Q3 2022 Membership Collective Group Inc Earnings Call

Hello, My name is Chris and I'll be your conference operator today at this.

I would like to welcome everyone to the membership collective groups third quarter 2022 results conference call and webcast.

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

After the Speakers' remarks, there'll be a question and answer session.

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Please note you may also submit your questions through the webcast. Thank.

Thank you Thomas Allen Chief Financial Officer, you May begin.

Thank you for joining us today to discuss the membership collective groups third quarter 2022 financial results. My name is Thomas Allen and I'm, The Chief Financial Officer I'm here. This morning, with Nick Jones, our founder Andrew Carnie, our president and incoming CEO.

Some of today's statements may be forward looking and actual results may differ materially due to a number of risks and uncertainties, including those discussed in our most recent quarterly report on Form 10-Q filed today November 16 2022.

Any forward looking statements represent our views only as of today and we assume no obligation to update any forward looking statements if our views change.

By now you should have access to our third quarter 2022 earnings release, which can be found a membership collective group dot com in the news and events section.

We have posted our third quarter 2022 earnings presentation, which can also be found on the news and events section on our site.

During the call. We will also refer to certain non-GAAP financial measures. These non-GAAP measures should be hit centered in addition to and not as a substitute for or in isolation from our GAAP results.

Reconciliation to the most comparable GAAP measures are available in today's earnings press release, now, let me hand, it over to Nick.

Thanks, Thomas and good morning, everyone I'm talking to you for the first time as justified or not let's see.

It was four years ago, we had Andrew colony to help me deliver significant growth, we had planned and I'm. So pleased to announce that he is now stepping into the CEO role well done Andrew.

Having worked closely with Andrew I'm Super confident that the M. C. G will go from strength to strength under his leadership and I really look forward to working with him and the rest of the team to help support that success.

As I step back from the day to day running of the company I will focus on doing what I love doing for the last 27 years designing new houses keeping members at the heart of everything we do and motivating our people.

With my recent diagnosis and successful recovery from prostate cancer I spoke with our executive Chairman and the board and agreed the time was right for me to transition.

Since I started so our house I've always been obsessed about what our members want and I'm really proud of what we have achieved Andrew over to you.

Thanks, Nick I want to take a moment to thank Keith as you head into the next chapter has found that.

You set a really high bar when it comes to creating and scaling our global membership business and I'm really humbled as I step into the role of CEO and I'm excited to partner with you Nick.

This is a unique business has huge opportunities ahead of it. It has all come from Nick's original vision, So house and my focus is on enhancing and growing our membership whilst delivering great profitability.

And I've spent the last few months with our executive Chairman, one battle, Nick and I see any team putting together a plan based upon analyzing our business. How members are using the houses using focus groups and our first global member survey I'll briefly touch on third quarter results before I give you a more detailed update on our future plans.

So here are the things we continue to be proud of in the quarter.

So how's mem sheet grade all my 30% year over year and total M. C. G. Membership grew 46% year on year, basically reaching record highs even with the extremely strong membership Grace O M. C. G. Waitlist is an all time high and in terrific shape, reaching 85000 by the end of the quarter up from eight to 2000 lots.

Quarter retention remained at around 95% despite concerns of a tougher economic environment, which shows how sticky our membership base really is.

Revenue grew almost 50% around 75% at constant currency.

Unfortunately, while our adjusted EBITDA grew 11 million year on year, and 5 million quarter on quarter to 20 million profits are not where we'd like them to be and we will do better and he saw highest focuses as a public company.

Now getting onto a data strategy going forward, we're focusing obsessively on two things growing and enhancing the value of a membership and driving operational excellence to improve profitability, which in turn will drive higher shareholder returns. This will now involve a more streamlined and data driven approach to reducing expenses without compromising what matters most to them.

Members on.

Our membership we plan to expand our physical footprint more efficiently by providing members with unique experiences and exceptional service, we need to be more targeted and given on them is what they really want and in the way we invest in the member experience.

This will involve a great focus on the Soho house business as the key driver of future growth and improve profitability.

That's not to say, we're not excited about all of the existing businesses. Sculpsure is just came off its best season ever while Soho themselves Green around 90% in October however, more of my time will be focused on the core so house business.

Secondly, we're really pleased with how we continue to live in membership and top line growth, we know with more to do on profitability and we're announcing a series of initiatives today that will help drive enhanced profitability and more on that shortly.

