Q2 2023 Soho House & Co Inc Earnings Call
Ladies and gentlemen, thank you for standing by my name is Bob and I'll be your conference operator today.
This time I would like to welcome everyone to the Soho House and car incorporated second 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.
He would like to ask a question. During this time simply press the star followed by the number one on your telephone keypad.
I would like to withdraw your question. Please press the star followed by the one once again.
Thank you.
I'll hand, the call over to Thomas Allen Chief Financial Officer, You May begin your conference.
Thank you for joining us today to discuss Soho House and cause second quarter financial results. My name is Thomas Allen and I'm, The Chief Financial Officer, I'm here 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 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 Q2 earnings release, which can be found at Soho House co dot com in the news and events section.
Additionally, we have posted our Q2 presentation, which can also be found in the news and events section of our site.
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.
Reconciliations 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 good morning, everyone I'm going to start by talking through the quarters highlights and provide an update on the progress we've made against our strategic priorities. I'll, then hand over to Thomas to talk to our financial performance given up that on balance sheet and our raised 2023 guidance before we move onto Q&A.
We're pleased to be announcing another strong set of results this quarter with further growth in membership revenues and profitability. We are delighted to have more members be pops out house in the second quarter. We added over 7500 members going to 176000, a year on year increase of 24% at a 5% rise quarter on quarter, which was ahead.
Of expectations, we welcomed members in all regions and in particular, new houses. We have opened in the past few years that are still maturing remember more than half our houses we've opened since 2018.
Our waitlist reached approximately 95000, an increase of 6000 quarter on quarter, we're really pleased to see our largest sequential increase since Q1, 'twenty, two which demonstrates the strong appeal of Star House globally.
Revenues grew 19% year on year to 289 million underpinned by continued growth in our highly recurring membership revenues.
In the quarter, they grew 35% year on year, 7% quarter on quarter.
Our initiatives to drive better member experience helped drive like for like in house sales approximately 20% above 2019 levels.
That's an acceleration from the mid teens growth we saw in the first quarter as we benefited from improved visitation and spend per visit.
Our focus on operational excellence continue to drive profitability higher with Q2, adjusted EBITDA of $32 million.
Since going public. This is the first time, we've reached over 30 million of adjusted EBITDA in the quarter and also the first time, we've reached over 10% EBITDA margins. We're proud of these milestones and we expect to maintain the momentum. We've built these strong results led us to deliver positive cash flow from operations in the quarter.
As we did in Q1, we're raising our full year adjusted EBITDA guidance to reflect the results of this performance given the strength, we're seeing in our membership and house performances were also raising guidance for our membership and the midpoint of our revenue metrics more on that later.
Now let me give you an update on progress, we're making against our two strategic priorities.
And enhancing the value of membership and delivering operational excellence to drive profitability and free cash flow.
Our focus on rolling out initiatives to improve member experience continued in the second quarter and we're pleased with the results we've seen across our houses.
As I mentioned, our like for like in house sales growth compared to 2019 accelerated up to approximately 20% for mid teens growth in Q1, we sold by spend per visit and visitation improved quarter on quarter with the U K and Europe , having both of their strongest quarters since the pandemic.
We're really pleased with both regions performance in particular Europe bouncing back.
All our houses had a great quarter, and it's really nice to see our recent newer houses.
<unk>, Paris, Tel Aviv, Stockholm, and Copenhagen, hitting their strides and delighting members while.
While a checking data suggests Europe and the UK are benefiting from the Americans travelling overseas again, as we said last quarter, we were quicker to introduce new initiatives and these reasons and that approach is bearing fruit. It is also worth noting our American business growth remained stable.
We're now in a good regimens implementing seasonal and local menu changes across all houses every quarter with members being made aware of what's needed through communication across all our digital channels.
We've also made changes to increase the breadth and variety of our in house food and beverage portfolio by introducing pop up experience like Maya or Mexican California restaurant I've looked at the house shortage House, So house Berlin, and Sculpeys residency at Little Beach has Malibu.
M as it benefited from increased choice and I've been sharing positive feedback.
Together these changes F&B have driven an uplift in sales and profits service down. This continues to be a top priority. We are introducing competed new trading because all our houses which is steadily improving service.
Outside of course of house proposition, we continue to see strong growth in friends memberships, which helped grow our other memberships by 40% year on year to approximately 72000 members.
One area, which has been more challenging is house openings, we're seeing delays in delivering projects on time from our developers while we were confident at the beginning of the year that we would deliver five seven houses. We now expect to open four after experiencing construction delays with Sarah House, Manchester Sarah House, Bangkok opened in Q1, So a house Mexico City.
