, we plan on leaving New Orleans in on hold status. So that we can reallocate our capital to getting the first two pottery menus built this will allow us to establish proof of concept with no additional capital requirements.

The numbers behind the pivot to the pottery format are compelling and are laid out on page 18.

To remind everyone. The pottery will cost around seven to 11 million to build and after tea I believe that cost could be even lower EBITDA is expected to be between two and 3 million per store with an estimated build time of six to nine months, we start generating revenue really quickly.

Drive shack stores cost substantially more and around 25 to 40 million with EBITDA EPS ranging from four to 6 million loss.

While still great numbers. These <unk> these menus take much longer to become revenue generating and with the higher overhead and build costs. The returns are much lower are much slower.

Yes.

Moving now to page 19, our liquidity position has grown substantially better with the sale of Rancho as of October 31st We had 44 million of unrestricted cash on hand, I, leaving Orleans on hold we eliminate the need for an additional capital raise in order to get proof of concept on the pottery experience from there in order to.

Our plan to build the remaining five pottery been using 2021, we only need to secure a 45 million of new capital, which will get us to our plan of seven pottery business well in a normalized world we have meaningful sources of liquidity in the value of our assets. We are currently exploring various options for new capital funding in 2021.

Before I hand, it over to Mike I want to quickly recap how this comes together over the next 12 months as we advance our plans for growth in 2021 with our pottery experience.

I'm on page 20 now.

As I mentioned earlier, our goal is to open seven pottery stores by the end of 2021, we expect the total cost of the project to run approximately 50 million and with the growth plan I've laid out along with the projected economics of our pottery barn use we expect to generate around $30 million of 2021 run rate EBITDA out of 15 times multiple this produces an enterprise value of just.

To over 435 million we.

We believe the path, we're advancing for a pottery experience provides a growth trajectory that is both achievable and highly profitable.

With that I will hand, it over to Mike to go through our results.

Thanks, Hannah and good morning, everyone for those following our presentation I'll start off on page 22.

All age you see courses engine to drive shack venues were open for the entire third quarter and the financial results on both sides of the business were.

Showed some very positive trends with momentum building throughout Q3.

On a total company basis, we generated revenue of 66 million. This represents an 8 million dollar decreased 11% reduction compared to Q3, 2019, which was expected given the unique circumstances at the business unit level. Our entertainment golf segment generated 6.2 million of revenue from our Gen. Two venues with walk in revenue averaging.

8% of Q1 2020 levels. However, Gen. Two total revenue averaged 70% of Q1 levels highlighting the impact of reduced event revenue.

As a reminder, our gen. Two venues were not open for the full quarter. During 2019. So we do not have same benny results versus prior year to report.

On the traditional golf side, we generated 45 million of revenue, excluding manage course reimbursements of approximately $15 million, which is down 10 million or 19% compared to Q3 2019. This is driven largely by the 95% or $10.5 million decrease in the event revenue compared to Q3 2019.

On the corporate side total company EPS DNA came in at $8 million, a decrease of 38% or 5 million from Q3 2019. This is an increase of 17% in Q2 of this year largely the result of lower compensation expense in Q2 during the pandemic shutdown and an increase in Q3 compensation expense as our operations emerge from the Pandemics.

Yeah.

Year to date US DNA of 19 million represents approximately 11 million of savings year over year, as we realigned our team and implemented cost reduction measures.

I want to make one final point on liquidity to preserve our cash during the pandemic shutdown, we significantly reduced spending and continued our efforts to sell our remaining golf course assets. We reported 12 million of unrestricted cash in July and at the end of October we had 44 million of unrestricted cash the increase in cash on hand was primarily the result of 33.

3.6 million of net sale proceeds from our divestment of Rancho San Joaquin.

October.

As Hannah mentioned, we are currently evaluating our options for new capital to complete our development plans and we'll report on that once we have definitive terms with that I'll turn it back to Hannah for closing remarks. Thanks.

Thanks, Mike and thank you all for joining us today with that I'd love to turn it over to the operator for questions.

Thank you and at this time Tuscan audio question. Please press star one on your telephone keypad.

And your first question comes from the line of Eric Wold of B. Riley.

Thank you good morning.

Couple of questions just on the financing in New Orleans, initially again one day.

I heard you correctly I know you mentioned that the.

The funding from the sale leaseback Golf course gets you into the first couple of pottery locations in next year than you need another.

45 million you get through the back half of 21 would that also additional funding also include New Orleans or would that be something separate and then.

Windows and financing for 2022 openings come into play.

Eric how are you and thanks for the question to answer your first question I'll take a stab at this and I'll turn it over to Mike for additional comments, the additional 45 million and raise would be to complete the other five potteries that we have in the pipeline that does not include any type.

The financing number for New Orleans. So you are correct that where we're sitting today will we will absolutely be able to you know get through our first two pottery venues.

