Soho House & Co Inc. Q1 2023 Earnings Call

I would like to welcome everyone to the Soho House and company incorporated first quarter 2023 results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press Star then the number one on your.

Telephone keypad I would now like to turn the conference over to Thomas Allen Chief Financial Officer. Please go ahead.

Thank you for joining us today to discuss so housing shows first quarter financial results. My name is Thomas Allen and I'm, The Chief Financial Officer I'm here. This morning, with Andrew Carnie 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.

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 Q1 earnings release, which can be found it so house co dot com in the news and events section.

Italy, we have posted our Q1 presentation, which can also be found on 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 not as a substitute for or in isolation from our GAAP results. A reconciliation to the most comparable GAAP measures are available in today's earnings press release, now, let me hand, it over to Andrew.

Thanks, Thomas and Hello, everyone.

I'm going to start by talking you through our Q1 highlights and provide an update on our progress we've made against our two strategic priorities. I'll, then hand over to Thomas to talk through the financial performance give an update on our 'twenty three guidance.

Yes, we've made in our balance sheet before finishing with our ESG initiatives.

We've had a strong start to the year in the first quarter membership hit a new high of 169000 members a year on year increase of 29% and a 4% rise quarter on quarter, leaving us on track to our full year target of more than 190000 members.

Tessa So hasnt kept memberships grew 38% year on year, and 5% quarter on quarter, which shows we continued to resonate well with all our members in line with membership growth membership demand remained strong while waitlist hit an all time high of over 89000 <unk>.

Nice growth quarter on quarter of approximately 3000.

We continue our focus on operational excellence is which led to profit beating expectations delivering adjusted EBITDA for the first quarter of $2 million up $18 million year on year. Today, we are raising our full year EBITDA guidance to reflect the results of the initiatives we have implemented across the company.

Total revenues grew 33% year on year to $255 million underpinned by continued growth in recurring membership revenues up 42% year on year and 8% quarter on quarter.

You remember, we said last quarter. The Q1 is typically the slowest quarter seasonally so our Q1 performance leaves us firmly on track to deliver our total revenue guidance of the year of one one to $1 2 billion.

Now let me give you an update on the progress we're making against our two strategic priorities first growing enhancing the value of membership and second delivering operational excellence to drive profitability and free cash flow.

Creating unique clubs with great atmospheres of members is at the heart of everything we do based off member feedback we are focused on improving our food offerings service standards and house events, we've introduced seasonal menus across all our houses are house regulars are now updated every three months with approximately five to six new dishes based on high quality.

Seasonal ingredients our houses it become more local with the food offerings to provide increased choice for every house members, who visit multiple times, we've added more healthy offerings at breakfast, including new yogurt Super food bowls, smoothies and pressed juice shops, and we've introduced pop ups more theme dining nice such as one not only fee events in regulus.

Slops such as Taco Tuesdays our service standards are being improved through increased training and all of our management within the houses are incentivized to improve service for our members, which is leading to improved staff retention.

Finally to make it easier for members to discover all of this we will communicate changes more regularly in Nevada, new menus on the App and improved the UX experience.

The teams are highly engaged and are clearly starting to deliver better results. We continued to focus on including food service throughout the rest of this year.

Outside our Coursera has proposition we continued to see strong growth in our friends membership, which helped grow our other memberships by 69% year on year to more than 69000 members and.

And finally, our new House opening program continued with the new cell house in Bangkok. This February located in the vibrant circumvent neighborhood. The house features of 12 meter pool, and outdoor terrace, and a really lovely tropical setting we have seen great demand for this new house and is outperforming our initial membership intake goals.

We continue to target $5 seven houses this year with the remaining earnings to take place in the second half of the year.

Turning to our second strategic priority operational excellence.

Saturday is centered around three key areas.

First leveraging data Amanda insight operating scale efficiently.

Expanding our in house margins and said, having operational discipline as we grow.

