Membership Collective Group Inc. (NYSE:MCG) Q3 2022 Earnings Call Transcript

Membership Collective Group Inc. (NYSE:MCG) Q3 2022 Earnings Call Transcript November 16, 2022

Membership Collective Group Inc. misses on earnings expectations. Reported EPS is $-0.46 EPS, expectations were $-0.12.

Operator: Hello. My name is Chris and I'll be your conference operator today. At this time, I would like to welcome everyone to the Membership Collective Group Third Quarter 2022 Results Conference Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and answer-session. Thank you. Thomas Allen, Chief Financial Officer, you may begin your conference.

Thomas Allen: Thank you for joining us today to discuss the Membership Collective Group's third quarter 2022 financial results. My name is Thomas Allen and I'm the Chief Financial Officer. I'm here this morning with Nick Jones, our Founder; and Andrew Carnie, our President and Incoming CEO. Some of today's statements may be forward-looking, and actual results may differ materially due to a number of risks and uncertainties, including those discussed in our most recent quarterly report on Form 10-Q filed today, November 16, 2022. 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 third quarter 2022 earnings release, which can be found at membershipcollectivegroup.com in the News & Events section.

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Additionally, we have posted our third quarter 2022 earnings presentation, which can also be found in the News & 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. Reconciliation to the most comparable GAAP measures are available in today's earnings press release. Now, let me hand it over to Nick.

Nick Jones: Thanks, Thomas, and good morning, everyone. I'm talking to you for the first time as just the Founder and not the CEO. It was four years ago, we hired Andrew Carnie to help me deliver the significant growth we had planned. And I'm so pleased to announce that he is now stepping into the CEO role. Well done, Andrew. Having worked closely with Andrew, I'm super confident that the MCG will go from strength-to-strength under his leadership, and I really look forward to working with him and the rest of the team to help support that success. As I step back from the day-to-day running of the company, I will focus on doing what I have loved doing for the last 27 years, designing new houses, keeping members at the heart of everything we do and motivating our people.

With my recent diagnosis and successful recovery from prostate cancer, I spoke with our Executive Chairman and the Board and agreed the time was right for me to transition. Since I started Soho House, I've always been obsessed about what our members want, and I'm really proud of what we have achieved. Andrew, over to you.

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Andrew Carnie: Thanks, Nick. I want to take a moment to thank you as you head into the next chapter as Founder. You set a really high bar when it comes to creating and scaling a global membership business, and I'm really humbled as I step into the role of CEO, and I'm excited to partner with you, Nick. This is a unique business with huge opportunities ahead of it. It has all come from Nick's original vision for Soho House, and my focus is on enhancing and growing our membership, whilst delivering greater profitability. To that end, I've spent the last few months with our Executive Chairman, Ron Burkle, Nick and our senior team, putting together a plan based upon analyzing our business, how members are using the houses, using focus groups and our first global member survey.

I will briefly touch on third quarter results, before I give you a more detailed update on our future plans. So here are the things we continue to be proud of in the quarter. Soho House membership grew almost 30% year-over-year, and total MCG membership grew 46% year-on-year, both reaching record highs. Even with the extremely strong membership growth, our MCG waitlist is at an all-time high and in terrific shape, reaching 85,000 by the end of the quarter, up from 82,000 last quarter. We tend to remain at around 95%, despite concerns of a tougher economic environment, which shows how sticky our membership base really is. Total revenue grew almost 50%, around 75% at constant currency. Unfortunately, while our adjusted EBITDA grew $11 million year-on-year and $5 million quarter-on-quarter to $20 million, our profits are not where we'd like them to be, and we will do better, and it's our highest focus as a public company.

Now, getting on to our updated strategy. Going forward, we're focusing obsessively on two things. Growing and enhancing the value of our membership and driving operational excellence to improve profitability, which in turn will drive higher shareholder returns. This will now involve a more streamlined and data-driven approach to reducing expenses without compromising what matters most to our members. On membership, we plan to expand our physical footprint more efficiently by providing members with unique experiences and exceptional service. We need to be more targeted and giving our members what they really want and in the way we invest in the member experience. This will involve a greater focus on the Soho House business as the key driver of future growth and improved profitability.

That's not to say, we're not excited about our other existing businesses. Scorpios just came off its best season ever, while Soho Home sales grew around 9% in October. However, more of my time will be focused on the core Soho House business. Secondly, we're really pleased with how we continue to deliver membership and top line growth. We know we have more to do on profitability, and we're announcing a series of initiatives today that will help drive enhanced profitability and more on that shortly. We believe, we can deliver a first-class member experience, while also being relentless on optimizing revenues, improving margins and our profits. We've always been a business that is centered around what members want. In our recent first global member survey, members told us we get a lot of things right.

They love getting access to our houses around the world, not surprising given our membership is around 80% every house membership. They love the design of our clubs, the atmosphere we create and the members that we bring together and the events we host. That said, we'll be working through some of the things they'd like to see us improve, specifically in service, programming of greater choice of events and a broader food offering. They also said they love us opening new houses, but opening them well. We have opened five new houses this year and demand has been very strong. Nashville already has over 2,500 members, Brighton 1,500 and Holloway House over 1,000 and Copenhagen and Balama approaching 1,000, all ahead of our typical maturation curves, which has houses starting at 750 members and ramping up to 1,500 at the end of the first year.