Get proof of concept. The additional 45 million would then be where the other five so that does not include New Orleans and in terms of your 2022 question I knew you know we're looking at a lot of different opportunities right now in terms of ways, We can fund and finance the business Mike's been onboard for.

A few weeks now and then and has been working really hard at looking at various opportunities for us I don't know if you have anything to add to that Mike well, certainly 2022 is going to require an additional part of part of that financing will come from the cash flows generated from the countries that we opened in 2021 so.

Really the answer is it's going to be a combination of new capital and capital financing.

Perfect and then just one follow up is is.

New Orleans on hold solely for financial reasons or there is there a chance that that does not continue and is there a deadline in which you would need to reach our construction for kind of your city.

You know two great questions it.

It is on hold right now because we have really seen.

Seeing the need to really get proof of concept for these pottery locations in the world we're living in today with Kobe and obviously, there's a level of uncertainty that we're all living with right now that it's hopefully going away sometime soon but we're operating as if it is not so given that we wanted to reallocate that capital.

Over to you. The first two pottery venues given the fact that were largely pivoting our business model to to opening you know upwards of 50 of them by 2024 really important for us to get proof of concept. So yes, partially financial partially strategic in terms of I think your second question Eric was when.

Is there a timeline on when we would need to restart construction and the the answer internally right. Now. It is no you know we intend to do so we would like to really focus on getting these first two potteries up and running and then reevaluate it at that time.

Perfect and nice job getting this quarter revenue.

Our non-GAAP results [laughter], Thanks, [laughter] thinks our team they did a great job.

Thanks, Eric.

Your next question comes line of Peter <unk>.

Great. Thanks, Thanks for taking my question.

I want to ask about the.

Just to start off the launch of the they package. It looks like you had some success with that.

At least in.

On stuff September can you comment a little bit on.

We're seeing maybe.

As you saw in October.

Success kind of continued a any sort of details around that.

What do you expect the impact.

From this launch.

Margins for the values.

Hi, Peter Great question, and I am very very pleased with the launch of these these packages, who obviously people are not really congregating in large groups, nowadays and and some of the corporate events has kind of falling by the wayside not necessarily because corporations don't want to do them, but.

How many businesses our remote.

And you know, they're just not comfortable in many cases, so we launched its weve seen tremendous success.

And we have seen continued success with these packages to answer. Your first question. We are continuing to try to innovate other ways that we can offer events without them, you know necessarily being large scale events and but we've seen a lot of success with that and we expect it to have a significant impact.

On on our revenue in Q4, given the fact that a lot of folks want to I want to go out during the holidays.

So.

Great success, so far we expect it to continue and and we should expect to see further innovation in this in this area from a.

Okay can you talk at all about what you expect.

Just maybe.

As we exit 2023.

So you know have been open and operational.

From a revenue standpoint, John.

Yes.

Well I think from a from a revenue standpoint, you'll you'll see that these venues in total are running at a little over 6 million in revenue for the quarter, we expect sets or to ramp up as we emerge from cold and completely. So I think you can take 2323.

Numbers based at their percentage run rate against Q1, and extrapolate those out as we go forward.

And Peter and I, if I'm if I'm understanding your question correctly, you are asking for 2021 run rate numbers. We've we've included Orlando in that considering we are opening and sometime in December [noise].

It's a modest amount and that we have included it and we're expecting about 13 million run rate and in EBITDA from our from our vineyards next year.

Okay Oh.

All right so.

Uh huh.

Just talk a little bit about Orlando, and maybe just give a little bit more details around.

What's changed is your expectation that Orlando.

From a cash flow positive you know a year from now or is that still expected that you know Orlando.

More of a a cash neutral type event.

Yeah, you know obviously, we wanted to be cash flow positive and we're working very very hard to get there and right now we're expecting a very modest amount to be in the in the green positive.

But you know not too far over over the breakeven point is what I'll say now.

We're obviously working towards that and we've put a lot of things into place and we're in the process of putting even more into place prior to our opening in December and will continue to to kind of revisit it to see what we can do and and changing what levers we can pull in order to make that many more successful were also.

So anticipating putting some form of these mini golf holes into Orlando.

As an additional as an additional draw. However, we're not we haven't committed to a date to do that yet we want to get open first and see how everything is going before we you know funnel more capital into.

All right. Thank you very much horse.

Of course.

Hi, Ken.

Please press star one on your telephone keypad.

At this time I'm showing no further questions I would now turn the call back over to Kelly I'm, sorry, you have another question.

At this time I'd like turn the call back over to Kelly Buck Horne for any closing remarks.

Thank you brandy and we'd like to thank everybody for dialing in and joining us today and we look forward to catching up with you next quarter. Thank you.

Thank you that does conclude today's conference call you may now disconnect.