He is opening next month, and so has Portland and San Paolo are planned to open through the end of the year.
That said, we still increased our Sarah house membership by 14000 year to date and raised our full year targets for 2023 membership revenue and adjusted EBITDA, We see the current global state of development as a short term challenge for new openings, but warm the our existing houses can more than offset a mid to long term target of five to seven new houses remains in place.
Turning to our second strategic priority operational excellence as a reminder, our strategy here is centered on three key areas first leveraging data member insights operating scale efficiently second expanding in house margins and said, having operational discipline as we grow.
In the second quarter, our teams control wages, well with wages as a percentage of revenues improved by approximately 250 basis points versus Q2, 22, and 50 basis points compared with Q2 19.
Our in house F&B margins continued to be strong up 240 basis points versus Q2 dollars 19 on a like for like basis. Despite is rolling out new menus on a quarterly basis that we referenced earlier overall, our house level contribution margins improved approximately 400 basis points year over year at 150 quarter over quarter.
<unk>, 6%. This is the highest level, we've seen since going public a testament to our efforts our G&A expenses were in line with our internal expectations as related to imply earnings calls, we expect G&A to be up in 2023 year over year, given the significant growth of our business, especially in new regions like Latin America.
G&A leverage will be contributing to our high guided adjusted EBITDA margins for the year.
We've continued to deliver on driving higher occupancy and ADR, leading to revpar, increasing 13% year over year at like for like properties of 36% versus the second quarter of 2019.
So all in all another great quarter delivering against our operational excellence initiatives now let me pass you to Thomas to give you more detail on the numbers and our guidance.
Thanks, Andrew total revenue for the second quarter grew 19% year on year to $289 million or 18% on a constant currency basis membership in house and other revenues rose, 35%, 14% and 9% year on year, respectively, or 34%, 13%, 8% on a constant currency basis.
House level contribution increased 45% year on year with house level margins, approximately 400 basis points to 26% of their contribution was up 35% with a margin climbing 370 basis points to 25%.
Giving more details on revenue we saw continued strong revenue growth year over year, increasing revenue by $45 million with three main drivers.
Membership growth and pricing drove a $23 million increase in membership revenues.
Strong trading in our houses, especially in the U K and Europe led to a $16 million increase in in house revenues.
And other revenues were up $6 million, driven by strong Soho home and Scorpius sales growth as well as higher partnership revenues and management fees.
Our second quarter adjusted EBITDA was $31 8 million up $16 4 million year on year as we benefited from the profitability initiatives, we have outlined and continued membership and revenue growth are.
Our adjusted EBITDA for the quarter also beat consensus of $29 million.
Now discussing our balance sheet, we ended the quarter with $177 million of cash and cash equivalents, including restricted cash and $590 million of net debt.
Our restricted cash was higher at the end of Q2, as we had to self insured portion of our hurricane insurance to close on our Miami Beach House mortgage refinance.
We felt this was a prudent thing to do and we werent in the hurricane season, and the risk inmate that interest rates would continue to rise which they have.
We have now secured this incremental hurricane insurance of the catches back and our bank and no longer restricted.
Supporting our cash position, we generated $32 million and adjusted EBITDA during the second quarter and had $2 million of noncash write.
Offsetting we had approximately $7 million of cash interest expense $1 million of cash taxes and $23 million of net capex.
Moving to guidance for 2023, the strength of our <unk> results has given us confidence to raise guidance across all metrics.
We expect total Soho as members of more than 191000 at year end at least 18% higher compared to the end of 2022 and an increase from our prior guidance of over 190000.
We have seen very strong application flows over the past few quarters as shown through our record waitlist remember, we still have 23 houses or more than half of our total houses that have opened since the beginning of 2018. They are still very much in that ramp period, which has supported stronger than expected membership growth.
We are narrowing the ranges and raising the midpoint of our 2023 revenue and EBITDA guidance metrics.
For total membership revenues, we have increased our guidance at the midpoint by $3 5 million to $360 million to $367 million total revenues at the midpoint by $5 million to $1, one two to $1, one 9 billion and.
And adjusted EBITDA by $3 million at the midpoint to $126 million to $134 million.
The increases are driven primarily by stronger unexpected <unk> results with FX only benefiting adjusted EBITDA by $1 million in to Q2.
Total revenue guidance is offset by the delay of matches that of next year, but that does not have a material impact on adjusted EBITDA.
Given macro uncertainty, we're generally living our organic second half expectations unchanged with that I'll pass it back to Andrew for some concluding remarks before we go into Q&A.
Thanks, Thomas we've had a strong second quarter delivered on the targets. We set for the year. We seen continued member revenue growth underpinned by a strong and growing waitlist.
