Soho House & Co - Q2 2024

Transcript

Operator (participant)

Hello, everyone, and welcome to the Soho House & Co. Inc. 2nd quarter 2024 results conference call. Please note that this call is being recorded. Everyone is on listen-only mode to avoid any background noise. You will have an opportunity to ask questions to our speakers later in the Q&A session. If you'd like to ask a question during that time, please press star one on your telephone keypad. Thank you. I'd now like to hand over to Thomas Allen, Soho House & Co. Inc., Chief Financial Officer. You may now begin.

Thomas Allen (CFO)

Thank you for joining us today to discuss Soho House & Co.'s 2nd 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 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 Q2 earnings release, which can be found at sohohouseco.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 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. Reconciliations from the most comparable GAAP measures are available on today's earnings press release. Now, let me hand it over to Andrew.

Andrew Carnie (CEO)

Thanks, Thomas, and hello, everyone. I'm going to update you on the quarter's highlights and provide an update on the progress we've made against our strategic priorities. I'll then hand over to Thomas to talk through the financial performance, give an update on our balance sheet and our guidance before moving on to Q&A. Q2 has been another strong quarter, with year-on-year and quarter-on-quarter growth in membership, revenues, and EBITDA, as we continue to deliver against our strategic priorities of growing, enhancing membership and operational excellence to drive greater profitability. Membership demand continues to be very strong. Membership revenues increased 16% versus the same period last year and 3% versus the last quarter. Our global wait list continues to grow, finishing the quarter at 111,000, and we welcomed 6,000 Soho House members, growing to 204,000 members globally.

Soho House member growth was driven by the strong opening of Soho House in São Paulo, our first house in South America, and other new openings such as Mexico City and Portland. We now have 26 houses that have opened since 2018 and are still in their ramp-up phase. We saw strong growth in houses such as Austin, Nashville, Downtown LA. Dumbo, White City, Hong Kong, and Rome this quarter. As we think about the future, we also announced our plans to open new Soho Houses in Madrid, Milan, Barcelona, and Tokyo over the coming years, helping to further strengthen membership demand. Q2 Adjusted EBITDA grew $2 million year-over-year to $33 million.

It's worth noting that excluding our planned investments in growth with the initial losses at new houses, which this year includes Portland, São Paulo, and Bodrum, that had a $4 million greater impact in the quarter, EBITDA would have grown closer to 20%. Total revenues grew 6% year-on-year to $305 million. We saw a sequential improvement in in-house trends, driven by better footfall and spend per visit, with in-house revenues up 2% year-on-year, improving throughout the quarter. We are really pleased with the membership demand we are seeing in our new markets and ramp-up houses, which gives us the confidence to raise our financial guidance today on total membership and membership revenue, while reiterating guidance on total revenue and adjusted EBITDA.

Our goal is to provide our members with a great experience in service in our houses, which we have seen reflected in improved member satisfaction scores again this quarter. We introduced more dining choices across all our houses, including new menus, new pop-ups, and one-night-only experiences. We continued our focus on service, rolling out further training, increasing the speed of service, and enhanced member recognition when members check in and eat with us. We increased the quality and variety of member events, which, combined with the personalized event recommendations on the app, resulted in almost 20% more members attending events year-on-year, and an increase of spend per member at events attended. Finally, we continue to provide members with the unique experiences they can't find anywhere else. We delivered our first backstage Soho House pop-up at Glastonbury Festival and a sellout House Festival in London.

We continue to focus on operational excellence, which leads to greater profits and cash flow. Through our new global beverages deal, we've improved the quality and choice of drinks for our members and have grown margins at the same time. We continue to transform our back-of-house systems to help us achieve greater efficiencies, improving member service and lowering our costs. And we have further streamlined our corporate office to reflect the current operating environment and our plans for fewer new openings over the next couple of years. These strategic initiatives contributed to House-Level Contribution, increasing 12% year-on-year, with House-Level Margins up approximately 100 basis points, despite more new houses having a short-term impact on our growth and margins. Now, let me pass over to Thomas to give you more detail on the numbers and our guidance.