In the first quarter, our teams control wages, well wages as a percentage of revenues improved by 400 basis points versus Q1, 2022, and 300 basis points versus Q1 2019.

F&B margins continued to be strong increasing by 190 basis points versus Q1 2019. Despite is rolling out a lot of new menu items, which I referenced earlier.

Our G&A expenses came in better than expected to the changes that we made and how we operate the business.

We've continued to focus on driving high occupancy and ADR, leading to revpar, increasing 25% year over year at our like for like properties and 28% versus the first quarter of 2019, we have a long runway in front of us and we're making good progress. We're confident that this will help us generate stronger more consistent earnings going forward.

Now, let me pass you to Thomas to give you more detail on the numbers and our guidance.

Thanks, Andrew total revenue for the first quarter grew 33% year on year to $255 million or 45% on a constant currency basis membership in house and other revenues Rose 42, 32% and 23% year on year, respectively, or 50, 444% and 34% on a constant.

Currency basis.

Gross level contribution increased 57% year on year with house level margins up three points to 24% other contribution was up 76% with a margin climbing four points to 13%.

Giving more details on revenue we saw continued strong revenue growth year over year, increasing revenue by $63 million with three key drivers membership growth and pricing drove a $24 $5 million increase in membership revenues.

Strong trading in our houses, especially in the U K led to a $28 million increase in house revenues and other revenues were up $10 million driven in part by an approximately 60% increase in sales at Soho home.

Our first quarter adjusted EBITDA was $20 million up $18 million year on year as we benefited from the profitability initiatives, we have been talking about for the past two quarters and continued membership and revenue growth our adjusted EBITDA for the quarter also be consensus of $17 million.

Now discussing our balance sheet, we have made great progress on improving our balance sheet over the past few months.

You may remember in November , we et cetera, or revolving credit facility, which remains undrawn, but a great source of liquidity if ever needed.

This week, we refinance our Miami mortgage we were able to secure the mortgage at a rate of approximately 7% approximately 60 basis points higher than the prior property mortgage loan, which was coming due in February 2024, and we lost refinance in 2019.

This is despite the fed funds rate rising approximately 250 basis points over that time period current extremely tough credit market conditions. Following the recent bank failures and us increasing the size of the loan from $117 million to a $140 million.

This highlights our credit market CR properties as more attractive investments today than before and it also means that we have no major maturities until 2027.

Moving to guidance for 2023, we continue to expect total Soho house members of more than 190000 at year end at least 17% higher compared to the end of 2022.

We are reiterating our guidance of total membership revenues of $355 million to $365 million and total revenues of one 1% to $1 2 billion. As a reminder, the 33% revenue growth we achieved in the first quarter benefited from a more favorable year over year comp due to omicron impacting in the first quarter of 2022.

The midpoint of our revenue guidance implies approximately 15% growth for the next three quarters, which should be relatively consistent across the three quarters on adjusted EBITDA. Our strong start to the year is leading us to increase our 2023, adjusted EBITDA target range by $2 million to between $122 million to $132 million. So we're encouraged.

Our performance year to date and believe we are well placed for the coming months to deliver on our plans for 2023.

With that I'll pass it back to Andrew to discuss some of our ESG progress then give some concluding remarks before we go into Q&A.

Thanks, Thomas Today, we published our 2022 ESG report, which provides detail on the work we're doing on sustainability social responsibility and governance highlights include our focus on data collection is helping us progress towards our 2030 environmental goals. We're now reporting on skate one.

And two carbon emissions globally, as well as food and non food waste and a large proportion of our portfolio. We're also making a voluntary disclosure in line with the task force on climate related financial disclosures, Tc ft, allowing us to understand and manage the risks and opportunities of climate change in our business better.

We've also conducted an ESG materiality assessment to better understand what our members and employees care about and helped guide our House Foundation strategy. We've had another strong year on social impact with more than 1200 young people from underrepresented backgrounds now supported through our creative access programs. So men's ship.