We're on track to deliver 7 new Soho Houses in 2022, which includes two further openings slated before year-end, Miami Pool house in Stockholm. While this is down slightly from our prior guidance of 9%, we've decided to delay Bangkok and Mexico City to make sure we give members the best possible experience from day one, and we expect both houses to open in early 2023. To give members the best possible experience and to ensure reduced pressure on the organization, we are returning to our previous target of five to seven new houses a year, and this is in line with our already signed pipeline for the next three years. At the same time, our cities at houses offer will continue to provide a clear path for longer-term growth at a minimal expense to the company.

As part of prioritizing the right investments for our business and our members, we are no longer pursuing the external digital membership. Now onto driving operational excellence to improve profitability. We are taking some immediate actions to ensure we give our members what they want, but do so in a more efficient way. Let me run you through a few of them. We are reducing our in-house operating expenses. Post COVID, we rush to get all our houses open as quickly as possible in the manner we were used to operating them. In addition, it was a tough and unpredictable labor market, which means our costs increased significantly. What we've learned is our members are using our houses just as much, but at different times, so we're adjusting our cost base accordingly.

Our recent global member survey highlights that members place less value on aspects outside our houses. With that in mind, we're refocusing our G&A with targeted reductions on content, digital and other corporate expenses, without impacting the member experience. For example, we are reducing our editorial content spend by about 40% going forward. We can raise prices, but the real opportunity is to run a more efficient business. One fine example, in recent months, we found additional sizeable opportunities across all our F&B procurement. The intention behind these actions is to enhance member value and drive profits for the business. If these do not fill those goals, then we will not pursue them. These changes will take time to feed through and the benefits will principally start to be felt in 2023 onwards.

We are confident that this will help us generate stronger, more consistent earnings going forward and achieving above 10% adjusted EBITDA margins in 2023. Now, let me pass it on to Thomas to give you more detail on third quarter results and updated guidance.

Thomas Allen: Thanks, Andrew. Total revenue grew almost 50% or approximately 75% at constant currency. Revenues beat consensus expectations despite $10 million of additional FX headwinds, compared to when we last guided. Membership, in-house and other revenues rose 39%, 62% and 41% year-over-year, respectively, or over 60%, 90% and 65% in constant currency. Membership and in-house revenue came in line with consensus, despite additional FX headwinds, while other revenue beat. House level contribution increased 36% year-over-year, but disappointingly margins fell approximately 200 basis points, as we overcompensated on expenses, especially wages as business volumes returned. Other contribution grew 66%, with margins increasing approximately 300 basis points supported by strong results for Scorpios.

Giving more details on revenue. Total membership revenue increased $29 million year-over-year, supported by strong growth in new house members, legacy house members and new membership. We also continue to benefit from the price increases earlier in the year, and another reduction in frozen membership. Frozen members as a percentage of total members is now 1.4%, well below pre-COVID levels, highlighting the increased value for our members and having an active membership. In-house revenues grew $42 million year-over-year, benefiting from six new houses, stronger food and beverage demand, an 18% higher like-for-like RevPAR versus third quarter 2021, and 23% higher than third quarter 2019. Despite these increases, our average daily rate indexes suggest that we are still providing significant value to members with our bedrooms.

Other revenues were up $25 million year-over-year, helped by strong Scorpios and Soho Home growth, public restaurants and townhouse revenues and increased fees from our management contracts. We also opened The Line, San Francisco in the quarter. Our third quarter reported adjusted EBITDA was $20 million, $5 million higher quarter-over-quarter and $11 million year-over-year, as we benefit from continued strong membership and other revenue growth. However, our adjusted EBITDA was below consensus, which was $26 million and similarly below our internal expectations, versus when we guided last quarter of 2022, FX was approximately another $1 million headwind in 3Q, and we expect a relatively similar amount in 4Q. And as Andrew mentioned earlier, we've continued to have to adjust to the shift in consumer behavior since COVID and in ways we overcompensated.

If our Soho House wages as a percentage of revenue had been where we want them to be, we would have generated approximately $7 million of additional adjusted EBITDA in the quarter. On to guidance for the balance of this year, which reflects both the strong momentum in membership and retention we are seeing as well as the challenges we have been having on the cost side. We are on track to deliver our total Soho House members target of 160,000 to 165,000 members by year-end, despite opening two fewer houses than we had previously expected. And looking at 2023, given our confidence from our waitlist and retention, we are introducing year-end 2023 Soho House membership guidance of approximately 190,000 members in line with consensus. We are reiterating our 2022 membership in total revenue targets is despite the fact that when we last set guidance, we assume the pound/dollar exchange rate will be $1.21 for the rest of the year and the euro/dollar exchange rate will be $1.02.

We had a $10 million FX hit to revenue in 3Q and basing 4Q FX on bank's forecast, expect another approximately $18 million impact in 4Q using $1.04 per pound/dollar and $0.95 for euro/dollar. On adjusted EBITDA, we are cutting our guidance from $70 million to $80 million to $55 million to $60 million. Our 3Q EBITDA was disappointing. And while we have a clear plan in place, we expect it to take a few months to start to really show results. We expect to reach over 10% adjusted EBITDA margin in 2023. So what would we like to leave you with today? It's been a good quarter for continued momentum in membership growth, recurring revenues and retention with future demand through our waitlist remaining very strong. We have clear strategic priorities in place to generate greater profit and free cash flow and in turn drive shareholder returns.

We are laser-focused on delivering for our members and growing value of the membership experience. As Andrew said, we are confident we can deliver a first-class membership experience, while also being relentless on optimizing revenues, improving margins and generating higher profits. With that, we will now open up to questions. Operator, can we take the first question, please? As a reminder, you can either ask your questions over the phone or submit them over the webcast.

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