Thomas Allen (CFO)

Thanks, Andrew. Total revenues for the 1st quarter grew 6% year-on-year to $305 million. Membership revenue rose 16% year-on-year to $104 million, while in-house revenue was up 2% and other revenues were down 1%. House level contribution was up $6 million, or 12% year-on-year, with house level margins up almost 100 basis points to 27%, despite the short-term impact of new house openings. Other contribution was down $3 million, or 16% year-on-year, due to the initial impacts from Scorpios Bodrum, the timing of design development fees, and lower standalone restaurant and townhouse sales. Giving more details on revenue. Year-on-year revenues were up more than $16 million, driven by the increase in recurring membership revenues. Membership growth and pricing drove a $14 million dollar increase in membership revenues.

In-house revenues were up $3 million year-over-year, while other revenues were $1 million lower. Like-for-like in-house revenues for the quarter were approximately flat year-over-year, an improvement from the mid-single-digit year-over-year decline we saw in Q1, and trends were relatively consistent across our major geographic regions, the Americas, U.K., and Europe/Rest of World. Our 2nd quarter Adjusted EBITDA was $33.3 million, up $2 million year-over-year. Higher membership revenues was offset by opening Soho House Portland at the end of the 1st quarter, and Soho House São Paulo and Scorpios Bodrum in the 2nd quarter, compared to last year when we only opened Soho House Bangkok in the 1st half of the year.

As you know from our maturation curves, we are confident all will drive long-term profitability, but in the quarter, these new openings had a year-over-year impact on our EBITDA growth of approximately $4 million. Now, discussing our balance sheet. We ended the quarter with $154 million of cash and cash equivalents, $10 million higher than the end of the 1st quarter, and $665 million of net debt. We had positive cash flow from operating activities again in the quarter, our 5th quarter in a row, and up approximately 80% from last year. While we incurred sequentially higher CapEx in the quarter related to all our openings, our cash flow from operating and investing activities was still net positive.

We continue to expect to spend $90-$100 million of CapEx in the year, in line with our prior guidance. We ended the quarter at 5x net debt to Adjusted EBITDA, down from 6x at the end of the 2nd quarter of 2023. We announced in February the board had approved a new $50 million share repurchase authorization. Following the dissolution of the special committee in late May, we began repurchasing stock and bought back $5 million of shares in the quarter. Finally, after a quarter of strong delivery across the business and particularly good membership metrics, we are raising our year-end membership guidance to over 212,000 and increasing our membership revenue range to $410-$420 million, from $405-$415 million.

We are reiterating guidance for other key financial metrics, total revenue and Adjusted EBITDA. With that, let me hand back to Andrew.

Andrew Carnie (CEO)

In closing, it's been a solid quarter for the business as we deliver against the goals we've set ourselves this year. I would like to thank our teams globally for their hard work and passion, and our members for their continued support and loyalty. I also want to mention that we plan on holding Investor Day in New York on December the 5th. We look forward to sharing with you our plans around long-term growth and profitability and bringing to life our excitement about the significant opportunities ahead. With that, we will now open up to questions. Operator, we can take the first question, please. As a reminder, you can either ask your questions over the phone or submit them over the webcast.

Operator (participant)

We are now opening the floor for question and answer session. Again, if you'd like to ask a question, please press star one on your telephone keypad. Our first question comes from Stephen Zaccone from Citi. Your line is now open.

Stephen Zaccone (Analyst)

Great, good morning, and thanks very much for taking my question. I wanted to focus on the house revenue improvement. Could you talk about any call-outs by region where things are progressing a little bit better than the overall trend? And then the broader restaurant backdrop has seen some weakness. So how do you feel about your competitive positioning, just given some of the macro data points?

Andrew Carnie (CEO)

Hi, Stephen. First and foremost, as you know, we're a membership club, so we're really pleased to see the strength of our demand in our membership, and it shows that our members are consistently using our houses. So, it was nice to see that our footfall trends improved sequentially in the quarter, but more importantly, I think as I mentioned, we saw spend per member improve in the last quarter. And I said on my prepared remarks that we have a lot of initiatives to improve these, which are really delivering results. Regarding any regional variance, the trends have been relatively similar across all our major geographies, across America, U.K., and Europe, rest of world, and including Latin America. So, we're not seeing any real difference. We're seeing an improvement across the board from when we reported in Q1.