We believe we can deliver first class member experience, while also being relentless I'm optimizing revenues improving margins and our profits.

We've always been a business that is centered around what members want and our recent first global member survey members told US we get a lot of things right. They love getting access to the houses around the world not surprising given our membership is around 8% every house membership they loved the design of our clubs the atmosphere we create in.

The members that we bring together and the events. We host that said, we'll be working through some of the things they'd like to see us improve specifically in service programming, a greater choice of events and the broader food offering. They also said they live is opening new houses, but opening them well. We have opened five new houses this year and demand has been very strong Nashville.

Already has over two and a half thousand members right in 1500, and Hollaway house over thousand and Copenhagen and bottom approaching 1000. All ahead of our typical maturation cause which has houses starting at 750 members and ramping up to 1005 hundred at the end of the first year. We're on track to deliver seven neustar houses in 2002.

<unk>, which includes two further openings slated before year end Miami to house in Stockholm.

While this is down slightly from our prior guidance of nine we've decided to delay Bangkok in Mexico City to make sure. We give members the best possible experience from day, one and we expect both houses to open in early 2023 to give members the best possible experience and to ensure reduced pressure on the organization. We are returning to our previous.

Target of five to seven new houses a year and this is in line with our already signed pipeline for the next three years.

At the same time, our cities that houses all said, we will continue to provide a clear path for long term growth at a minimal expense to the company.

As parts of prioritizing the right investments for our business and our members we are no longer pursuing the external digital membership.

Now onto driving operational excellence to improve profitability, we have taken some immediate actions to ensure we give our members what they want but do so in a more efficient way, let me run you through a few of them.

We are reducing our in house operating expenses post Covid, we rushed to get all our houses open as quickly as possible in the manner. We will use to operating them. In addition, it was a tough and unpredictable labor market, which means our costs increased significantly.

What we've learned is our members all using our houses just as much about at different times. So we're adjusting our cost base accordingly.

Our recent global member survey highlighted that members place less value on aspects outside our houses.

With that in mind, we're refocusing our G&A with targeted reductions on content digital and other corporate expenses without impacting the member experience for example, where would you see our editorial content spend by about 40% going forward.

We can raise prices, but the real opportunity is to run a more efficient business. One final example in recent months, we've found additional sizable opportunities or cross all our F&B procurement.

The intention behind these actions is to enhance member value and drive profits for the business. If these do not fill those goals. Then we will not pursue them. These changes will take time to feed through the benefits will principally start to be felt in 2023 onwards. We are confident that this will help us generate stronger more consistent earnings going forward and achieving.

10% adjusted EBITDA margins in 2023, now let me pass it onto Thomas to give you more detail on third quarter results and updated guidance.

Thanks, Andrew total revenue grew almost 50% or approximately 75% at constant currency.

Revenues beat consensus expectations, despite $10 million of additional FX headwinds compared to when we last guided membership in house and other revenues rose, 39%, 62% and 41% year over year, respectively, or over 60%, 90% and 65% in constant currency.

Membership at in House revenue came in line with consensus despite additional FX headwinds while other revenue beat.

This level contribution increased 36% year over year, but disappointingly margins felt approximate 200 basis points as we over compensated on expenses, especially wages as business volumes returned.

Are their contribution grew 66% with margins increasing approximately 300 basis points supported by strong results for Scorpius.

Giving more details on revenue total membership revenue increased $20 million year over year supported by strong growth in New House members legacy House members and new membership. We also continued to benefit from that price increases earlier in the year and another reduction in frozen membership.

Frozen members as a percentage of total members of that 1.4% well below pre COVID-19 levels, highlighting the increased value for our members and having an active membership.

In house revenues grew $42 million year over year benefiting from six new houses stronger food and beverage demand and 18% higher like for like Revpar versus third quarter, 'twenty, 'twenty, one and 23% higher than third quarter and 19. Despite these increases our average daily rate indexes suggests or we are still providing significant value to them.

Members with our bedrooms.

Other revenues were up $25 million year over year helped by strong Scorpius and so her AUM growth public restaurants, and townhouse revenues and increased fees from our management contracts. We also opened the line San Francisco in the quarter.

Our third quarter reported adjusted EBITDA was $20 million $5 million higher quarter over quarter and $11 million year over year as we benefited from continued strong membership and other revenue growth.

