Soho House & Co Inc

Good morning. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the SoHo House & Co third quarter 2024 conference call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. At this time, I'd like to turn the conference over to Thomas Allen, Chief Financial Officer. Please go ahead.

Thank you for joining us today to discuss Soho House & Co.' 's third quarter financial results. My name is Thomas Allen. 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 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. We assume no obligation to update any forward-looking statements if our views change. By now, you should have access to our third quarter earnings release, which can be found at sohouseco.com in the news and events section. Additionally, we have posted our third quarter 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 for the most comfortable GAAP measures are available in today's earnings press release. Now, let me hand it over to Andrew.

Thanks, Thomas, and hello, everyone. Before we get into the quarter, I wanted to discuss another press release we published this morning. In July, UKIPO retained financial advisors to do a strategic review of Sohausen Co. to enhance shareholder value, as they believe the inherent value of the company is not reflected in its current share price. Earlier this week, the board of directors of the company received an offer from a new third-party consortium who has spent substantial time and energy understanding the company, including recent internal due diligence and time with management. The group presented an actionable plan with an offer of $9 per share that our executive chairman would support. A substantial premium to the current share price. The offer is conditional on certain significant shareholders, including UKIPA, rolling over their equity interests in the company. As a result, our board has reformed an independent special committee to evaluate the offer. Remember, our board and their affiliates own approximately 75% of our common stock. Given that this work is led by independent members of the board, as management, we are not able to address any questions regarding it on the Q&A. No assurances can be given that the special committee's assessment will result in any change in strategy or if a transaction is undertaken. Until there is more clarity, we will also hold off on confirming a date for our investor day. Now I'm going to update you on the course'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 financial performance, give an update on our balance sheet and our guidance before moving to Q&A. We continue to deliver against our strategic priorities of growing and enhancing membership and operational excellence to deliver greater profitability. Q3 has been another solid quarter with year-on-year and quarter-on-quarter growth in membership revenues and adjusted EBITDA. Membership demand continues to grow nicely. Membership revenues increased 17% versus the same time last year and 5% versus the last quarter. We welcome 4,000 Soho House members growing to approximately 208,000 members globally while our waitlist remained at record highs. We now have 27 houses that have opened since 2018 and are still on their ramp-up phase. Like recent quarters, these houses drove the majority of our membership growth. With really strong growth in houses such as Sao Paulo, Portland, Mexico City, Rome, and Paris this quarter, we expect to see a continuation of this proven maturation curve in 2025 and beyond. Total revenues grew 14% year-on-year to $333 million. We again saw a slight sequential improvement in light flight and house trends, driven by improved spend per visit, with in-house revenues up 5% year on year. We saw light flight sales growth in our housing UK, Europe, and the rest of the world, while North America was slightly behind. Scorpius Mykonos had a record-breaking season, and we opened our second Scorpius in Bodrum. So our home continues to be strong, with this quarter's new collections and our first source book delivering double-digit revenue growth in the quarter. We continue to be excited about the opportunity for Soho. Q3 adjusted EBITDA was 48 million, growing 38% year on year, but slightly below our expectations. That said, we continue to live a good growth, levering strong membership revenue and our progress on operational excellence. This led to increased adjusted EBITDA margins of approximately 14.5% this quarter, despite a choppy revenue environment. Net income was positive in the quarter. up from negative 49 million in the third quarter last year. When it comes to growing and enhancing membership value, we continue to focus on providing our members with the best experience in our houses, which we've seen reflected in our continued improving membership satisfaction scores this quarter. We opened Soho Muse House at the end of the quarter in London's Mayfair area. Our new house, the 11th in London, has three floors in a cobbled courtyard with an outdoor terrace and a restaurant British Grill menu. On the top floor, we are providing our members with live performances in such a great space. So far, we've hosted Nick Cave, Jules Holland and Macy Gray, among many others. We continue to deliver unique events in our houses. We again hosted Food Festival at So Farmhouse and introduced it to our National Houses Quarter. These types of events are resulting in more members attending our events and increased spend per member at events they attend. As well as opening great new houses and delivering unique events, we'll also continue to focus on ensuring our members enjoy the best experience in our existing houses, whether that's through training, our F&B offering, including our new no and low drinks offer, or house improvements. I was recently in LA visiting all our houses and teams, and I'm pleased to see our investments in Malibu, Holloway House, and West Hollywood are delivering an enhanced member experience and also driving revenues. Our focus on operational excellence leads to greater profits and cash flow continued over the period. We are driving change that both directly benefit our members as well as change to simplify our business and transform our back of house systems. In turn, helping us achieve greater efficiencies, improve service and lowering our costs. This is an important strategic unlock for the business and we have made significant progress over the recent months. While this is having a slight drag on our quarters results, it will be a significant tailwind in the long run As part of this transformation, we continue to simplify our business and increase our focus on what matters most to members. Since the second quarter and into this period, this has evolved restructuring of our corporate offices globally, including removal of roles that were not core to our long-term strategy and reflecting our more targeted approach to new houses openings. We have continued to focus on improving cost management through vendor consolidation and also a focus on improving our labour hours within our houses. Together, we've seen the initiatives drive positive results over the quarter. We increased food and beverage margins again over the period, while our successful accommodations focus helped drive red power up 5% year over year. Q3 house level contribution increased 17% year on year, with house level margins up approximately 150 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 our numbers and guidance.

