Q4 2022 Membership Collective Group Inc Earnings Call

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Speaker 2: Thank you for joining us today to discuss the Membership Collective Group's fourth quarter and four-year 2022 financial results. My name is Thomas Allen and I'm the Chief Financial Officer. I'm here this morning with Andrew Carney, our CEO . Today's discussion contains forward-looking statements that represent our beliefs or expectations about future events. All forward-looking statements involve risks and uncertainties that could cause the actual results to differ materially from the forward-looking statements. Some of the factors that may cause such differences are described in our SEC filings.

Speaker 2: 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 Q4 and full year 2022 earnings release, which can be found at membershipcollectivegroup.com in the News and Events section.

Speaker 2: Additionally, we have posted our Q4 and full year 2022 earnings presentation, which can also be found in the news and events section on our site. During the call, we also refer to certain non-GAAP financial measures. These non-GAAP measures should be considered in addition to, and neither to substitute for or in isolation from, our GAAP results. Reconciliations to the most comparable GAAP measures are available in today's session.

Speaker 3: SIR House membership hit a new high of 162,000 members, a year-on-year increase of 32% and a 6% rise quarter-on-quarter. We came in within our original guidance range despite the decision we made in the third quarter to reduce our annual target for 2022 new houses openings from 9 to 7. We delivered strong profit growth over the period with adjusted EBITDA reaching 23 million, up 21 million year-on-year and above our implied guidance range of 17 to 22 million. This was driven by revenue growth which was up 47% year-over-year and above our expected growth range of 17 to 22 million.

Speaker 3: and the implementation of the operational excellent initiatives we outlined last quarter. More on that shortly.

Speaker 3: While our Q4 results show the progress we've made on profitability, alongside continued strong membership demand, it's important to look at our full year 2022 picture to appreciate how much the business has grown year over year. The number of Soho House members rose 39,000 or nearly a third. We added around 10,000 or more in each of North's

Speaker 3: 127,000 as we also saw strong membership growth in Soho Friends and Soho Works.

Speaker 3: The growth we've seen in membership and new openings, as well as strong pricing power, drove total revenues up 73% to $972 million. Finally, on adjusted EBITDA, we've moved from a $24 million loss in 2021 to a $61 million loss of EBITDA in 2022. While we're proud of the turnaround, it is still early days and our focus of driving improved profitability in 2022 adjusted EBITDA does not reflect the true potential of the business.

Speaker 3: Finally, it's worth highlighting that in the fourth quarter we completed our 50 million share buyback programme, spending 15 million to purchase 3.5 million shares at an average of $4.31. In total over the year we bought back 8.5 million shares or 4% of our shares outstanding at an average price of $5.91.

Speaker 3: Now let me give you an update on the progress we are making against our strategic priorities.

Speaker 3: To recap, you will remember last quarter that we said we were in a

Speaker 3: So let's talk about two things. First, growing and enhancing the value of membership to drive long-term recurring revenue, recognising that membership remains the core driver of our business.

Speaker 3: Second, delivering operational excellence to drive profitability and free cash flow. An area where we know we can do more and where we've identified and orally implemented a number of initiatives.

Speaker 3: In line with our first priority, today we've announced the decision to change the group's name from Membership Collective Group to Sower House & Co. As we've spent time as a listed company, we've recognised the benefits of being associated with a powerful and unique brand. The Sower House name is a huge asset for us and we want to leverage that fully. This change is also in line with our move to strengthen our focus on the Sower House business.

Speaker 3: while continuing to support our other strong businesses.

Speaker 3: We would expect the name change to take effect later this month and the stock will trade on the New York Stock Exchange under the ticker SHCO.

Speaker 3: Members are at the heart and soul of Sower House and we know that bringing people together in our houses with great atmospheres is what matters most to them and us.

Speaker 3: We've significantly increased the amount of data that we look at by house which has enabled us to provide the right service at the right time and tailor our programming such as menus and events to the local market and members. Here are a couple examples. At 180 house in London we've introduced a more elevated 1970s inspired menu which leans into the design and feel of that house. We've also launched new events programming such as weekly jazz nights and daily wellness talks to align with the atmosphere and approach. At two of our houses in Soho the original Soho house at 40 Greek Street and 716 Street we've designed new menus to reflect the differing member demographic behaviors and needs of each house.