However, our adjusted EBITA was below consensus, which was $26 million and similarly below our internal expectations.

Versus when we guided last quarter of 2022 FX was approximately another million dollar headwind in <unk> and we expect a relatively similar imagine for Q.

And as Andrew mentioned earlier, we've continued to have to adjust to the shifts in consumer behavior since COVID-19 and in ways. We overcompensated, if our sewer how's wages as a percentage of revenue had been where we want them to be we would have generated approximately $7 million of additional adjusted EBITDA in the quarter.

On to guidance for the balance of this year, which reflects both the strong momentum of membership and retention, we are seeing as well as the challenges we have been having on the cost side. We are on track to deliver our total so house members target of 160 to 165000 members by year end. Despite opening two fewer houses than we had previously expect.

And looking at 'twenty 'twenty, three given our confidence from our waitlist and retention, we're introducing year end 'twenty 'twenty three so as membership guidance of approximately 190000 members in line with consensus.

We are reiterating our 2022 membership in total revenue targets. This is despite the fact that when we lost that guidance, we assume the pound dollar exchange rate would be $1.21. So that's a year and a euro dollar exchange rate would be a dollar or two we had a $10 million FX hit to revenue and three Q embracing forcier FX on bank's forecasts expect another approximately 18.

Million dollar impact in <unk> using a dollar of four for pound dollar in 95 cents for Euro dollar.

On adjusted EBITDA, we are cutting our guidance from $70 million to $80 million to $55 to 63.

Three Q EBITDA was disappointing and while we have a clear plan in place we expect it to take a few months to start to really show results.

We expect to reach over 10% adjusted EBITDA margins in 2023.

So what would we like to leave you with today, it's been a good quarter for continued momentum in membership growth recurring revenues, our attention with future demand through our waitlist remaining very strong.

We have clear strategic priorities in place to generate greater profit and free cash flow and in turn drive shareholder returns.

We are laser focused on delivering for our members and growing value of the membership experience.

And as Andrew said, we are confident we can deliver a first class membership experience, while also being relentless on optimizing revenues improving margins and generating higher profits.

With that we will now open up to questions. Operator can we take the first question. Please.

Minor you can either ask your questions over the phone or submit them over the webcast.

Thank you and as a reminder to ask a question over the phone. Please press star one on your telephone keypad.

First question is from Shaun Kelley with Bank of America. Your line is open.

Okay.

Hi, good afternoon, everyone.

Thank you for all the color and Nick.

Obviously, you've been an inspiration to an entire generation here. So thanks for all your efforts and continue to look forward to see some of your revision coming together in some of the houses here.

If I if I could.

Yes, Andrew.

I'm not sure if this brand or for Thomas.

Could you just give us your maybe your broader thoughts as we think about the.

The impact at the house level of some of the operating changes you're contemplating here you really what I'm thinking about contribution margins, which clearly were a little disappointed with some of the headwinds in the third quarter help us think about just sort of how you think about the four wall model as we move out to 2023 and you start to optimize.

The things you want to do but if labor is the key linchpin help us balance that with with obviously not compromising on service, which we know is pretty paramount here to the model.

Yeah, So I would say that one Sheila and good to hear from you. So if you think about coming out of Covid. We we wanted to houses to be shifted to pad for our members. When they came back. So we you know and it's very tough labor market. So what we've realized.

Last couple of months is that our.

Our members all using our houses differently. The footfall is still the same if not greater than 2019, but the slightly easing them differently coming out of Covid.

And what we can be much more.

Focused stone and improve upon is optimizing all house wages and expenses based on when members visit our houses are the most.

That is it that's one of the biggest things that we control and we can do better on our ready to radio and are forecasting.

Optimizing when we open our houses and closeout houses in each house is different so we've analyzed.

Each hasn't quite a lot of detail to come up with a plan that we're implementing second if you think about our G&A you know we've been investing heavily over the last few years in our content platform in a lot of our digital initiatives and like I said one.

My pre recording.

Turning to a lot of members now and they theyre less interested in that so that's the one area that we can really pull back on which will help again.

On a cost and becoming more streamlined and efficient and then secondly.

Or thirdly, as Thomas mentioned, we were getting back to $5 seven houses a year and the reason we're doing that.

As we want to take some pressure off our organization.

We want to take so we want to be streamline we won't have the right cost base and eight to 10 was with was putting too much pressure on for us. So those three things combined are meaningful for us and Thats why that is forming the basis of our plan going forward into 2023.