Our operational excellence initiatives are continuing to drive profitability and adjusted EBITDA was ahead of expectations for the third quarter in a row, leading us to increase our full year EBITDA guidance for the second time this year.
We've also made great progress on cash flow, we remain focused on delivering for our members and further driving membership value and we're more confident than ever in the growth opportunities ahead for our business.
I'd like to thank all our teams globally for their hard work and dedication throughout this year.
With that we will now hand over to questions to the operator, we can take the first question. Please and as a reminder, you can either ask your question over the phone or submitted over the webcast.
Thank you at this time I would like to remind participants and I wanted to ask a teleconference question. Please press the star followed by the number one on your telephone keypad.
Our first question comes from the line of Steven Zaccone from Citi. Please go ahead with your question.
Great. Good morning. Thank you for taking my question and congrats on the improvement here.
I was curious if you could talk a little bit more about North America, because I guess the commentary you gave that business was stable it sounds like Continental Europe , and the U K had some of their best quarter. So how is member spend per visit trending in North America.
Some of the changes that you've made with regarding menus and stocks been received by members and are there any houses in particular, where you still feel like you have work to do.
Hey, Steven it's Andrew.
So let me stop and I think I should give you an overall view of our demand. So we've seen demand, it's really strong across F&B bedrooms and events.
On a waitlist to all time high Footfall has continued to grow nicely, we spend which I mentioned in my prepared comments, yes.
U K and Europe have been very good for us.
You can see a lot of our new initiatives driving high spend and paying off in the quarter. We have seen that in North America. So North America has increased and saw improvements well all of the changes on the local menus are in place.
Service has is starting to improve and gain traction which drives tremendous spend as we've always talked about.
If I think of June June was the strongest month.
Year to date across all our regions and North America and also July is in line with trends that we're seeing Q2 say North America is improving like I said in my comments.
Panned out.
The changes we've done in Malibu. Please scope is in Malibu is what really well we've had some really nice traction.
<unk>.
Concepts, California, Medicaid into a few of our houses but in general we're feeling much more positive about North America.
Okay great.
Our topic I wanted to hit on is the home business. So it seems to still be exceeding expectations. Despite.
The backdrop for big ticket discretionary spending being a bit challenging so.
Have you raised your outlook for Soho home this year, and just maybe give us a refresher how large it is today and where you think it can go over time.
Good question Steven said, we've obviously had a lot about with you in the past is it does continue to exceed expectations. It's growing really nicely again this year much more than what you hear.
In the home industry is particular RH and other folks.
We are very focused on profit they shared with us and improving member experience.
For example, we just launched our first <unk> collection to our members because our Mems kept asking us where they could find our bathrooms, so thats pretty exciting.
I'm not going to talk about how big it is just yet I think he has got another year of growth until we really start articulating that business, but yet.
It's really strong for us.
And again in.
<unk> bye.
So everything that we do it.
Based on what our members are asking us to do and it continues to delight them and grow really nicely.
Great. Thanks for all the detail take care.
Yes.
Thank you. Our next question comes from the line of Sharon Zackfia from William Blair. Please go ahead with your question.
Hi, Thanks for taking my question.
I appreciate there's been a lot of complexity with opening new properties for you as well as others have over the past few years, but can you talk about the pipeline for 'twenty four 'twenty five and kind of what that looks like maybe then breaking that down by where the focuses regionally.
Sure Hi, Sharon Great care for me.
So if you think about it opening new houses is important and we do have a great pipeline of $5 seven for the placebo feature.
What matters most to us.
Keep growth and retention.
Really proud of the members we welcomed in our existing houses this quarter, which delivered 35% increase in membership revenues.
We've opened 24 fantastic houses since 2018, and what Youre seeing is they are really hitting their stride in a lot of them are now ahead of historical maturation test. So I think we obviously our membership business and we focus on membership houses are part of that.
Regarding today.
Developers are suffering from supply chain issues labor availability, it's obviously, a more expensive financing environment and you've heard on other earnings recently.
I did want to talk a little bit about Manchester because we did it in my pre recorded comments.
The developers are renovating an old good artist studio building is built.
In the 19 fifties, it's got expensive structural work.
Just taking a bit longer because as you know we go in more historical buildings were not new builds and sometimes we have some lumps and bumps along the way on that so the project is progressing well now.
It Hasnt impacted membership applications and again that is the key so actually our membership applications continue to grow actually ahead of our exploration expectations of Manchester.
So that's the only one that's moving this year if we think about the next three years, we do have a pipeline locked at five to seven week continue to get favorable terms or terms haven't changed we're still asset light and the favorable terms that we have and we continue to grow in the key regions like North America.