Thanks, Andrew. Total revenues for the third quarter grew 14% year-on-year to $333 million, accelerating from 3% growth in the first quarter and 5% growth in the second. Membership revenue rose 17% year-on-year to $107 million, while in-house revenues were up 5% and other revenues up 22%. House-level contribution was up $9 million, or 17% year-on-year. with house-level margins up approximately 150 basis points to 28% despite the short-term impact of new house openings. Other contribution was up $5 million, or 24% year-on-year, supported by a strong summer for Scorpius Mykonos and continued growth in Soho home sales. Giving more detail on revenues, year-on-year revenues were up $40 million, driven by increases in recurring membership revenues in-house and other revenues. Membership growth and pricing threw a $15 million increase in membership revenues. In-house revenues were up $5 million year-on-year, supported by new house openings, while other revenues were $19 million higher, driven by very strong growth in Soho and Scorpius. Like-for-like in-house revenues for the quarter were up slightly year-on-year, an improvement from the approximately flat growth year-on-year we saw in the second quarter. Europe, rest of the world, saw the strongest like-for-like growth in the quarter, followed by the UK, then the Americas, which was down slightly. Note we excluded Tel Aviv from our like-for-like calculation. Our third quarter adjusted EBITDA was $48 million, up 38% year-on-year, with margins increasing approximately 250 basis points year-over-year. However, while margins increased year-over-year, they weren't as strong as we hoped. FX had an approximately 2% or $5 million benefit to revenue, but had only approximately 1% or half a million dollar benefit to EBITDA, as the pound strengthened significantly in the quarter. While this is helpful, the benefit to EBITDA is smaller than for revenue, as our in-house costs are tripling in the same currencies as the revenue, and the greatest share of our support costs are in the UK. In addition, as Andrew touched on, we are taking steps to rapidly ensure our back-of-house performance matches the strength and operational excellence of our front-of-house. As you know, we have been investing in our finance team, adding additional expertise. We are making investments to try to replace our current finance enterprise resource planning or ERP software with a new industry-leading cloud-based system led by our new chief transformation officer who we hired last month. The investment will overhaul how we manage finance, procurement, reporting and compliance, payments and staffing, and more seamlessly connect to our membership and operations. It will allow us to scale more cost-effectively which is important for a company that is in over 20 countries today with plans to enter more in the next few years. As part of our overall investment to improve our back of house, we have also hired consultants to support the company to create a comprehensive plan and assist with the review of our books to make sure the data that would go into the ERP system has been checked over. The consultant cost this quarter were over a million dollars. One other thing that came out of this was that we, with continued investment in our finance team and the help of consultants, found that through manual errors or systems not interfacing properly, there were misstatements in a prior period financial statement. These were from historical costs that had not been expensed or revenues that had not been accounted for properly. This includes items previously found to be an error, which had been deemed inaccurate, not material to adjust for until now. While correction of these adjustments as out-of-period corrections would be material, inaccurate to the current period, we determined the impacts of these misstatements were not material to the financial statements for all prior periods identified. As a result, we have revised our 2022 through first half 2024 financial statements with the adjusted prior periods and provisions in our earnings release 8K and 10Q with detailed explanations around the misstatements. The largest driver of the misstatements came from a review of our North America segment balance sheet work that we have carried out ahead of the ERP. North America is our largest region and handles over 150,000 sales invoices and over 100,000 vendor payments per year for over 60 corporate entities. This has generally been a manual process, which is therefore more prone to error. We have been investing in this area to remediate these issues. We have been adding other technology fixes that are helping the team until the new ERP system is fully up and running. We replaced our North America corporate controller with someone who has a lot of experience in remediation situations like this, and are increasing the size of their accounting team by around 50%. Now discussing our balance sheet, we ended the quarter with $147 million of cash and cash equivalents, $5 million lower than the end of the second quarter, and $686 million of net debt. We repurchased $13 million of shares in the quarter. We ended the quarter five times net debt to adjusted EBITDA, down from six times at the end of the third quarter of 2023. Moving on to guidance, we continue to see strong momentum in the core drives of our business. We are reiterating our guidance for reaching over 212,000 SOAS members at the end of the year and delivering membership revenue of $410 to $420 million. However, we are lowering our total revenue guidance to the low end of the previous range, so around $1.2 billion from $1.2 to $1.25 billion previously, so down approximately $25 million from the midpoint. You've heard from some other companies exposed to food and beverage spend and accommodation revenue that demand hasn't been quite as strong as hoped heading into the end of the year. While we enjoy the benefit and resilience that membership revenue gives us, we are tempering our expectations for in-house and other revenue. We've had a choppy end of the year. In October, in-house revenues saw the weakest month for Life Flight year-over-year growth we've seen since the first quarter, down mid-single digits. However, November was much stronger, with Life Flight growth roughly flat. We've also had some unique factors impact us, such as significant flooding that has closed some of our facilities to our farmhouse across October through to December, as well as the recent Malibu fires which temporarily closed that property down. FX has also gone against us as the dollar appreciates significantly post the U.S. election. It's worth reiterating here that while we do feel the impact of macro consumer discretionary trends, our membership loyalty and growth, which are the foundation of our business, continue to meet and exceed expectations. We were also cutting adjusted EBITDA guidance to approximately $140 million from $157 to $165 million, approximately $21 million below the midpoint of our prior guidance, but still approximately 21% higher than our revised 2023 results. 3Q margins did not come in as strong as we had hoped, and our revisions lowered first half 24 by about $1 million. We continue to have costs associated with ERP, which will weigh on results in the fourth quarter, and the timing of the restructure that we started in the second quarter and will finish in the fourth has also slightly lagged our prior expectations. $21 million lower EBITDA and $25 million lower sales is not the typical flow-through we would expect from lower revenue if it was just business as usual. But we see approximately half of this as one of the unique factors that we do not expect to occur going forward. With that, let me hand back to Andrew.