And fellowship and the launch of our global Cherokee The Cera House Foundation.

So to conclude we've had a great start to the year delivering further member revenue growth underpinned by a strong and growing waitlist, our operational excellence initiatives are bearing fruit and adjusted EBITDA was ahead of expectations for the second quarter NII, leading us to increase our profit guidance for the full year I would like to thank all our teams for their hard work.

And dedication in all the regions that we operate in.

We remain focused on delivering for our members and driving further membership value and we're more confident than ever in the growth opportunities ahead for this business, which will result in <unk> house generating positive free cash flow this year.

With that we will now open to questions. Operator, we can take the first question. Please and as a reminder, you can either ask your questions over the phone or submit them via the webcast.

Youre asking audio question simply press Star one our first question will come from the line of Shaun Kelley with Bank of America. Please go ahead.

Hi, Good morning, everyone and thank you for taking my question.

Andrew Thomas I was wondering if you could just talk a little bit about that.

Adverse spending trends kind of across the quarter and get a little bit about the exit rate.

What you saw margin so far into the second quarter I think is holding steady.

Kind of behavior out there and maybe a little commentary on.

Revpar bucket as well.

Thanks, Sean.

So when we look at our lifeboat like and how it's revenue growth for the quarter.

It increased about mid teens.

Slightly lower than the about 20% that we saw in the fourth quarter. There was a bit of a timing impact there. So the day of the week that new year's head in January impacted the very beginning of the year and then the rest of the quarter was closer to high teens similar to the fourth quarter.

When we think about the split of that.

We continue to see really strong trends and visitation.

And spend per visitor.

Been lagging visitation.

We think.

Yes, there could be some macro impact on the consumer but generally it feels like it's holding steady.

One of the key things to highlight which kind of which is great for us is because we have our membership business.

Versus traditional restaurants and hotels, we add members every quarter, so that definitely could be could offset any kind of decline in consumer spending the other key thing.

It is important to highlight is that.

When we look at some of the properties that we have.

Put large initiatives and efforts into last year.

Give you examples of Greek Street, and 70, 16th Street and 180 strand.

We.

We introduced.

New initiatives, there, we really bucked the trend there and saw really strong growth in spend per visitor and so our internal initiatives, Ken Ken can continue to drive that higher.

Okay.

That's great. Thank you. Thank you for the color and then maybe as a follow up.

Any geographic callout, Thomas relative to that yet.

Yes.

Spending weakness was it particularly tied into Europe , or the U K seasonality anything in the U S. Just kind of trying to get that.

Drill down there.

Hi, sure to give you a little bit of color, we would say.

U K is our strongest market followed by Europe Europe has.

We if anything taken us by surprise at how how strong it's come back and we're looking forward to a very good summer in Europe .

Both U K and Europe benefited from a lot of the initiatives that we laid out back on our Q4 earnings call. We got ahead of it quicker and those regions North Americas.

Nightly behind and that's more around we're rolling out a lot of the new menu change is the service standard improvements a lot of the local menu that's all happening this month.

What we're expecting is that North America will jump up a little bit because of the great. We actually saw from our members.

UK and Europe , and Asia remained steady obviously massively up.

Last year, because we will build the closed in Hong Kong.

And our Bangkok House has got off to a I would say a very very good start with Super pleased with the team and bank call. It we've got some fabulous members.

And we've actually exceeded.

Internal plans around Bangkok, So we feel good in Asia.

Thank you and sorry to hog the ball a little bit, but just maybe last question would be can you just give us the latest on Hong Kong, both sort of plans on the reopening how it's going.

Is the longer term and what maybe the year over year impact of that housewares, because I believe it was pretty material.

Relative just given it sorry.

Yes, Sean So we continue to see a Hong Kong improved quarter over quarter between total membership visitation and overall performance.

Why don't you EBITDA came in higher than internal budgets, we now have over 3000 members there.

And so we're seeing progression.