Okay.

And maybe just as my follow up Thomas might be for you, but just thinking about some of those G&A changes does this is this significant enough that G&A dollars could actually decline year over year, maybe help us put some guideposts around what this can need for the broader organization here, maybe a little preliminary for guidance, but just any any sort of ballpark on <unk>.

<unk> of what this could mean at the G&A level.

Sean So our actions are definitely being put in place to streamline.

<unk> DNA.

One that you have im looking at it on a on a consolidated basis says.

The support office is broadly that are included in our consolidated numbers. So if you think about next year, we're expanding in Latin America. So that's going to be included in G&A.

But we are seeing meaningful savings there and.

I'd expect.

I expect a number of savings in G&A.

Okay.

Thank you very much.

The next question is from Sharon Zackfia with William Blair. Your line is open.

Hi, Thank you I guess I'm curious given the state of the UK economy, if you could kind of touch on trends in the UK.

Separately.

All of our waitlist for explorer Christina Lake Charles M kind of in house.

Hey girl pattern.

In the U K and then secondary.

Secondary question I was a bit surprised that revenue guidance wasn't borrowed.

Full year, given we are just one quarter left can you kind of give us.

Thoughts on that radar ocean or what kind of implies a really broad range for the fourth quarter.

Yes, well I'll take the first part of your question should I say regarding the U K. So we in Q3.

We are members.

Our houses are higher than they were in 2019, we've not seen any change in our <unk>.

And the behavior. So we are not seeing any recessionary behavior.

As it stands in a membership in the U K in fact, we actually grew quarter on quarter on our revenues and our spend.

What we focus a lot on is the things that we can control, which is making sure we have the best service.

All houses that we have value options for our members if they want them.

So regarding our waitlist our waitlist.

This is actually one of our strongest waitlist, we've got Super Great Weightless on every single house across the U K our applications in Q3 record levels pretty much in all regions, but in particular the U K. So as we as we stand well.

We feel cautiously optimistic about our U K and our members, but as always we want to make sure that we're delivering the best value the best service and the best experience for our members when they do come into the houses Thomas John answered the second part, yes, sorry, Sharon our key messages from the quarter is that membership and revenue continued to have realized.

Driving momentum and we continue to be.

On track to our full year guidance I mean, I think on the revenue side remember we guide to two things we guide to total revenue and membership revenue.

Both of them are feeling FX impacts, but as you can as you can imagine we feel good there.

That were forming while there and I would I would say that.

We are going to be well above the bottom of the bottom of the ranges.

Thank you.

The next question is from Stephens at Cowen with Citi. Your line is open.

Great. Good morning, Nick Best wishes in the new realm, and congrats to Ron.

Yes.

I had a question on the change in strategy or unit growth going back to 5% of staffing per year. How do you think about that in terms of differences by region. And then also in turns out smaller houses versus the bigger properties that you like that Michael farmhouse. For example, how do you think about that in terms of the difference.

Yes.

Yeah.

Yes, well I'll go first.

Our strategy Hasnt changed on the types of houses where thing.

Based on our CW H members that we have in each city that kind of define what type of house.

<unk> be a smaller made a large house.

That's fundamental to our growth.

Any change that we've put in place even as we just want to slow down we want to go back to the 5% to seven which we which we articulated the IPA because at par generating more profits is that we want to streamline things and what we found this year is that given all the challenges in the macro would be supply chain be it labor.

Even though my opening houses.

It just makes sense just to go to $575 seven housing is still a lot of houses Egfr for our members to enjoy and we will continue with our tried and tested strategy of CW H and then figuring out what configuration of our house is suitable for that city. Yes. Just wanted to give you a couple of additional comments on the.

On the updated house guidance I mean, if you think about it we've delivered seven how is that where we were on track to deliver seven houses this year and we delivered six houses last year.

And.

The 5% to seven is in line with our science pipeline for the next three years.

As we think about next year a lot of those projects are already underway and so this is really relieving the burden on the company and giving us, allowing us to deliver on our planet. That's really are already set.

To give you a little bit more geographical color about next year.

There's going to be a lot.

Excuse me.

Big increase in the Americas.

What we found and as you know we.

Our largest segment is North America now we're expanding into.

Latin America with Mexico next year and.

We're going to continue to expand in the region.

Great.