In closing, 3Q was a solid quarter for the business as we grew performance meaningfully compared to last year. It was also a quarter of continued transformation as we took further steps to simplify and strengthen the business, especially in our back of house operations. While this has created a lot of noise, its positioning is better for the future, and I believe we'll continue to see the benefits of the transformation 2025 and beyond. Finally, as always, I would like to thank our teams globally for the hard work and passion and our members for the continued support and loyalty. With that, we will now open up for questions.

Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. Our first question comes from Stephen Saccone at Citigroup.

Great, good morning. Congratulations on the offer. Maybe Thomas, could we just talk through some of that part, the last commentary you gave there about the guidance change? So it sounds like 21 million reduction in EBITDA, approximately half of that we should think is one time in nature as we think about next year. And then just on the cadence of like for like sales, When you talked about some of that weakness in October and then things got better in November, was there notable differences by region? Like was it primarily continued, you know, weakness in the U.S. underperforming? Any geographical comment would be helpful there.

Hey, Steven. So I'll start with the first part of the question and then pass it on to Andrew to talk about the recent trends. As we send the prepared remarks, we continue to see strong momentum in the core driver of our business, which is membership. However, we are lowering total revenue guidance. You've heard from other companies exposed to food and beverage spend and accommodation revenue. The demand hasn't been quite as strong as hoped heading into the end of the year. We are no different except that we have membership revenue, so we're tempering our expectations really for in-house and other revenue. We're also cutting our EBITDA guidance. Our third quarter margins came in slightly below where we expected them to. We will continue to have costs associated with the finance ERP, which will weigh on results in the fourth quarter. And then the timing of restructure was slightly lagged for prior expectations. As I said, about half of the guidance change was unique as we do not expect to recover going forward, such as the flooding impact at the farm. We had about a million dollars of revision in the first half while also investing in the future. with the time there was structure, the PRP work, and some other financial consulting cards, and just other unique items.

Hey, Stephen. Just on the trends, I think what we said in our preferred remarks, we saw a slowdown in UK and America in October, both impacted by pretty sizable macro events, a well-documented UK budget that we saw slow down in UK. And then on the buildup to American elections, we saw a slowdown. In November, both those regions bounced back. So Europe was pretty consistent and Asia is actually doing okay. So it was mainly UK and USA that we saw the change.

Okay, that's helpful. And the last question I had is the opening of Muse House this quarter, Can you just talk a little bit more about the strategy there? You already have Malibu, but when you think about the opening of the Muse House, do you see the opportunity to do more of like an elevated tier of houses or elevated tier of membership going forward?

Great question. We couldn't be more happier with the Muse House. I think our members could be more happy. So it got off to a phenomenal start. We're providing a more elevated house than what we would normally do, both in the design aesthetic and both the menus, the British Grill menu. And then the events that we put on, as I mentioned in my pre-recorded remarks, are pretty special artists. At the moment, we are looking at New York as a potential Muse house. And also we have Ibiza coming as well in the summer next year, which will be in similar veins. We're really happy with how it's worked, and yes, we are looking at other ways that we can roll that concept out.