Across you add some more growth outside of London here in the U K and some further growth in Asia. So that Hasnt changed just a few small lumps and bumps that we're managing.
Thanks for that and I know you've done a lot to improve the member experience.
Yes, when you.
Talk to you remember either anecdotally or in a more systematic fashion, where do your members think there has been the most improvement and where do they think they are still the most opportunity to improve going forward.
Yes. So we recently did is another one of our surveys across all of our members and what they've noticed in the last six months as we've really improved food, which is one of the things that they really wanted us to do so they've noticed the food becoming more local had different houses offering different offers becoming more season.
No they've noticed the improvements we've made in communications and our digital channels on our App on our events.
We've got a lot more choice in our events. We recently did could Sheila for our members and House Festival. So they are seeing the things that we're really focused on the one area that we continue to to really focus to improve any service. So a lot of the next six months. He is going to be based around service and improving our service improve.
Yeah.
The quality of service the speed of service friendliness of service.
10 of our largest houses we've just introduced a new low code member host. So this is a new role really when the members come into our houses we greet them in a really friendly way, we take them to the table, we get the maturing we know a lot more about them now. So we can really really help them have a better experience.
But I would say a lot of the things we've talked about our members notice and enjoy and then the next.
Next six months is definitely service.
Okay. Thank you.
Thank you. Our next question comes from the line of Stephen Grambling from Morgan Stanley . Please go ahead with your question.
Hey, thanks.
Maybe a follow up on the cadence of house build it seems like.
This year, even with the lower house build youre kind of hitting this.
And a positive cash from operations inflection.
Yes.
Why a habit accelerate do you feel like actually having a much more balanced growth rate may actually be providing optionality down the road.
Great Great question Steven.
Thomas answer that one thanks, Steven So if you think about our pipeline. Obviously these are projects that we've committed to over the past few years.
And so.
What's being delivered in the next couple of years really got locked in.
And historically.
A couple of quarters ago, we slowed our guidance just because we didn't want to be aggressively trying to go out and find new deal do we really want to be.
Picky around looking for what was best for our members and work to generate the highest rois.
We have a good pipeline as Andrew highlighted earlier.
Yes to continue to deliver on our growth.
And so we.
We are going to deliver the pipeline that we have embedded I mean, we are dealing with broad macro construction delays and so that is having an impact on how many we can deliver this year.
Got it and then a quick clarification as a follow up I think I caught this in your remarks, but the core guidance. I think you said is unchanged I think I saw that the FX.
Moved by about $10 million, which looks like it's a little bit more than that.
The increase in EBITDA is it just a trend like a translation issue like that doesn't fully flow through to the bottom line and maybe any any kind of color you can provide in time in terms of puts and takes there yes.
Yes, so when we think about the guidance, we updated the midpoint of the guidance range for the year on revenue by $5 million, we had about a $10 million benefit from FX.
Offset almost directly by a $10 million impact from house delays.
And so we're upgrading our guidance for the year by $5 million on the top line.
EBITDA, we raised the midpoint of our guidance by $3 million.
About $1 million of that was FX and about $2 million of that.
Yes.
The organic trading.
We're not seeing a big impact from the house ways in terms of benefiting our performance for the year.
Super helpful. Thank you.
Thank you. Our next question comes from George Kelly from Roth and Ken. Please go ahead with your question.
Hey, everyone. Thanks for taking my questions and congrats on a real strong quarter.
So the first topic I wanted to cover is your house level contribution margin.
Really nice improvement there sequentially and year over year I was curious.
I guess two questions on that.
What were the biggest driver as you mentioned a whole bunch of stuff in your prepared remarks, but are there one or two things that you could isolate just.
Being most meaningful in driving that margin improvement and then second question on the same topic is.
What initiatives have yet to play out that youre excited about and could those sort of bring us another leg higher.
Contribution margin.
Hi, George.
Wait here for me.
The team are doing a good job.
Delivering on our initiatives that we laid out containing costs and sharing the membership rolls down to profits.
Improving margins on F&B. So we've just been very consistent on delivering that we can leak out which is what we articulated we were going to do at the beginning of the year. The things I'm. Most excited about is continuing to be consistent on delivering those improvements on margin within F&B.
Managing our costs as we grow.
On reducing our G&A as we look through for the next 12 months.
Because there's some really good opportunities. Therefore, so we're just continuing to be very focused on managing the core of our cost structure really well.
Okay. Thanks, and then second question for you on your waitlist the growing waitlist.
Yes.
Curious.
What does it tell you I guess the broad question and I am just curious like does it give you a lot more confidence to take pricing in the future or are there other ways to monetize folks on that waitlist I don't know through alternative membership offerings or.
Anything thats being contemplated there.
Thats all I had thank you.
Thanks George.
We look nothing better than welcoming new members into our houses. It's what we do best we are seeing very strong applications. The most in every year across all our regions. We're super pleased with some of the newer houses like Austin, and Nashville, and Paris, and Rome in Tel Aviv that really really starting to.
Gain momentum with the local membership so if we think about our membership our retention remains really strong and thats one of our key metrics driving that recurring revenues.
Delivering that 35% growth.
Our application levels continue to be.
Exceptional so that that's something that we obviously work really hard on especially in our newer regions say theres a lot of appetite for joining so our house, we're not thinking about pricing this year yet.
As a reminder, we did increase pricing for new members at the beginning of this year higher than existing members. The existing member increase was below inflation and.
We were not really thinking about monetizing that way at least we have our trends obviously set a trend that continues to grow and he sold items in the quarter, but we're just focused really on growing our membership retaining all members and delighting them when the rental houses.
I would just add historically, we've increased prices.
Most years, we didn't during progress, but then for the past two years, we've had outsized price increases.
So we always have we always look at increasing prices every year.
And so that's where we will make looking at the macro environment at the end of the year.
Got you. Thank you.
Thank you. Our next question comes from the line of Joe Greff from JP Morgan. Please go ahead with your question.
Hello, everyone.
Andrew I had a question on the house pipeline and I know you talked extensively on it.
Would you say that the houses that you had originally planned to open in 2024 also similarly delayed or.
Do you actually see.
And above average growth youre in houses.
Fitting from the delays in 2023, how are you thinking about next year.
Hi, Joe.
In short answer no.
And just to move into next year and the current plan of five to seven is still the plan for 2024.
We have not seen any movement in that thus far.
As a nice pacing throughout the year.
Like I said in my prepared comments the only change we're seeing right now is Manchester.
And Thats why we just reiterating that we still got the $5 seven planned out each year for the next three years.
And.
Yes, there is lots of macro challenges, but we're very focused and we have a fantastic team working with our partners to deliver them.
Great.
Frozen. Thank you for that my next question is the frozen member accounts.
Spike up and it's up in.
In absolute terms and in follow up as a percentage of total memberships by a wide margin over the last five quarters.
What's driving that is that just a function of.
And you will do increases or what's driving that.
Candidly no it's actually normalizing.
It's below 2% of total members always healthy for us to have frozen members. We are super flexible with our members. It's part of what we do.
B remember situation.
Situation changes they made.
My life changes so that I think is a real value add membership being able to freeze any.
If you say, we're still below pre COVID-19 levels on frozen so we're not even where we used to be before COVID-19.
We're not concerned about frozen.
The benefit to our members and we always embraced it when our members want to freeze Joe I'll just add that remember during October we saw a big spike in fragrance percentages of number of members.
Obviously, that's going to be a pause after people freeze and tanger.
Andrews point, I think we're normalizing and we're still.
We're very happy that we're I think we're still sub 2% and then pre COVID-19.
3% on average.
Okay.
Thank you.
Okay.
Thank you Alan.
Our next question comes from the line of Julie Hoover from Bank of America. Please go ahead with your question.
Alright, Thank you for taking my question.
Other revenues were really healthy this quarter you touched on several of them already but can you discuss where else you're seeing strength in that segment.
Hello square feet during the summer. Thank you.
Sure Let me Thomas answer that question.
So as Andrew said.
Had strong we're continuing our strong growth.
<unk>.
Despite us focusing more on profit given then revenue there.
We continue to see just see really good growth there management fees.
To grow remember we added two net last year.
They're performing well and we're also seeing good organic growth.
And that segment Scorpions is growing year over year.
We have heard anecdotally that the <unk> market grew a little bit softer, but we continue to see strong growth there.
And then finally I'd highlight that our town houses are performing very well.
Remember those are those are hotels with restaurants.
So they're benefiting from really strong revpar trends.
Okay, great. Thank you very much.
Thank you.
There appear to be no further questions at this time I'll now hand, the call back to Thomas Allen for concluding remarks.
Yes.
Thank you everyone for joining the call today. Please reach out if you have any follow up questions. We look forward to talking to you all again after our third quarter results.
Thank you. This does conclude today's conference call. Thank you for participating you may now disconnect.
[music].
Okay.
[music].
Sure.
Sure.
[music].
Okay.
Yes.
[music].
Okay.
Yes.
Okay.
[music].
Okay.
Yes.
[music].