Speaker 3: Across all three houses, a third of the menu now is bespoke to that club. More broadly, we've focused on two main improvements across our houses driven by member feedback. Firstly, we've changed our menus to be more seasonal with more healthy options.

Speaker 3: Secondly, to improve service across all our houses, we've rolled out new staff training and realigned manager incentives with member satisfaction as the primary focus.

Speaker 3: Both of these quality improvement processes will continue throughout this year.

Speaker 3: The changes have been well received by the teams and the initiatives are driving positive results where we've seen improved performance and member satisfaction across our houses over the past few months.

Speaker 3: New house openings in Miami, Stockholm in Q4 and last month in Bangkok further create value for members and we're looking forward to announcing exciting openings throughout the course of 2023 in line with our target of 5-7 new houses a year.

Speaker 3: We've also seen good progress in delivering operational excellence to drive profitability and free cash flow. Our strategy here is clear and focused on three key areas. Leveraging data and member insight to operate and scale efficiently without compromising what matters most to our members. And a focused approach to expanding in-house margins and enhancing the membership value proposition.

Speaker 3: We hit the ground running in the fourth quarter and are having made good inroads into a number of areas. We talked to you previously about the need to reduce our in-house operating expenses and in particular our wage bill. Through more efficient rostering and ensuring that we have the right number of staff in our houses at the right time for our members, wages as a percentage of revenues dropped approximately 1000 basis points in December .

Speaker 3: this expenses we talked to reductions on content and digital as we discussed last quarter, and other corporate expenses across all parts of our business.

Speaker 3: And the changes we've made in our FMB program continues to drive growth margin expansion, with light flight FMB margins 230 basis points above the final quarter of 2019.

Speaker 3: In addition, greater focus on driving higher occupancy in ADR led to revpar increasing 22% year over year at light fly properties.

Speaker 3: It's still early days in terms of driving the benefits of these proper initiatives, and we have much more to go. But we're on track and we feel confident that this will help us generate stronger, more and consistent earnings going forward, which is a great segue to pass over to Thomas to give more detail on the fourth quarter result and updated guidance.

Speaker 2: Thanks, Andrew. Total revenue for the fourth quarter grew 47% to $270 million, or 66% on a constant currency basis.

Speaker 2: Membership, in-house, and other revenues rose 46% 36% and 70% year-of-year respectively, or 66, 54 and 93% respectively on a constant currency basis.

Speaker 2: House level contribution increased 42% year over year. House level margins were up 30 basis points year on year, which was a decent result given 4th quarter 2021 benefited from still ramping cost structures post-COVID, but our 4th quarter 2022 margins were still impacted by the cost increases we saw earlier in the year that we are unwinding.

Speaker 2: Other contribution grew 190%, with margins increasing approximately 800 basis points supported by strong Soho Home revenue growth, good results for our standalone townhouses and restaurants and design fees.

Speaker 2: Giving more details on revenue, we saw quarter over quarter revenue growth to the eighth consecutive quarter with three key drivers.

Speaker 2: Strong football in both new and legacy houses led to stronger sales which drove a $31.7 million increase in in-house revenues.

Speaker 2: Finally, other revenues were up $29.8 million with Soho homes in 104% increase in sales year of year.

Speaker 2: Our fourth quarter adjusted EBITDA was $23 million, up $3 million quarter on quarter, and $20 million year on year, as we benefited from continued strong membership and revenue growth and the start of our additional profit initiatives. Our EBITDA also beat consensus of $19 million.

Speaker 2: Moving to guidance for 2023, we expect to see continued momentum through the course of the year with strong growth across membership, revenues, and adjusted EBITDA. In line with the guidance we gave with third quarter results, we're getting to at least 190,000 Soho House members by the end of 2023, a reflection of the strong demand we continue to see.

Speaker 2: as well as our record weight list, strong retention, and our plant open 5 to 7 new soil houses this year.

Speaker 2: We expect to deliver total membership revenue of $355 to $365 million driven by our membership and pricing growth. We are forecasting total revenues of $1.1 to $1.2 billion representing 13 to 24% growth year over year. We're fighting continuous strong membership, in-house and other revenue growth.

Speaker 2: On our revenue guidance, we are assuming FX is in approximately $40 million dollar headwind.

Speaker 2: would prefer to take the more cautious path given the headwinds we experienced in 2022. We were also assuming that light-flight food and beverage revenue trends remained relatively stable to where we were in the second half of 2022.