We're not giving individual property performance, but we're definitely seeing improved performance. The key for Hong Kong is obviously the profits and revenues are up significantly because we were closed with Covid. There's no restrictions were now back doing remember in case, we had a great pause will even recently.

Where we showcase so has to a lot more potential members and we got a good influx of applications through that.

We've got a great team there.

Yes.

We're pretty we're feeling pretty good about Hong Kong.

Thank you so much.

Yeah.

Your next question will come from the line of George Kelly with Rob and Ken. Please go ahead.

Hey, everyone. Thanks for taking my question.

So first one.

I'm curious about.

What about margin.

I was wondering this year theres such.

Our year over year.

Improvement in your EBITDA margin and my sense is there was kind of a lot of low hanging fruit there and you took a member pricing.

Curious if you could talk a bit more just like whats. The remaining if you look past this year, what's the kind of remaining margin opportunity.

I'm sure it'll slow from what you're doing this year that margin expansion, but is there a lot of opportunity left.

So thanks, George So when you think about our business model.

Continuing to see really strong growth in membership revenues, that's driven by a mix of.

The increasing number of members and interesting pricing that that should be very high flow through and so to your point this year.

We're guiding to.

Again margin expansion last year, we put up 6% EBITDA margins. This year were guiding to about 11%.

But as we think through the next few years, we expect to continue to grow margins as you see the benefit of that of that very high flow through membership revenue.

Okay.

Okay, and I mean, do you have any kind of medium term margin targets.

So.

Around the IPO, we talked about getting to around 15% EBITDA margins over the medium to long term and then we think that there is an opportunity to keep on keep on working beyond that.

Okay, Great and then last question for me is on your balance sheet.

So I saw the and you talked to I think.

Amy.

Financing is there.

I know youre maturities now or what 2027 or something for the significant ones is there anything else to do between now and then any other goals for this year.

Your balance sheet.

And that's all I had thank you.

Thanks George.

So look we wanted to get to a good place on our balance sheet.

Got to the company, we had a revolving.

Credit facility there was.

There was there is going to end and then we had this Miami mortgage I was coming due in February 2024, and so the two we extended our revolving credit facility and now we've extended the mortgage out to 2033.

We wanted we want to have a conservative position.

We don't know where the macro environment is going to be.

We like to be conservative and have significant cash on the balance sheet.

And so I would say our main priorities.

It had been head.

I mean, just to stress right. After this after this.

Reyes, we should have about $180 million of cash on the balance sheet and undrawn about $90 million revolver.

And you made the point and we expect to turn free free cash flow positive. This year and we will have no major maturities until 2027.

Okay.

Our next question will come from the line of Steven Zaccone with Citi. Please go ahead.

Great. Good morning, everyone. Thanks for taking my question.

I wanted to follow up on the commentary you had Thomas about.

Member visitation and spending lagging but could you just expand upon that is that is that in certain regions that youre kind of seeing that activity.

And hand in hand with that some of the UK strength that you've seen could you just talk about the feedback to some of the food and beverage offering changes like what you've heard from members.

Hi, Stephen good to hear from you.

I'll take the I'll start on that one.

We've seen a big.

Nice increase in footfall.

New members new members historically use our houses more often when they joined so what Thomas was saying is that we have seen all visitations go up across a lot of our houses, which is which is a great thing.

The spend is kind of static there's not one region that stands out on a on a lowest spend is kind of in line with where it was.

One of our big goals is to increase that spend so we want to actually increase member spend and actually hold for we didn't necessarily need more footfall in our houses.

So thats why were doing a lot of work with <unk>, which I spoke about.

On our food.

<unk> offerings are beverage offerings are events, making the houses more local especially in the bigger cities that we operate in like New York and L a and London.

We've seen where we've made good progress is in those <unk>.

Is that we've done pretty significant changes we have seen members spend go up.

And that is the plan.

That's what we're focused on across all our houses so I would say that London feels good.