Can you go back to the earlier question about the claims over extension impact I think the last time, we had the call you talked about how the business performed in recessions.

And I'm curious if you could just opine on that topic.

What are you seeing in terms of member engagement journey weaker economic environments.

A visit the houses last year, they actually visit a bit more just like just talk to that impact would be very helpful.

Hi, Steven.

Well, yes.

<unk> been doing it for 27 years, and we've seen a number of slowdowns and recessions and what we've seen in the past is as members actually.

Going back to the houses even more because it's a home away from home.

Yes, I think people look at.

Scripture in times like this and go to the ones, which they feel that they don't need so often or don't use a box in Soho house is one of those subscriptions and we are a membership business. So we care deeply about our member and I think they vary.

Very very they look at it and say Oh, I'm going to use that more and.

When they come into the house.

Sensitive to the economic conditions outside service value value items on the menu et cetera. So we in the last 2008 2009, we saw growth in our membership.

No.

No no increase in people resigning membership.

I really think the membership side of this business is so loyal to us so good to us we've never seen more people on a white list, we've never seen applications higher.

And I think you know.

Whatever the economic conditions are over the 12 months that in.

In the past it hasn't helped us and I don't think it will help us at this time.

Great. Thanks, very much in the detail best of luck.

Again, Thats Star one if you would like to ask a question over the phone and the next question is from Stephen Grambling with Morgan Stanley . Your line is open.

Thanks for taking the questions Congrats Andrew and Nick Happy to hear about your recovery and wish you continued health.

You all mentioned some record trends from Scorpio Ocean and you didn't really spend as much time on some of the other categories. How should we be thinking about the future growth and investment in some of these other areas, whether it's home plus digital works et cetera.

Hi, Steven.

I expect it to continue to see growth in the other revenue.

We're continuing to expand.

And our management contracts as we said we opened up the Lions.

Francisco in the quarter, we recently opened up.

Another NAD this week actually.

Hum home is continuing to grow and so we're.

We're going to continue to see that other revenue line grow I think our key message, though is that we're trying to be more focused and really simplify the story and so more of our more of our focus and efforts are really going to be on of course, all of our us business.

Okay.

Got it.

And then one other follow up I guess, you mentioned that reduced editorial I guess, how did you generally think about the value of content historically and how do you anticipate.

The reduction will impact the number of member touch points or is it more about pruning ineffective content.

Yes, great question.

Following our.

Global member survey our members told US is that they we spent a lot of time recapping our events globally say.

You know when we have like Kenya, Lamar, who recently flight into houses we would record it.

Especially <unk>.

And then put it on our App.

That's quite a big cost for us.

Didn't want that they've left that she said, we're less fussed about that we actually won.

Then programming going forward in each of actually personalize on Iraq, which which you just written just how does what events coming up and what ones I should like based on what you know about me. So it's little things like that that we can do that will actually help us streamline a lot of our expenses in our support offices.

We made the decision.

Recently stopped pursuing digital membership after speaking to our members they they want us to focus on them. They won't they do on collectability, but actually they won't collectability more in the physical spaces in Moreno houses more than ever before so that's what we're going to focus our efforts on so it's all based on what our members are telling us and what they are telling us.

Is that they like some of the stuff that we're doing.

And some of the stuff we're not doing.

And Thats, great news, because thats, what we should be done.

That makes sense.

Yeah helpful. Thank you.

Yeah.

We have no further questions over the phone at this time.

We have one question that sentiment over the survey.

What did you learn through their surveys and focus groups.

Andrew.

We learned a lot. So the first thing that we learned is our members love us They love what we're doing.

<unk>.

Really value when we opened new houses.

They want us to open more around the world, which is reflects an 8% of our members being every house members.

They.

They love the events that we put on but it didnt has is not the houses and <unk> want us to be better about communicating that to them in the future like I said.

They are really satisfied.

With our App that we've obviously put a lot of investment over the last three years, but they want the app to be fantastic booking and paying.

Looking at our events spa classes bedrooms.

And dining room reservations globally, they care less about the collectability and the content I just mentioned.

So it was really positive.

The things that they want us to to try and improve a service.

<unk> houses the speed of service quality of service and they want us to have more diversity of food and differentiated food offerings across the different houses, which is great news for us and we're already working on these plans.

So thank you everyone for listening.

If you have any follow up questions. Please feel free to reach out.

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

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Sure.

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