Speaker 2: We see this as a prudent approach in case the economy weakens, which should be more than offset by our increase in members.

Speaker 2: Finally, we're getting to a adjusted EBITDA of $120 to $130 million, an increase of 97 to 113% year over year, with implied margins of approximately 11%, up from 6% in 2022.

Speaker 2: plan. Just one point of notice to remember that hotel, food and beverage businesses like ours are seasonal, with 1Q typically the seasonally slowest quarter. We expect 1Q revenue in EBITDA to be less than 4 Q2 022 before a more significant ramp up in Q2 through the end of the year, as we benefit from more business when the weather is better.

Speaker 3: and holiday events in the fourth quarter. Thank you Thomas. So in conclusion here are the key points. 2022 was a strong year revenue and membership growth, underpinned by robust retention, record applications and a record wait list.

Speaker 3: already driving results.

Speaker 3: We are laser focused on delivering for our members and growing membership value. And finally we are more confident than ever in the future of a unique global membership business, Serahouse & Co. as we enter 2023 with momentum.

Speaker 3: With that we'll now open to questions. Operator can we take the first question please. And as a reminder you can either ask your questions over the phone or submit them over the webcast.

Speaker 4: To ask a question please press star 1. Your first question is from Steven Zaccone of Citi. Please go ahead. Bach, Kevin MacLeod grade 2 Friends of the Big SevenWe are a

Speaker 5: Great, good morning. Thank you for taking my questions. Congrats on the nice results. First question on pricing. Can you talk about the ability to take price increases this year across membership fees, food and beverage, and room rates, maybe specifically to membership fees? Can you talk about how much? Thank you.

Speaker 6: Christ even

Speaker 3: Yes, so membership pricing and pricing in general. So if we take membership first...

Speaker 3: You know, everyone around the world suffering at a high cost of living right now. So what we've done is we've shifted our approach. So for existing members, we've passed on mid single digit, which is actually below current inflation levels.

Speaker 3: And for new members, given our continued strong demand, we've raised prices double digit this year. What we wanted to do was create more of a distinction between new and existing member rates, and to give increased value to our existing loyal members.

Speaker 3: Since we've increased our new member pricing, we continue to see super high applications, which shows the strength of our business.

Speaker 3: You know Stephen, we changed our dining menu, we increased the quality of ingredients, it's all 1970s inspired, we changed our events, tailored to the local member, we improved our service standards, and our average spend since making those changes is up by about 20%. And this approach is being implemented throughout our regions and houses.

Speaker 3: You know, our members have always told us they don't mind paying more if we deliver better value more choice across service and food and beverage.

Speaker 3: And that's what we're really going to focus on and that we're excited about the improvements we've made in Q1.

Speaker 2: And actually we're going to be rolling out throughout the year. Thomas, do you want to cover ADOs? Yes, so Stephen, just echoing what Andrew said, look, we have two strategic priorities. First is to grow ahead and hand some membership and second is to drive higher profitability. And so we want to make sure that we continue to deliver value to our members. And so...

Speaker 2: We can continue to offer good rates on rooms, but when we look at the index, there has been opportunities, especially on select sites. And so as we've seen market rates go up, and as we've analyzed our red part indexes and our ADR indexes, we have found some good opportunities.

Speaker 5: Great. That's all helpful detail. Appreciate that. The follow-up question I had is to focus on the EBITDA margin approaching 11 percent. Thomas, could you walk through the building blocks in a bit more detail? And what I'm curious on is, do you see this as a ceiling for EBITDA margin? I assume no. And then, how do we think about the building blocks to go above?

Speaker 2: as a percentage of sales had gotten higher than where we thought that they should be. And so we started to deliver that in the fourth quarter, but that was gradual in the fourth quarter. So we still see a very big opportunity to continue to drive that higher. Second is on GNA. So we talked last quarter about streamlining our support offices, especially things like content and digital, but really across the board.

Speaker 2: percent this year, you know, that should generate good operating leverage. And finally, it's on food and beverage costs. You know, we're continuing to find new ways to improve that. You know, we highlighted and prepared remarks that in the fourth quarter are food and beverage margins were 230 base points better than fourth quarter 2019.

Speaker 5: and we're still finding ways to drive that board. Okay, great. Thanks for all the detail. Best of luck this year.

Speaker 4: Your next question is from Stephen Grambling of Morgan Stanley . Please go ahead. Your line is open.