Stephen Zaccone (Analyst)

Okay, great. Then my follow-up question is just: with the increase in the membership count guidance, Thomas, how should we think about preliminary planning for 2025? Is this a good run rate for us to think about on a go-forward basis in terms of membership count growth?

Thomas Allen (CFO)

Thanks, Stephen. So, I think it's early to give guidance for 2025. As we said, we'll host an Investor Day in December, and we're gonna talk a lot then about our long-term plans. So, if you don't mind, waiting till then.

Stephen Zaccone (Analyst)

Okay, no problem. Thanks very much, guys.

Operator (participant)

Question comes from Sharon Zackfia from William Blair. Your line is now open.

Sharon Zackfia (Analyst)

Hi, thanks for taking the question. I guess in terms of new house openings, are there any more plans for this year? And you cited, you know, a handful that you've announced. Are any of those coming in 2025? I'm just trying to figure out what we should think about for new house openings.

Andrew Carnie (CEO)

Hi, Sharon. So, we said at the beginning of the year, we anticipate opening 2-4. So, we've already opened 2 great houses, big houses in Portland and São Paulo. Next up is at Soho Mews House in London, which is our first Mews concept, and it's a beautiful unique house, which is going to be very much aimed at our longer-tenure members. So, we're very excited about that for this year. We have Manchester opening early next year, and then we recently announced upcoming openings with Barcelona for next year, and then following that, we have in the future, Madrid, Milan, and Tokyo. So, regarding the end of this year, we were very focused on opening Mews House.

Sharon Zackfia (Analyst)

Okay. And then on here in the 3rd quarter, I think we're lapping now that kind of Hollywood strike last year, which I think impacted your business in, in several areas. Can you talk about kind of how we should think about in-house revenues as we, we go into the back half of the year as we're lapping that impact?

Andrew Carnie (CEO)

Yeah, that's a good question. I wouldn't say the impact is totally gone right now. There's a lot of folks still in the entertainment industry that aren't back at work, and there's a transition going in Hollywood as well. So, I wouldn't say that it's completely over, but what I would say, and I'd reiterate, that across pretty much all our houses in the quarter, we saw an improvement in member spend, and we're confident on that continuing through Q3.

Sharon Zackfia (Analyst)

Okay. Thank you.

Operator (participant)

Your next question comes from Shaun Kelley of Bank of America. Your line is now open.

Shaun Kelley (Analyst)

Hi, good morning, everyone. Thanks for taking my question. Andrew, Thomas, just wanted to ask about, you know, what you're seeing, like, at, as it relates to cross-border travel. You know, obviously, it's been a big theme. A lot of U.S. and domestic hotel companies are talking a bit about, you know, outbound travel weighing on some of their domestic brand. So, just curious on, you know, you have a unique lens into that. What are you seeing, you know, pattern-wise and, you know, kind of any way you can, track or give a little insight there? Thanks.

Andrew Carnie (CEO)

Good question. Hello, Shaun. We have had a good season in Europe, and that's the region that we see most of cross-border travel. We've, as you saw, on occupancy and ADRs are broadly in line with last year. Occupancy is slightly up, actually. So, we have had a, you know, a good season. We've had a fantastic last three weeks in Paris because of the Olympics. So, for the most part, we've continued to see really good cross-border traveling with our members across the world into the houses that we have bedrooms.

Shaun Kelley (Analyst)

Great. Thanks for that. And then, Andrew, I noticed in the beginning of the prepared remarks, you mentioned some houses, you know, that I think we would expect are doing well, Austin, Nashville, but you also mentioned Downtown L.A. and Hong Kong, and those have been names that in the past, I think have not been, you know, top of the kind of funnel or ramp. So, are you starting to see, you know, either a broadening out, I mean, some of those may be a little idiosyncratic with the kind of timing and, you know, timing of openings, but curious on, on both those two markets in particular, given you have several houses in L.A., and, and obviously, Hong Kong is a bit of a unique gateway in Asia.

