Soho House & Co Inc

Hello everyone and welcome to the Soho House and Co. Incorporated second 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 1 on your telephone keypad. Thank you. I'd now like to hand over to Thomas Allen, Soho House Incorporated Chief Financial Officer. You may now begin.

Thank you for joining us today to discuss Soho House & Co.' 's second quarter financial results. My name is Thomas Allen, and I'm the Chief Financial Officer. I'm here 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. 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 in today's earnings press release. Now, let me hand it over to Andrew.

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 waitlist continues to grow, finishing the quarter at 111,000. And we welcome 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 Sao 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 the 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 Sur 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, San Paolo 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 and 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 and 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 in 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.

Thanks, Andrew. Total revenues for the first 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 impact from Scorpius Boardroom, the timing of design and 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 increase in membership revenues. In-house revenues were up $3 million year-on-year, while other revenues were $1 million lower. Life-like in-house revenues for the quarter were approximately flat year-on-year, an improvement from the mid-single-digit year-on-year decline we saw in Q1. and trends were relatively consistent across our major geographic regions, the Americas, UK, and Europe slash rest of world. Our second quarter adjusted EBITDA was $33.3 million, up $2 million year over year. Higher membership revenues was offset by opening SOAS Portland at the end of the first quarter and SOAS Sao Paulo and Scorpius Bodrum in the second quarter, compared to last year when we only opened SOAS Bangkok in the first 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-in-cash equivalents, $10 million higher than the end of the first quarter, and $665 million of net debt. We had positive cash flow from operating activities again in the quarter, our fifth 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 to $100 million of CapEx in the year in line with our prior guidance. We ended the quarter at five times net debt to adjust to EBITDA, down from six times at the end of the second 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 cost of 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 to $420 million and $405 to $415 million. We are reiterating guidance for other key financial metrics, total revenue and adjusted EBITDA. With that, let me hand back to Andrew.

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 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.

We are now opening the floor for question and answer session. Again, if you'd like to ask a question, please press star 1 on your telephone keypad. Our first question comes from Stephen Zacon from Citi. Your line is now open.

Great. Good morning. Thanks very much for taking my question. I wanted to focus on the house revenue improvement. Could you talk about any callouts 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?

Hi, Steven. 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 consistent at using our houses. So it was nice to see that our football 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, UK, and Europe, the rest of the 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.

Okay, great. And 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?

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 going to talk a lot then about our long-term plans. So if you don't mind waiting until then.

Okay, no problem. Thanks very much, guys.

question comes from Sharon Zechia from William Blair. Your line is now open.

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 a handful that you've announced. Are any of those coming in 25? I'm just trying to figure out what we should think about for new house openings.

Hi, Sharon. So we said at the beginning of the year we anticipate to open two to four. So we've already opened two great houses, big houses in Portland and Sao Paulo. Next up is at Soho Muse House in London, which is our first Muse 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 Muse House.

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

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 lot of, there's a transition going in Hollywood as well. 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.

Thank you.

The next question comes from Sean Kelly of Bank of America. Your line is now open.

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

Good question. And hello, Sean. 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, our occupancy in ADRs are broadly in line with last year. Occupancy is slightly up, actually. So we have had 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 great thanks for that and then um andrew i noticed in the the beginning at the prepared remarks you mentioned some houses um you know that i think we would expect are doing well austin nashville but you also mentioned downtown la 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 either a broadening out? I mean, some of those may be a little idiosyncratic with the kind of timing and timing of openings, but curious on both those two markets in particular, given you have several houses in LA and obviously Hong Kong is a bit of a unique gateway in Asia.

That's a great question, Sean. 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. um in hong kong and we've seen terrific growth there throughout the year so one of the things we're most pleased with um complete turnaround in hong kong uh and it's all down to delivering what the member really wanted in the in that city obviously a big comeback in football as well and the city's bounced back and then we downtown la uh we've got really good programming in downtown 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.

Great. Last question for 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, 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 modeling there going forward. Thanks.

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 sites that we highlighted, Portland, South Palo, and Bodrum in the first half of the year. And then as Andrew said, we're likely only going to open up Soho Muse House in the second half of the year. And so this year, we've seen a, you know, that's almost $4 million that we talked about in the call was really the second quarter impact. First quarter, we saw a bit of a drag, too. And then second half of the year, which actually flipped a bit of a tailwind, given the impacts of openings last year.

Thanks so much.

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

Hey, everybody. Thanks for taking my questions. First on Scorpius, and I apologize, I missed part of your prepared remarks, but can you talk about how the new Bodrum location is performing and your plans for opening in Tulum at some point, if that's still later this year? And then how do you expect the Bodrum, 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 location in Mykonos?

Hi, George. Good question. Firstly, Scorpius Mykonos has gotten off to another strong season. I think it's going to be one of our best. So that shows the strength of the Scorpius brand. Bodrum opened in June. I was there recently. It's a beautiful property. We've got our first private bungalows, which is the first accommodation Scorpius has delivered. And we're confident it will be another success story. and next year it will build just like Scorpus 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 and in that property we'll also have an accommodation component and we're excited to see the performance when it opens.

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

Most likely.

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, 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?

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 attrition. 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 schools improve on that. What members want us to continue to focus on is great service, friendly service, and member recognition when they're in their houses. And I think I quoted those things on my pre-recorded That's what we're very, very focused on. What was the second part of your question?

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

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

Okay, thank you.

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.