Speaker 7: Hey, thank you. I would hope that you could just remind us of when we think about the 5-7 new property that are going to be open this year. I guess what do the locations look like for these and how do they compare to the base? Are there any reasons why these houses will drive either a different number of new members and or spend in ROIC kind of maturation? Thanks.

Speaker 2: Thanks, Stephen. So, rather than compared to last year where we gave the specific houses, we chose not to do that this year because we really want the investment community to focus on our membership growth versus our house growth. That said, we've talked a lot about opening Mexico City. And also, if you go on our website, you'll see the link to

Speaker 2: For this year and for next year, what we're seeing is a lot of entries into some new markets, some new kind of major city markets, which we're excited about because we see really strong potential for membership growth in those markets.

Speaker 2: When we look on average, the size of the houses this year will be a little bit smaller than last year, but in terms of the performance, we feel like they should be comparable given the location in places like Mexico City.

Speaker 2: Manchester, Bangkok compared to 2022.

Speaker 7: development and rent that might be associated with those. Have you found any changes in terms of, you know, the cost in terms of rent per house or how we should be thinking about that? I think you have some disclosures in your K about the undiscounted rent payments, but I don't know if there's anything to call out in terms of the...

Speaker 7: better implied interest rates or anything like that given what's happening in the broader rate environment. Thanks.

Speaker 2: Yeah, so we continuously really strong demand from developers. In fact, we've seen an uptake in interest in new territories. As we've grown in more beta cities, places like Copen, Hagen, and Stockholm, and Austin, and Nashville, we're finding developers in comparable cities, places like Oslo and Helsinki, come to us with interest.

Speaker 2: We know that the developers have higher financing and import costs. And so in some instances, that is affecting the economic to the deal. And that looked. That was partially why we chose to cut our new unit, our guidance last quarter, was not to be forced into taking deals that we didn't feel comfortable with.

Speaker 2: However, we've also been offered some really attractive deals at good terms and some even better than what we've had before. And so, you know, it's just about choosing the right opportunities.

Speaker 4: That's helpful, Collar. I'll jump back in the queue. Thanks so much. Your next question is from George Kelly of Roth MKM. Please go ahead. Your line is open.

Speaker 8: Hi everybody, thanks for taking my questions.

Speaker 8: I was curious if you could help us sort of think about growth this year. I know the SoCo Home business, I think you said in the quarter, grew over 100 percent. So just trying to frame sort of expectations for 2023 that you bake into your guidance.

Speaker 2: Thanks, Roger. And so when we think about the hierarchy of the revenue growth next year, I put it as we expect membership revenue to grow the fastest, followed by in-house revenue, followed by other revenue. There's parts of that other revenue that we expect to grow really quickly.

Speaker 2: So for example, we expect so home to have really strong growth. However, we're taking a more tempered expectation there, given overall backdrop in home products, and we're really focusing on profitability there, while we'll still deliver really strong growth.

Speaker 2: The other component of that is Scorpius should continue to have strong growth. Our works business should continue to have strong growth but more measured growth in this past year. The line and the nets, we've opened up a few over the past year and so those should continue to have growth. And one of the things that have also been in there have been legacy restaurants.

Speaker 2: and townhouses and we're not growing that business really as quickly and we've also streamlined some of that business and so that'll weigh on some of the growth. And so, you know, other businesses that we've been investing behind in that segment will continue to go really, really, really quickly and strong.

Speaker 2: while others are not going to have as much growth. Let me add one thing. Back to our point earlier in the prepared remarks, but how we're trying to take a prudent approach to thinking about light-full-like sales in 2023 versus 2022. We've taken that same view on those restaurants and townhouses.

Speaker 2: for 2023. Okay, great. And then two other quick ones. Okay, great.

Speaker 8: I know you don't guide to free cash flow, but do you expect to be free cash flow positive in 23, or can you talk at all? I don't know if you want to talk to CapEx or however you could answer that. And then second question is you commented in the prepared remarks about changing the incentive structure on, I believe you were talking about kind of house level management. Can you detail just what those changes were and maybe what it was before? That totally fits right too.

Speaker 2: We do expect to be free cash flow positive in 2023. When you think about our second strategic pillar driving higher profitability, internally, we also really think about free cash flow too. In the presentation, we talked about how we expect our CAPEX to be lower in 2023 versus 2022.