We're now very much focused on New York and L. A.

Because what happens is if you have different menus and different houses based on the.

Local member demographic.

We see increased spend but also we see members visited the houses more because they get a different offerings. So that's what we're very focused on so when we as we progress in our initiatives, we will be talking quite a bit more about member spend as we go forward because it publicly in our top five things that we're focused on as a company right now.

And let me just follow up with that is I don't want people to interpreted my comments that we've seen.

Gradation in our spend per visit.

We saw a strengthening of that in the fourth quarter, we put on a lot of events in the fourth quarter in general.

There's a lot of activity going on around around our properties.

It wasn't quite as strong as the fourth quarter when I look at the past three weeks things have gone back to more similar to fourth quarter level. So.

I think it's too early to try and read into any kind of macro trends. These things. These things are volatile and theres not a significant deviation around the trend that we had been seeing.

Okay. Thanks for that clarification that's helpful.

If we just shift to the expense side. So it sounds like G&A came in better than expected how should we think about the trajectory of that line for the balance of the year.

Dollars or the ability to continue to drive leverage just help us think through that.

So yes.

In the first quarter, we knew that there was a seasonally slower quarter and so we really.

We really held back on all expenses around the company, we really pushed it teams on travel on new hirings.

We want to watch the macro environment.

Given the macro environment has.

Stayed.

Pretty good.

As we open more houses in business's seasonally ramp up in <unk> <unk>.

G&A.

So I would expect G&A to be higher in the next few quarters as there was this past quarter, but just remember as a percentage of revenue we definitely expect it to be down this year versus last year.

Okay, Great and then just a last clarification is.

On the free cash flow positive. This year is there a certain quarter that you'd expect to reach that milestone.

Yes, so Steve.

Similar to what we've talked in the past about how seasonally EBITDA generally gets better through the year the summer months benefit from.

More of our outdoor spaces being utilized.

The fourth quarter benefits from a lot of events.

So home business does really well in the fourth quarter.

I'd say that I would think free cash flow should generally follow that path.

But we said last quarter and reiterated this quarter, we expect to be free cash flow for the year, but we haven't committed to a specific quarter.

Okay Fair enough. Thanks, guys best of luck.

Again to ask a question press Star One. Your next question comes from the line of Sharon Zackfia with William Blair. Please go ahead.

Okay.

I was hoping you can touch on the decision to merge.

Home and just that whole Brian .

And if.

That results in any kind of uptick.

Fire.

Members with the pain.

Hello Friends program.

Hi, Sharon good question.

So if you think back to last year, we had a membership court.

<unk>, plus which was just on Soho.

And what we realized quickly realizes those plus.

And then basically are highly valuable and we wanted to simplify our membership so we decided to roll it into so friends because if you think about our best selling category in Soho is bedrooms, because when we see the bedrooms and so house.

And basically the friends membership is they can go in and stayed on housing stay in our bedrooms. So it seemed logical to merge them on what we've seen.

His or her friends members are now the highest spending in the highest value members and setup.

They equate for really high percentage of our business that really engaged.

And now they can travel and stay at our house. So it was it was just a logical move this actually benefited us and benefitted the set of friends member.

Thanks for that.

Just a question on the house numbers are you.

Any change.

Membership joins very younger members or visitation or.

It's been pattern.

Thank you.

No we're not seeing much change.

We're still very very focused.

Adding new young members throughout under 27 program.

Which continues to be strong across all our regions and.

Other members to all the ages and demographics are continuing to behave just like they have so we haven't really seen any any change in what we normally see within our membership.

Great. Thank you.

And we have no further questions at this time I'll turn the call back over for closing remarks.

Just like to say thank you everyone for joining the call. If you have any follow up questions. Please reach out.

Sorry to talking to you next quarter.

Ladies and gentlemen that does conclude today's call. Thank you all for joining you may now disconnect.

Thanks.

Yeah.

Yeah.

Okay.

Okay.