Andrew Carnie (CEO)

That's a great question, Shaun. We couldn't be more pleased with Hong Kong. We've got a fantastic new team in there from the beginning of the year. They've done a terrific job in Hong Kong, and we've seen terrific growth there throughout the year. It's one of the things we're most pleased with, complete turnaround in Hong Kong, and it's all down to delivering what the member really wanted in that city. Obviously, a big comeback in footfall as well, and the city's bounced back. And then with Downtown LA, we've got really good programming in Downtown LA, and we've seen a real good ramp-up in our members. We feel really good about the service and the food that we're delivering now in Downtown LA. So, that's another house that we're really proud of this year.

Shaun Kelley (Analyst)

Great. Last question from me would just be, Thomas, you mentioned, I think, a $4 million drag from the new openings, at least relative to last year. Can you just remind us, like, either was that, you know, all isolated to this quarter and, or, you know, this, the first half, and just kind of how should we think about, you know, any incremental, you know, drag from those houses? Obviously, it's undoubtedly contemplated the guidance, but just trying to kind of think about, you know, the out years and, and modeling there going forward. Thanks.

Andrew Carnie (CEO)

Yeah. So, Sean, if you think about what we opened last year versus this year, so last year, we opened Bangkok in the first half of the year and Mexico City in the second half of the year. And then this year, we've opened, we've opened the three, the three sites that we highlighted, Portland, São Paulo, and Bodrum, in the first half of the year. And then, as Andrew said, we're likely only going to open up Soho Mews House in the second half of the year. And so, this year, we've seen a, you know, that's, that's almost $4 million dollars that we talked about on the call was really impact-- was really the, the 2nd quarter impact.

1st quarter, we saw a bit of a drag, too, and then 2nd half of the year, which actually flipped to a bit of a tailwind, given the impact of openings last year.

Shaun Kelley (Analyst)

Thanks so much.

Operator (participant)

Our next question comes from George Kelly of Roth Capital. Your line is now open.

George Kelly (Analyst)

Hey, everybody. Thanks for taking my questions. First, on Scorpios, and I apologize, I missed part of your prepared remarks. Can you talk about how the new, the Bodrum, location is performing and, and your plans for opening, in Tulum, at some point, if that's still later this year? And then how do you expect the, the Bodrum, you know, given that you've seen it for a little while since it's been open, how do you expect it to perform, as compared to the, the location in Mykonos?

Andrew Carnie (CEO)

Hi, George. Good question. Firstly, Scorpios Mykonos has gotten off to another strong season. I think it's gonna be one of our best, so that shows the strength of the Scorpios brand. Bodrum opened in June. It's. I was there recently. It's a beautiful property. We've got our first private bungalows, which is the first accommodation Scorpios has delivered, and we're confident it will be another success story, and next year it will build, you know, just like Scorpios Mykonos has done, and we're confident in the future it will get to the same levels as Mykonos. With Tulum, it's still under construction. As reported, there was a hurricane in that region, so, the developers had to pause construction.

In that property, we'll also have an accommodation component, and we're excited to see the performance when it opens.

George Kelly (Analyst)

Okay. Okay. And that location will probably open, is it next year?

Andrew Carnie (CEO)

Most likely.

George Kelly (Analyst)

Okay. And then second topic I wanted to cover is just, you speak about member surveys and satisfaction. I know you're kind of regularly checking on those things. I guess two-- so two questions. The first one is, what are you hearing that members are still maybe complaining about or wanting more of? And then secondly, have you seen any kind of changes to attrition this year in recent quarters?

Andrew Carnie (CEO)

So, we measure... We obviously do our surveys, where we ask our members questions. Then we have our weekly survey, which measures our success on service, food, atmosphere, experiences. What our members continue to want more of is unique experiences and be in houses that are fantastic experiences for them, and we've seen our scores improve on that. What members want us to continue to focus on is great service, friendly service, and member recognition when they're in the houses. And I think I quoted those things on my pre-recorded remarks. That's what we're very, very focused on. What was the second part of your question?

George Kelly (Analyst)

Whether or not you've seen any changes to member retention?

Andrew Carnie (CEO)

No, we're. It's consistent, so we're not seeing any changes.

George Kelly (Analyst)

Okay. Thank you.

Operator (participant)

We have reached the end of our Q&A session. Thank you, everyone, for joining today's call, and we hope you have a wonderful day. Stay safe, and you may now disconnect.