Okay. Thanks very much for the questions. Happy holidays.

We'll go next to Sean Kelly at Bank of America.

Hi. Good afternoon, everyone. Thanks for taking my question. You know, Andrew, Thomas, just first on the, I know it's always difficult to comment on the strategic alternatives piece. But anything you could do to outline kind of one or two areas, one would be just sort of next timeline or milestone. When will we know a little bit more, you know, at least on the public side about, you know, kind of what's occurring here? Either is there a timeline for the review? Is there, you know, a milestone or additional filings that need to be provided? And two, any, you know, obviously it's a third-party consortium. just you know any clarity or when we might receive a little bit more clarity about who that is or what the financing sources may be hey sean i'm going to give you a pretty disappointing answer um as we said in the preparative comments we're not going to comment on the offer sorry okay got to try you know the game um second Second question, maybe just digging in a little bit. So here, kind of all the, thanks for the bridge and we hear sort of all the different pieces moving together here. But as we think about just like purely fundamentals, we've heard more and more about, you know, some uptick in the travel world, you know, post-election, especially here on the America side, probably some component of pent-up demand, a little bit of excitement around just sort of probably some certainty, you know, moving forward. So have you seen that in your business? Can you talk a little bit about bookings, December? Just give us a little color because, again, you know, we parse everything from RevPAR data to, you know, a lot of the airline commentary that's out there. Things actually look pretty rosy after the election and appreciate it was a tough October. Thanks.

Yeah, great question. Yes, so we've seen something similar. If you remove all the noise of the one-offs like the farm and fires at Malibu and all the things that Thomas has mentioned, we've seen in the last few weeks an uptick. But in more particular, which I think is much more of a positive, is Q1. So our bedroom business in Q1, the bookings we have on now, looks very strong in Q1, very strong, which is a great sign of what you're describing on more of a positivity around 2025.

Great, thank you very much.

And we'll go next to Steven Gramling at Morgan Stanley.

Hey, thanks for taking the questions. I'm going to take one more stab on the deals, which I guess without having to comment explicitly on anything, I guess is there anything you could maybe provide in terms of comparing and contrasting? It sounds like you had a strategic review earlier in the year with a separate offer. So I guess I'm just wondering if there's any framework that makes looking at this one different, or if there's any takeaways from the original review that you could share.

Hey, Stephen. I mean, given the fact that this is really a Board decision, you know, we're going to stick with not commenting on it. Sorry.

Got it. And then I think I heard in this, this has come up a couple of times, but you made a comment that the third quarter, like for like in North America, I think was weaker than it's been choppy October, November timeframe. And I think you touched on this a little bit, maybe I missed it, but just is there, are there specific houses in the third quarter? Like when you, when you put on a broader lens, what do you think has been driving some of that choppy behavior?

uh we we candidly we saw it across the board in the run-up to the election um in america um and then post-election we've seen uh uh the more positive bounce back in new york um central uh miami west coast lagging a little bit um but it was mainly across the board of what we saw in q3 which we could and he was only slightly down um But I think to my earlier point, if we look at Q1 on our bedroom business in America, it's up versus Q1 at 2023, which is a positive sign.

Got it. And one other one I'll sneak in quickly, just on the cost side. Thomas, I think you said that the accounting team has been increased. by something like 50%. You also had a comment that the flow through in the quarter is below what you would normally expect, but I think we've seen these kind of ERP processes sometimes take longer than people anticipate. Should we be anticipating that 2025 may still be a bit of an investment year behind some of these initiatives, and then we'll get the more normalized flow through thereafter even better flow through beyond 2025 because of some of what's being implemented?

Hey, Stephen. So, you know, the cost to, you know, the cost of the ERP and some of the other transformation stuff, yeah, will have an impact. But as we talked about in the prepared remarks and as you can see from our financial statements, you know, we took pretty significant seven charges over the past, two quarters, and, you know, we've really shifted focus within the company. And so if you look at the size of the seven charges, I mean, it could give you a good sense of the savings that we're going to make out of other parts of the business to invest in getting our, you know, our forecasting and our controls and our, you know, and our core tech operations into a better place.

But just I'll give you a bit more color. On the ERP, yes, it will be a transformation through 2025. And then we see once that's done, we would see significant savings like in a phase two of our efficiencies within our teams and efficiencies with running the business. So, yes, you will see a better flow through once ERP is in and what you're seeing today.

Got it. That's helpful. Thank you.

And that concludes today's question and answer session and today's conference call. We thank you for your participation. You may now disconnect.