Speaker 2: That's benefiting both from us moving more and more asset light, as well as us just being more mindful about CAPEF and getting to free cash flow, which I know a lot of investors and we, and obviously we want. The only thing I would say about seasonality is do you remember the seasonality of our business?

Speaker 3: wanted to do as part of our improving our value for members is we are super focused on improving the service we provide in our houses and also improving our food and food is more diversification across our houses quality seasonality services quicker service high quality service more personal service so what we've done to really drive that forward

Speaker 3: is with our leadership teams in our houses, we're now incentivising them on a quarterly basis based on their performance both financially but more importantly their performance on improving member experience which we can now measure really really well and it's another key area that we've

Speaker 3: evolved and developed as part of our obsession on improving our members' experiencing across all our 41 houses globally.

Speaker 1: Thank you.

Speaker 4: Your next question is from Sean Kelly of Bank of America. Please go ahead your

Speaker 9: Hi, good morning, Eric and everyone. Thanks for taking my question. First, would maybe be Thomas or Andrew. Could you give us a little bit more color on just the consumer environment? Obviously, there's been a bit of consternation about how the European consumer in particular would react to some of the broader macro.

Speaker 9: I think on the travel side it sounds to us like things that actually held in really well, but could you just give us a little bit of color about maybe how that worked in the quarter and what some of your maybe forward expectations are just for the booking window or what you can see right now in the business.

Speaker 2: Thanks, Sean. So when we think about what we're seeing in terms of current trends and trends in the quarter, when we look at in-house revenue growth versus 2019 on light-fuly houses, you actually saw an acceleration in the fourth quarter.

Speaker 2: I think on the third quarter call, and during the summer we talked about how we were seeing kind of low double digits, low teens growth in that metric, and that growth was 2019. That accelerated up to about 20% in the fourth quarter.

Speaker 2: When we look at January and February and we look at the past few weeks, we've seen relatively similar growth to what we saw in that fourth quarter, up close to 20%.

Speaker 9: Got it. Very, very helpful. And then second question, and this might be a little technical, but when we kind of think about, you know, your, your, the operating expenses for the, you know, in-house operations, we kind of think about as a ratio relative to, to in-house revenue. And I'm kind of curious to me, that, that number did come down sequentially at 120.

Speaker 2: Yeah, so Sean, we're continuing to work. So, on, do you remember there is some forthcoming benefit and seasonal benefits to that, but that is a key metric that we're looking at. And as we talked about, as we showed with our guide, we are expecting to get cost leverage through our business.

Speaker 2: When we think about wages, we really started to see strong improvements in our wage incentive revenue.

Speaker 2: Starting in October , but it really started to take hold in December , and we're still seeing improvements as we go through the months comparing it to prior comparable periods. And so, we're not going to get into guiding to our in-house expenditure issue.

Speaker 2: But you can see where worry dies and you can see that we are expecting to see good cost leverage.

Speaker 2: see where our EBITDA is and you can see that we are expecting to see good cost leverage. Great, thank you very much.

Speaker 4: Your last question is from Owlietnackvie of HSBC of London. Please go ahead. Your line is open. Hi, thanks for taking the question. Just in terms of the staff cost, longer term. Where do you expect that to reach? Is it you work through all these initiatives on church language and then everything else? And then?

Speaker 10: finally.

Speaker 4: Obviously with the consumer demand environment that we have, is there anything happening to the member mix that we should be aware of, for example, as travelers restarted up people moving to more every house members, the single house memberships? Thank you. Allie, go through the three questions, just on wages. We have an historically given a percentage.

Speaker 4: of our members. So I think Chris Arkley, we've said, you know, our regular members are about 80 percent under 27, about 20 percent, and our every house members around 80 percent and local members about 20 percent.

Speaker 4: That's been pretty consistent. And so no major thing to call out there. In terms of the wait list, what we did see was, we continue to see really strong growth. We saw growth across all regions really. And.

Speaker 2: So, when we look at it, it was really across all reasons. The quality continues to be there, so we continue to see really strong, really strong, really high quality members. And just remember when we think about the wait list, the more houses we enter and the more countries we enter.

Speaker 2: opens up new markets for us. So that's continuing to help on the applications and driving that higher weight loss.

Speaker 2: up new markets for us. So that's continuing to help on the applications and driving that higher weightless. Thank you.

Speaker 4: So no more questions. So thank you everyone for listening and we look forward to continuing to talk to you through the quarter.

Speaker 11: Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect.