ClubCorp Holdings, Inc. (NYSE:MYCC)
Q1 2016 Earnings Conference Call
April 27, 2016 11:00 AM ET
Frank Molina - Vice President Investor Relations and Treasury
Eric Affeldt - President and Chief Executive Officer
Mark Burnett - Chief Operating Officer
Curtis McClellan - Chief Financial Officer and Treasurer
Randy Konik - Jefferies
Joe Edelstein - Stephens Inc.
Steven Kent - Goldman Sachs
Steve Wisneski - Stifel
Chris Agnew - MKM Partners
Scott Hamann - Keybanc Capital Markets
Carlo Santarelli - Deutsche Bank
Lee Giordano - Sterne Agee CRT
Shaun Kelley - Bank of America Merrill Lynch
Matthew Brooks - Macquarie Group
Tim Conder - Wells Fargo Securities
Good morning, ladies and gentlemen. Welcome to ClubCorp Holdings Fiscal 2016 First Quarter Earnings Conference Call. Please note today's call is being recorded and is being broadcast live from ClubCorp's website and a replay will be available on the ClubCorp website after this call. During today’s presentation, all participants will be in a listen-only mode. [Operator Instructions] At this time, I will turn the call over to Frank Molina, Senior Vice President of Investor Relations and Treasury. Sir, you may begin.
Thank you, Sean. Good morning everyone and welcome to ClubCorp's first quarter conference call. With us this morning are Eric Affeldt, our President and CEO; Curt McClellan, our CFO; and Mark Burnett, our Chief Operating Officer.
Earlier today, we issued our financial results for the first quarter ended March 22, 2016. Our earnings release and our earnings presentation are available online at ir.clubcorp.com. On today's call, we will be discussing our first quarter fiscal 2016 results. As a reminder, our first quarter results represents our smallest quarter for the year, the first quarter of fiscal 2016 and fiscal 2015 consisted of 12 weeks and all growth percentages unless otherwise stated will refer to year-over-year results.
Following our prepared remarks, we will open the conference call for questions and answers. As a reminder, ClubCorp Holdings desires to take advantage of the Safe Harbor Provisions of the U.S. Private Securities Litigation Reform Act of 1995 and certain statements in this conference call may be considered forward-looking statements within the meaning of that act. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. For a list of these factors, please refer to the Risk Factors section of our Annual Report on Form 10-K filed with the SEC on February 29, 2016.
Again our discussion includes certain non-GAAP financial measures. More information regarding our forward-looking statements and reconciliations of non-GAAP financial measures to the most comparable GAAP measures are included in our earnings release and in our SEC filings.
With that, I'll now turn the call over to Eric.
Thanks Frank. Welcome, everyone and thank you for joining us on today's call. As you’ve seen, we are off to a great start this year. Our first quarter revenue was up 6.3% to a record $215 million and adjusted EBITDA was up 8.2% to another record $42 million. We experienced solid same-store club performance in both divisions with revenue increasing in both segments. Growth in adjusted EBITDA was driven by strong performance in our Golf and Country Club segment.
Adjusted EBITDA margins continue to expand on same-store combined clubs by approximately 90 basis points. During our first quarter, we benefited from improved golf operations revenue and increased a la carte food and beverage revenue across many of the states where we operate, as we encountered a mild winter across much of the US east of the Rockies.
Additionally, we experienced very good performance here in Texas. In Houston, revenue at same-store combined clubs was up 2.4%, and adjusted EBITDA was up 7.7%. This compares to the rest of Texas excluding Houston, where same-store combined clubs revenue was up 7.6% and adjusted EBITDA was up 10.6%.
These results continue to demonstrate the resiliency of our business here in Texas. Before diving into our results in more detail, I’d like to answer a question that I think is on investors minds as we speak with them. That is, what makes us believe we can drive superior returns in our business? And the answer is quite simple. It hinges upon both our structure and our strategy.
Our business model is unique and differentiated from other leisure businesses and continues to facilitate profitable growth. We’ve summarized the key attributes of our business on Slide 5.
First, we operate a predictable and stable dues-based membership business that is resilient to swings in the economy. Our focus is on operating multi-faceted private clubs, versus on dimensional daily C clubs or equity owned private clubs with no profit orientation.
This key strategic decision makes nearly half of our revenue recurring in nature and less subject to the vagaries of weather, changes in golf trends or macroeconomic weakness.
Second, we operate clubs in economically stable neighborhoods that has stood the test of time and weathered economic downfalls. We've all heard the mantra, location, location, and location, and this adage could not be any truer of running private clubs.
The location of a club is a vital strategic decision for us. We look to acquire clubs with high levels of affluence and high population density within a 10 to 15 mile radius of clubs. Our discipline in choosing clubs that meet our demographic criteria is integral to our investment rationale and critical to the success we have had with our acquisition strategy.
Third, our competitive market is highly localized. Most of our members live near their clubs and they are most interested in the private club that has been close as proximity to them. If you look at a Google map of our clubs, you’ll see that most of the clubs have few local competitors. In many cases, there are high barriers to entry limiting the ability for our competitor to build a 150 acre Greenfield club in close proximity to our clubs.
Fourth, we offer a differentiated leisure product that resonates with the lifestyles of today’s vast affluent consumer. Our clubs appeal to multi-generational group of families or individuals who are seeking a nearby multi-faceted sports resort for recreational, leisure, and social activities. Our clubhouses become a second home, a place where members can socialize, entertain, and relax.
As most of you know, today’s trend is toward experiences, rich programming, and personal enrichment cater to the entire family. There is an overall emphasis on fitness, wellness, and fun, not just golf. We have continued to reinvent the modern club experience from a greater usage of our facilities, having completed approximately 94 dining venues, multiple fitness, tennis, pool, and aquatic amenities, and we have greatly improved our golf practice facilities, as well as our golf courses.
These reinventions remain vital to our growth and have a proven track record of success. As a testament to these improvements, in 2015, same-store golf members visited their clubs in average of 58 times per year and spent an average of nearly $8400 per year including dues. Moreover, members of our same-store reinvented golf and country clubs visited an average of 29% more frequently, than members of our non-reinvented clubs.
Another leisure offering that has proven successful is our ONE offering which enhances our memberships value proposition further by providing a 50% reduction in food and beverage at most members' own clubs and provides extensive travel benefits and reciprocal use privileges across our whole network.
From 2010 to 2015, use of our network facilities by members outside their home club increased by 59% excluding clubs acquired from Sequoia Golf. Similarly, during a same also period also excluding Sequoia clubs, food and beverage revenue increased 41%, largely due to our ONE offering, club reinventions and acquisitions. These results further support our belief that reinvention and network are very relevant to our members.
Finally, we believe our scope, scale and expertise make us a more efficient club operator. We have proven operating methods, procurement practices, and learning curve advantages that keep our operating expenses low and our maintenance CapEx at or below 5% of revenue.
We continue to drive solid organic growth and continue to see multiple opportunities for additional growth via accretive reinventions and acquisitions, which have both delivered superior returns to our cost of capital. All of these reasons represent unique competitive advantages that in many cases, a single member equity club or even the small portfolio of clubs cannot access today.
It is why we can generate nearly 30 points of adjusted EBITDA margins across our portfolio of golf and country clubs and why the clubs we acquired since 2010 are on average, delivering 17% cash-on-cash returns by year three. We firmly believe that strategically investing in growth options such as reinvention and acquisitions help build and maximize long-term shareholder value and we remain excited about the opportunities and prospects we see in our business for additional growth.
I’d now like to turn the time over to Mark to discuss our progress on dues revenue and capital spending in our first quarter.
Thanks, Eric, Good morning everyone. It’s good to be with you today. Let me start with an update on dues revenue. On our last earnings call, I said membership dues is the life blood of our business. We believe that one of the key elements of a healthy private club business is one where dues revenue is growing. Our results on this key performance metric are a strong indicator that our focus here is working.
For the first quarter, same-store dues revenue in the golf and country club division increased 3.9%, while in the business, sports, and alumni division, same-store dues increased 3.3%. We intend to continue our focus and success on increasing overall dues revenue as a key performance indicator of growth in our business.
While membership count in certain clubs can be a driver of success, it is not necessarily an accurate representation of dues revenue growth across our portfolio of clubs. For example, across a certain portion of our Sequoia portfolio in Atlanta, we specifically elected to improve member experience and raise rates to change member behavior.
The result was an increase in dues revenue at the expense of membership count. Ultimately, adjusted EBITDA across these clubs grew by approximately 14%. This decision obviously resulted in the right business outcomes with enhanced profitability.
While we will continue to focus on dues revenue growth and we will be providing total membership count in our total quarterly disclosure, we will no longer provide less relevant same-store membership count. Same-store membership count includes seasonal memberships such as aquatics, fitness, and certain social products.
Additionally, changes in mix affect the level of social memberships versus full paying golf memberships. Alternatively, we may consolidate or sell clubs to improve the profitability of our overall portfolio.
Because of factors like these, same-store membership growth does not necessarily have a direct relationship to dues revenue growth. We believe the correct metric investors should focus on is in increasing dues revenues.
Next, let’s move on to an update on capital plans for the remainder of 2016. In 2016, we expect ROI expansion CapEx should be approximately $45 million. We anticipate investing approximately $21 million on 10 same-store clubs and approximately $24 million on recently acquired clubs.
We believe this level of expansion capital is appropriate and will ultimately make the clubs more relevant, drive increased member usage, and drive future revenue and adjusted EBITDA growth.
Regarding our maintenance CapEx, our objective is to keep maintenance CapEx between 3% and 5% of consolidated revenue. On Page 27 of our earnings presentation, we show you that maintenance CapEx as a percent of revenue has averaged 3.5% from 2010 to 2015. We believe we have an ability due to our scale and the way we manage the business to continue to deliver this low level of maintenance CapEx at or below 5% of revenue.
We work together with our operations team to identify how best to utilize maintenance dollars effectively. This flexibility allows us to balance capital requirements over multiple clubs and gives us visibility into future capital spends. In 2015, we spent about 3.4% of consolidated revenue on club maintenance and 1.6% on corporate IT.
Similarly, in 2016, we plan to spend $56.4 million on maintenance CapEx, which represents 3.5% of consolidated revenue dedicated to maintenance of our clubs. As an add-on we will spend approximately 1.6% of consolidated revenue on corporate and IT-related systems, which is higher due to our transformation and centralization of administrative processes.
This process will continue for the rest of this year, but ultimately our spend in corporate and IT-related systems should begin to decrease after 2017.
I'll now hand it off to Curt now with a few additional details on our first quarter financial results.
Thank you, Mark. Good morning, everyone, and thanks for joining us on today’s call. As Eric mentioned, we are excited about the start of this year and continue to remain focused on delivering quality results throughout the remainder of 2016. While the first quarter is our smallest quarter of the year, our overall results were solid.
The outcomes in Texas and more specifically, our Golf and Country Club division were excellent. We appreciate all of our employee partners, for serving our members so well.
Let’s take a deeper look now at segment results. For the first quarter in our Golf and Country Club segment, total revenue was up $13.9 million to $172.8 million, up 8.8% versus the prior year. In Golf and Country Club total adjusted EBITDA increased $5.2 million to $50.1 million, up 11.6%. Adjusted EBITDA margin increased 70 basis points to 29%.
Across same-store, Golf and Country Clubs revenue increased $7.1 million driven by increases across all three major revenue streams. Dues revenue was up 3.9% due in part to increased participation in the ONE program and an increase in dues rates. Food and beverage revenue was up 9.1%, due primarily to a 7.5% increase in a la carte revenue and an 11.5% increase in private party revenues.
Golf operations revenue increased $0.9 million or 3.1% due largely to higher cart fees and more golf outings.
Similarly, same-store adjusted EBITDA increased $4.1 million, up 9.1%, due largely to the increase in higher margin dues revenues and increased food and beverage revenues combined with well controlled variable operating cost and expenses.
Additionally, same-store adjusted EBITDA margin improved 130 basis points to 29.9%. Clubs acquired in 2015 and 2016 contributed first quarter revenue of $7.7 million and adjusted EBITDA of $0.9 million.
Now for a look at our Business, Sports and Alumni club segments. First quarter revenue was up $0.8 million to $41.3 million, up 2% driven by increases in dues revenue while food and beverage revenue was flat.
Adjusted EBITDA decreased $0.2 million to $7.3 million down 2.1% primarily due to higher variable payroll expenses and other operating expenses. Adjusted EBITDA margins declined 80 basis points to 17.7%. There was no material contribution in this quarter from new clubs in the Business, Sports, and Alumni club segments.
Our SG&A expenses, excluding equity-based compensation and capital structure costs, were $18.2 million for the first quarter, an increase of $3.7 million or 25.5% compared to first quarter of 2015.
This included increased cost of $1.4 million related to our initial efforts associated with SOX 404(b) and cost to transform and centralize certain administrative processes. We also incurred $1.2 million of higher ongoing support cost including payroll and cost related to software agreement as part of our compliance to SOX 404(b) and centralization of administrative processes.
Additionally, incentive compensation increased $0.6 million due to timing and acquisition cost increased $0.4 million. During the first quarter, cash flows from operations totaled $22.3 million. Our leverage free cash flow over the last four quarters was $101.2 million. At the end of the first quarter, we had $97.3 million in cash and cash equivalents, and total liquidity of $242.3 million.
The company was compliant with all of its debt covenants. Subsequent to quarter end, we purchased approximately 15,000 shares under our previously announced stock repurchase plan.
The company reiterates its 2016 outlook. For fiscal year 2016, we anticipate revenue in the range of $1,085,000 to $1,105,000 and adjusted EBITDA in the range of $242 million to $252 million. This outlook implies year-over-year revenue growth of 3% to 5% and adjusted EBITDA growth of 4% to 8%.
Our estimated guidance is based on current management expectations and maybe subject to change. Please refer to our forward-looking statements, cautionary language in our earnings release and our 2015 10-K and our first quarter 10-Q and the Risk Factors section of our 2015 10-K.
This concludes our prepared remarks, Sean, if you'll open the line for questions.
[Operator Instructions] And your first question comes from Randy Konik with Jefferies. Your line is now open.
Yes, thanks a lot. So, I appreciate the comments around the focus on dues and almost, like productivity per member not just trying to grow members for just growth sake, just body count sake. Given the Atlanta example, as - can you give us - is there any perspective on, do you think there is other markets within the portfolio that may be underpriced? Just get some color there would be very helpful first, thanks.
Randy, it’s Eric. Thank you for the question. Every time we buy a club as we’ve discussed I know with you and I think with most people on the call, we take a very careful look at the pricing at the existing club. We have had cases where we have lowered dues.
Obviously, to the glee of the members at those clubs sometimes because they had another dues line associated with CapEx and of course we assume all the CapEx as opposed to assessing our clubs. So it is a case-by-case, market-by-market basis. I can’t tell you of a particular club or set of clubs today where we are taking paid what I would call more aggressive posture on dues in order to change the profile of the membership, but that is certainly what we did in Atlanta.
We deliberately if you will, lost some members in order to gain profitability and obviously you’ve seen the product. We think it was deserved because of the capital that we spent to improve all those products down in the Atlanta market.
That's super helpful. And then, I guess, similar to last quarter, you gave some good color on just the feel of members in the Texas market. You posted another quarter of sequential acceleration in broader Texas, but also in Houston in particular. So can we just get some additional commentary on that state market as well? Thanks.
I’m happy to and again, much along the lines of our comments during our last call, the hype about the Texas somehow going away or being materially impacted by the decline in oil prices as we said has not happened, certainly here in Dallas. Houston, absolutely has been impacted by lower energy prices, but even with a modest return to higher prices, you can see that Houston had a very good quarter as did the rest of Texas. So, again, we are geographically diversified, we are geographically diversified here in the State of Texas and we love the business we do here.
That's helpful and I guess, my last question would be, it looks like during the quarter there was the two acquisitions, one in Florida, one in California, how should we be thinking about the go-forward acquisition philosophy from a real estate perspective toward geographic perspective, I should say. Should we think about concentrating more on fortifying big and center markets like Dallas, Houston, what have you or are you know new market opportunity? How are you thinking or has that thinking changed at all over the last year or so? Thanks.
Really hasn’t changed. The only thing that’s changes as you know due to concern expressed by some of our investors around return on invested capital as we raised our hurdle rates, the 17% return on invested capital both for reinventions and acquisitions, clearly as we’ve said many, many times we’d love to add more clubs in general in markets where we currently exist, because we do believe there is value and having reciprocity in a larger metropolitan area.
However, we are not targeting a specific state or a specific city in order to add clubs. I can tell you that our business development team is the best in the business as I believe our operators are, and they are very aggressively targeting top MSAs in the US trying to come up with new prospective acquisitions.
Thanks, that’s very helpful.
Your next question comes from Joe Edelstein with Stephens Inc. Your line is now open.
Thank you and good morning everyone.
Good morning, Joe.
It was touched on there just for a minute, but the Sequoia clubs were lower priced dues clubs than some of the prior base and so, how much can dues grow really, as that rolls into the comp base and maybe just another way to ask it is, just how big is that rate play and ultimately, what does that mean from a revenue per club standpoint? Is it 10% increase? 15% increase over a time, I certainly understand you can't push through a number quite that big in the first year, but we'd just hope for some more clarity there please?
Joe, it’s Eric again. Thanks for the question. Couple of things, I won’t provide specific percentages that we anticipate growth. I will tell you that not only that we see dues growth in the Sequoia portfolio, but as importantly, and certainly this was part of our strategy all along which we articulated, post-acquisition of Sequoia, we anticipated more upside from revenue opportunities than from cost opportunities in that portfolio and thankfully again, as I started to say, not only we are seeing dues growth, we’ve seen significant increase in a la carte visitations and a la carte spend at our clubs.
So we have seen revenue growth from the other revenue centers in the Sequoia portfolio. How long that persists, we would hope for a few years, several years if not indefinitely, but maybe not at the same pace, because we said that we did increased dues in the Sequoia markets more aggressively than other places in the country.
That's helpful, Eric. Thank you and I know you mentioned that you are kind of moving away from the same-store membership number, but just in the first quarter, I seen the golf membership is up over 4%. I was curious if you could comment just as to what might be a more reasonable run rate for membership growth this year, just particularly considering you had such a challenge last year with the 100 year rain events – disruptions from the reinventions that you were doing and maybe you could even just comment please, on what you are seeing in April?
We are just as you well know, and I think most of the people on the call know, we are just entering our peak selling season. We are pleased with the results thus far. I am not going to target a specific percentage amount for the full year. But again, I think as I commented a moment ago to Randy’s question, this is a highly localized decision that we make at all of our clubs relative to pricing as well as volume. So, we are off to a good stat.
We like where we are. We are not going to talk about whether it occurs every year some places I said last year. So, again, we are very comfortable with where we sit relative to membership growth for the year.
That's helpful and the maintenance CapEx, as you called out is elevated with the IT, the corporate-related costs. Just in terms of timing, when do you see that potentially dropping back into - like the 3%, 3.5% type range?
I am going to let Curt answer that, but before I do, I just want to point out and again I think everybody on the call as well aware of this, there was some very misinformed information that was disseminated here in the last 60 to 90 days around our capital spend and we wanted to specifically address head on the fact that our maintenance capital as we’ve said since day one of IPO continues to be in the 3% to 5% range and Curt will comment on the balance of the year for capital spending relative to IT.
Yes, and just for context, Joe, as a reminder in 2015, we had about $53 million in maintenance CapEx that included about $17 million for corporate IT. If you back that out as a percent of our revenues, $35.8 million of maintenance that would remain would have been about 3.4% of our revenue.
For 2016, we had said that we expect the maintenance to about $56.4 million, that includes $18 million of IT maintenance if you – so we are sitting right at 5% in total. If you back that out, we would expect about 3.5% of maintenance capital across the club. So, to your question, when do we expect that to settle out, we said all along that we’ll continue our IT investments this year and into 2017 and we’ll have our estimated spend for 2017 out there in front of everybody as we get to the end of this year or the beginning of next year.
So we are not projecting those numbers, but we do expect the IT spend to continue into 2017 and we will be announcing it at what level as we get deeper into the year.
Sounds great guys. I appreciate you taken the question.
And your next question comes from Steven Kent with Goldman Sachs. Your line is now open.
Hi, good morning. I think what was very interesting about this quarter was, that you had very strong EBITDA flow through, especially during a seasonally slow quarter. Can you give us any read across to the remaining quarters in 2016, does this operating leverage continue as you flow through given some of the initiatives that you’ve put into place?
And then, just on the new initiatives to broaden appeal and boost member retention, can you give us some numbers around that? So for example, percentage of the new golf members who are joining ONE? I am not sure if you've mentioned that on this call, but sometimes you give us some sense for that.
How are those ramping up, especially for the summer program, which you mentioned a couple of quarters ago that you’re rolling out these summer programs for kids and Never Ever programs, that you are rolling some of those out a little bit earlier to try and get people to lock in a little earlier. If you could just answer those two operational questions. Thanks.
Steve, Eric here. Thank you for the questions. First of all relative to margin expansion, this is what we had hoped for and in fact what we discussed going back to the third quarter of last year when I believe a few people were – I’ll call it disappointed with the margin growth even though we saw excellent revenue growth.
And frankly, my response to the quote disappointment was, this is exactly what we have predicted exactly what we had anticipated, exactly what we had hoped for around the Sequoia acquisitions and those that we – the clubs that we obtained in 2014 and 2015 when we typically see revenues accelerating faster than margins as the clubs adjust to the new operating profile.
So I am really happy to see the entire portfolio margin expansion in this first quarter, but as specifically and again, we don’t breakout Sequoia for you all, but that margin expansion and that portfolio did continue to improve the way that we had hoped. I can’t really predict the balance of the year what happens, lot of it has to do with how many rounds of golf we play which we know is a higher margin business, how our private event business continues to progress which we know is a higher margin business.
But at this point, we are very happy with the outlook for the balance of the year. Relative to your second question, and we have – we’ve talked about this in one-on-one meetings with you all, we’ve seen new members, new golf members taking the one product at approximately 75% cliff meaning 75% of the people coming and joining clubs in the golf member category are joining as ONE members.
So, with our new penetration rate across the system of 51%, logically you would assume that the people leaving the system are lower users and probably not ONE members, so logically you would assume that the ONE membership penetration would continue to increase. So hopefully that answers your question. It’s too early to say what impact the marketing efforts, particularly around the summer season are going to have, but I appreciate the callout. We have accelerated those marketing efforts this year earlier than we have done in the past several years.
And Steve, one thing I would just add to what Eric said is a remainder on the margin expansion question. Q1 is our smallest quarter. So, keep that in mind as we get into Q2 and Q3, there is a lot more operation to support the volumes. So it doesn’t necessarily translate in terms of exact margin, but we certainly had nice pick up in margin in Q1 this year.
As we mentioned milder – a little bit milder weather which allows for a little more play in golf. We had nice visitation and nice private events. So, we are very happy with where Q1 came out.
Okay, thank you.
Your next question comes from Steve Wisneski from Stifel. Your line is now open.
So, I have a quick question on the private event side of things. I think we went back to last year and you looked at private events, they were down - I want to say like, 3% to 4% in the Golf and Country Club segment, and when we look at food and beverage, this year it was up very, very nicely up 9%. You didn't break out though, what private events, Mark, can you give us kind of an idea of how well that did this year?
I’ll let Curt handle that if you would like. One of the reasons that we saw a little bit of softness in the profitability of the business, the Sports Club division in the first year or excuse me in the first quarter was the fact that we had a little lower private event business in the first quarter, higher a la carte business, which of course results in a little lower profitability for that division. But I think Curt has got some other statistics here if he chooses to share them.
Yes, absolutely on the private events side, we did see nice pick up for Golf and Country at about 11.5% and a la carte was at little over 7%. So we like what we saw in the SMB sector there. It was nice growth there. Business in sports are relatively flat as Eric said on a la carte and private events was down ever so slightly.
As we look out across the balance of the year on private events, we feel good about where our private events are headed. Understanding of course Q1 is our smallest quarter. The real opportunity for us in private events is in our fourth quarter and a little bit in the third. So that’s where we are on private events.
Okay, great. And then, second question goes back to or goes to guidance. A question we've gotten a couple of times this morning from some investors is, I guess, with the pretty strong beat here in the first quarter, what's the rationale, I guess, behind maintaining the full year guidance discipline? Is there some conservatism there? Is there visibility obviously it's still very, very low? Are you baking in some potential weather events down the road? Can you help us out with that?
This is Eric and maybe Curt will follow me, but frankly it’s way too early. As we’ve commented, this is our smallest quarter of the year. The second quarter really kicks in and as we’ve said many, many times, our second and fourth quarters are our two largest quarters. So it’s just too early frankly to be adjusting guidance if and when we see material trends in the second and third quarter, we will come back to you and tell you how we feel about making any adjustments.
But it’s way too early. We also – and curt acknowledged this, we also incurred some SOX-related expenses in the first quarter we told you last year at the end of the year that there would be even more expenses. So we would anticipate those to kick in the second quarter. So again, all that’s going to have an impact on how we adjust our guidance and again the final point I’ll make it’s just way too early to make any adjustments.
I don’t have anything to add to that.
Understood, thanks. Can I ask one more simple one, Eric? When - I know the last, I guess, the last week or so in Texas, there was some pretty nasty weather and, again, it was very minor relative to last year. Is that anything to even think about or am I overthinking that?
No, last year, again, look we had a year of – although it didn’t all happen everyday of the year, but we had 100 year cumulative rain events throughout the State of Texas. Last week, as you are correct in pointing out, Houston tragically, because there was loss of life suffered a very, very torrential downpour over a short period of time that has resulted in the closure of one of our large clubs there, the Clubs at Kingwood for the better part of the week.
However, we are back up and operating in Houston and at this point, while we have CapEx that we are going to have spend in order to fix up the facilities that I am talking mostly about golf courses not structurally, the OpEx, we’ll wait and see how that shakes out, but I am hopeful that we will be able to overcome that by better weather elsewhere in the system.
Okay, great. Thanks a lot guys.
And your next question comes from the line of Chris Agnew with MKM Partners. Your line is now open.
Thanks very much. Good morning. Wanted to ask a question on the pipeline with stronger consumer and, I think anecdotal evidence that waiting lists at the clubs are starting to come back for the first time in maybe ten years. Is this impacting the quality of the pipeline at all, is sellers are maybe raising their price expectations or inclination to sell? Thanks.
Chris, good question. The answer is no. It’s not impacting sellers’ expectations. We have commented previously that and in fact if you look at the history of our one-off acquisitions over the last four, five, six years, the majority of those have come from equity clubs.
Again, I want to make the strong point, most of those clubs are designed to break-even or make a little money or lose a little money and consequently when times get tough, their business gets harder, and harder, because you are not breaking even and because they change their business model during the last recession by dramatically lowering joining fees.
Many, many equity clubs continue to just get by and when you are just getting by and it’s time to rebuild a clubhouse, or rebuild your golf course or whatever the case maybe, you just can’t do it. So, we are continuing to see excellent opportunities from equity clubs and again in large part due to the fact that they are structurally built or designed to break-even or make a little money, lose a little money and frankly, we think that’s a slot business model, but it presents an opportunity for us to buy more clubs.
Excellent, thank you. And then a question on what you are seeing in wage and payroll inflation. I know, there is a bit of minimum wage legislation out there in certain states, and I haven't tracked exactly where and when, but what are you seeing and are there any specific risks to your model? Thanks.
I appreciate the question. This is Mark. At this point, there certainly could be some impact to some of the increases, we are already putting in plans to mitigating efforts and again, it is not material at this point. But some of those efforts that we would look to do as we continue to address will be the ability to increase dues and prices to offset it obviously, that’s certainly an opportunity and times we’ve dealt with this in the past, we’ve been pretty affected of being able to talk to our members and our boards and some of those decisions.
Other things are pricing opportunities and other revenue streams as we look to manage the margins or we’ve been affected on that side as well. And then, other things that we are currently looking at is, in certain cases, would be any modifications to our operating structure. There is times that we can look at how our flex of our business is on fixed payroll versus variable and those are things that we constantly look at when some of these pressures arise and that’s very helpful in maintaining margins.
The only thing I would add to what Mark just said is, just kind of reiterate, we do know, as all other companies are anticipating the finalization of some of the exempt labor laws that are coming out, I guess, towards the end of May and June is when that’s expected. We are analyzing what impact if any that will have and we’ll make adjustments that’s necessary to mitigate the outcome of that, so.
Great, thank you.
Your next question comes from Scott Hamann with Keybanc Capital Markets. Your line is now open.
Thanks. Just two quick questions and number one, Curt, just to clarify on your cost assumptions in the first quarter, I think last quarter you highlighted something like $3 million, $4 million bucks of incremental cost. Did those all flow through in the first quarter and is there going to be any impact in future quarters?
And then, secondly, just in terms of the improvement that you saw in Houston, I am just kind of curious if what was driving that, and if it was as simple as the backdrop there or was it something like Woodlands coming online and potentially driving something that's maybe a little bit more visibly sustainable in your mind? Thanks.
Yes, thanks, Scott. I’ll take the first part of that and then let Mark address the second part on Houston. Yes, we had articulated that we had incremental cost associated with SOX to the tune of about $4 million annually with half of it coming through during the second half or the first half of this year. And so that headwind is still before us. We encountered some of that in Q1. We have more that we’ll encounter in Q2.
So, we put that marker out there to make everybody aware of that incremental spend. So there is a portion of that that will still come through in the second quarter. All that has been factored into our guidance, so where there is comments around where our guidance is, keep in mind that we have factored that in.
So, yes, a portion of it was incurred and we would expect as articulated in the year-end results, that we are going to see some of that come through in the second quarter as well. And Eric, I’ll let you address the question on Houston.
Scott, I’ll jump in on Houston. Yes, we did see nice pick up at the Woodlands, but it would be unfair to our other great clubs in Houston to say that it was all but Woodlands, we had a good quarter across the board in Houston. We did just open to your comments about the Woodlands, a brand new private events center adjacent to our Mark, Palmer Clubhouse, is that correct?
Yes, that’s correct.
Which we are very excited about. That’s been under construction since last spring and of course and I’ll mention this at the closing, we got the Insperity Championship, the Champions Tour event, coming up there next week. But, it would be unfair again to Houston to throw it all to the Woodlands. We had good growth across the board.
I will say, just as an add-on, not just the private event, new opening that we’ve done, but in correlation with that, we’ve got a brand new 3500 square foot fitness facility that we are really, really excited about for increased penetration of social and fitness memberships within the very, very large community of the entire Woodlands area. So, lots of excitement that we are looking for upcoming down in that part of the country.
Your next question comes from Carlo Santarelli with Deutsche Bank. Your line is now open.
Hey guys, good morning. I have two questions. First of all, Curt, maybe could you tell us if, obviously, under the new same-store with Sequoia in the mix now, if we should be thinking about seasonality any differently this year from a same-store perspective than prior years?
Sure, thanks, Carlo. No, I don’t anticipate that the seasonality would be different as that relates to Sequoia. Mark, I’ll let if you have any thoughts on that.
I agree with that. I think when you look at the mix of the business again in markets like Atlanta, in Houston being the predominant areas where the majority of the clubs are, they follow along pretty well with the rest of our clubs from a seasonality standpoint as far as there are winter, spring, fall and summer trends. So, I see that the percentage mix would be fairly similar.
The only thing I would say, Carlo and I think you are seeing part of this in Q1 is last year for Sequoia we did have a lot of reinvention, construction underway and there was some impact related to that and certainly, there will be a lot less of that this year because we’ve got a lot of that capital in play.
Yes, just to follow on that, really excited that we are getting through, I mentioned in the Woodlands and the private event in the fitness, so the majority of the $30 million that we’ve talked to you about for Sequoia capital is now coming to closure which is a good thing from an operations standpoint is it really allows us to continue to see improved business with less interruption, so.
Great, thanks. And then if I could, just one quick follow-up. As your scope has obviously grown in your time as a public company and maybe the incremental acquisition or one-off here or there barring Sequoia it doesn't have that meaningful of an impact. Would you guys ever consider going to a reporting structure that was - that kind of extracted same-store and maybe provided color on operations of a single asset that you recently bought or do you think this is kind of the best model to go through and present the information, going forward?
Carlo, this is Eric. I think this is the best model with 207 stores, you are absolutely correct, a single store is not going to move the needle. A significant acquisition of 10, 15, 20, 30 plus clubs might move the needle, but we think this is the appropriate way to report it.
Okay, great, thanks guys.
Your next question comes from Lee Giordano with Sterne Agee CRT. Your line is now open.
Thanks, good morning everyone. I was wondering if you could talk about prospective new members. I guess, what are you hearing about the primary reasons they are stating for wanting to join a ClubCorp club today and has the rationale really evolved over the years from primarily golf to now looking for new dining options or socializing, I guess, how has that evolved and is it continuing to change? Thanks.
Lee, it’s Eric. It’s a great question. It’s something that we pay a lot of attention to. The rationale for joining has evolved. Let me put it that way, because we have been on the forefront at least from an industry standpoint in creating a broader appeal meaning more reasons for people to join the club because we are investing in something other than just as the golf experience although, don’t get me wrong, we are putting a lot of money into our golf courses and material improving that experience.
I have literally heard from new members and frankly from prospects who are thinking about joining saying, we haven’t thought about joining the club until we came and visited and we saw all the things to do. And if you come to visit here in Dallas particularly, hopefully a weekend here as we get into season and you go around our clubs, again, you will see real-time the reality of what I refer to as multi-generational appeal to everybody from kids to grandparents and it is by design, but again, with very, very few exceptions, because we do have some clubs that offer nothing but golf and dining with very exceptions it is expanding the appeal to a broader base of consumers that’s had a big impact on our business and frankly to the determent of a lot of our competitors.
To add-on, this is Mark, to Eric’s comments, which completely agree with the demographic too is really catering to where we are getting very, very good usage and interest from the younger generation. So, the impact as a family, our young executive junior memberships continues to be a strong focus as well.
Your next question comes from Shaun Kelley with Bank of America. Your line is now open.
Hey, good morning, guys. Most of my questions have already been asked, but, just two small specific ones. The first one is, you are kind enough to give us the breakout of Houston and then non-Houston Texas. So, just a specific question on how much of non-Houston Texas is Dallas, rough percentage?
Probably, Shaun, 90%, that’s a rough guess, but we have Austin, I am looking at Mark, we have the University of Texas Club which is in our Business, Sports and Alumni club division. We have the Baylor Club in Waco in Austin back again, we have one, two, three additional golf and country clubs. San Antonio, we have a single golf and country club and a single business and sports club. So, predominantly Dallas.
Okay and we think about the drivers of the healthy growth that you are seeing in that segment. Obviously, plenty has been documented about what's going on with golf participation rates, but, what do you guys look at? Is it some of the broader local economic indicators? Is it housing? What do you think correlates best with some of these clubs that obviously you have been involved with now in some of those - in some capacity probably for 30, 40, 50 years?
Well, internally, it would be rounds played per member. It would be cover counts at the clubs which – thanks to our ONE offering and the capital improvements we made have increased substantially over the last several years. It would be private event business. Those are kind of the internal metrics. From a macroeconomic standpoint, I’ve said before that I think housing starts, housing sales, consumer spending, so discretionary spending, consumer sentiment, all those things come into play when you look at it up from again from a macro standpoint.
Okay, thanks for that and then, just one final one and sorry to beat the dead horse on this SOX thing. But just to be clear and it's probably for Curt, but in the adjustments between EBITDA and adjusted EBITDA, you've been breaking out a centralization and transformation cost add-back. Is the preponderance of that number, I think it was $2.4 million this quarter, the preponderance of that number, SOX and is that the number we should expect to see coming down in the future or is there other stuff in that line item beyond SOX?
Yes, there is two things in that line item Shaun that we consider one-time non-recurring but cash-oriented expense. Part of that is, the initial cost of our SOX testing for under 404(b) and certainly it was higher in Q1 this year than last. This was our first quarter in Q1 we finished up all of our year-end process and the final impact of all of that one-time spend occurred in our first quarter.
But keep in mind, we had said we are spending incremental dollars to transform the full integration of Sequoia and so there is some one-time expenses more related to the onboarding and the full integration of the Sequoia networking club and our IT spend as we rearchitect if you will, some of our technology that is much more one-time in nature. It’s not part of a normal run rate which you’ll see. So, we are not providing guidance on those numbers, but that line items specifically references those two things.
Okay, thanks for that.
Your next question comes from Matthew Brooks with Macquarie. Your line is now open.
Good morning, guys. I've got a couple of questions on the reinventions. I know you can't, sort of, give out specific details, but can you say anything about in what year you typically got most of the benefits of a reinvention? Is it year one, two, and three and maybe some sort of comment about how long the benefits last? And after that, I've got a follow-up.
Matthew, it’s Eric. I appreciate the question. There is – again, this is probably, I said it a gazillion times and I’ll say it again, this is a one-by-one, one store at a time, one club at a time basis. The reaction that we get from reinvention in some cases is almost instantaneous. A case in point, in Las Colinas County Club where we spent a couple of million dollars we’ve highlighted this one before, we had new members joining the club because of what they heard was coming. It hadn’t even been completed yet.
So we saw an uptick in membership activity prior to the completion of the capital improvements at that club. We saw a similar phenomenon at our club at in Edmond, Oklahoma Oak Tree. There are other clubs and particularly some of the clubs that we recently acquired in the Sequoia transaction where members said, we will wait and see what you guys are going to do.
We think that’s interesting and we think it’s exciting, but we’ve heard promises from other people before, we’ll wait and see what you are going to do and therefore we had yet to see the uptick or we’ve seen uptick but it’s not to the degree that we thought in the two clubs that I just described before. So I would say if I had to generalize, first of all, it takes nine months to a year for most of our reinventions to be completed.
So, usually it would be by year three, post reinvention, we would hope to be – if not at peak, at least that numbers are producing incremental revenues in EBITDA that are inline with our 17% unlevered cash-on-cash returns and thankfully we found that to be the case. As to how long that persists, it’s quite interesting and again I’ll use the Las Colinas as a poster child, I could use countries over the south as well, but Las Colinas we saw an 80% post-reinvention, we saw an 80% increase in a la carte, or excuse me 70% increase in a la carte cover counts, the year after we finish the reinventions, the year after that we saw 40% increase on hop of the 70% and today that club has not gone backwards, it continues to grow, it just grows a little more slowly.
All right, I understand and, as a follow-up to that, sort of you've talked about the IT CapEx tailing-off, can you say anything about when we are going to see, maybe, a more material dropdown in the reinvention CapEx and obviously the free cash flow generation?
I’ll start with the reinvention CapEx and give it to Curt to talk about IT. We have discussed that we have reinvented a significant number of our clubs. With that said, we are always going to be opportunistic in how we deploy capital and if we believe we can generate 17 plus percent unlevered returns, we will continue to invest in our properties to reinvent them. So, I view that as more of an opportunistic situation, but having said that, we have reinvented the lion share of our core clubs today. Curt?
Yes, on the IT side, as I mentioned earlier, $17 million in 2015, we expect about $18 million this year and as we look at FY 2017, we do anticipate that spend to continue. But we will announce really at what level as we get closer.
Okay, thank you.
And your next question comes from Tim Conder with Wells Fargo Securities. Your line is now open
Thank you. Most of my questions also been answered, gentlemen, but just to clarify here, Curt, it sounds like most of the - I guess, one of the early questions was about given what you reported here in the seasonally weakest quarter, the upside, why not maybe raise guidance and it sounds like just to make sure a little cautionary on the SOX side and so forth, is that - and the timing of that and it sounds like most of it's going to fall in the second quarter, is that what we are hearing?
Okay, and then you - it sounds like - and Curt, you alluded to this in one of your answers, that that related to margins earlier in the Q&A, given that Sequoia here now we are getting into that, you've done a lot of the reinventions. We should, given the size of Sequoia, is it fair to say and what you outlined on last quarter's call is that cadence comes in year in two, three, and so forth, we should start to see some of the outsized benefits just due to the scale of Sequoia flowing into 2016 and more so into 2017 with potential for margin expansion, dependent on subsequent acquisitions the degree of or not?
Tim, it’s Eric. I’ll take that. I commented earlier on the margin improvements around Sequoia, so that was me, not Curt.
That’s all right. We are really happy to see – as frankly we said over the last several quarters, sequential improvements in overall margin activity in the Sequoia product, I can’t tell you for certain that that reaches a crescent in 2017 or 2018. Obviously, we are focused on driving top-line first and then, ultimately making sure that a good percentage of those top-line dollars go to the bottom-line.
But as I mentioned earlier, part of it has to do with the mix of business that we ultimately obtain, that being highest margin membership, second highest margin golf, third highest margin, private events, fourth highest margin a la carte revenue or a la carte food and beverage.
So, again, part of it has to do with our business mix and we will see how that shapes up over the next several quarters and frankly next several years. And to your final comment there which I think is totally accurate, which is, as we continue to acquire clubs, you are going to continue to see the same sort of phenomenon where margins will gradually and progressively increase over two, three, four years.
Okay, and gentlemen, congrats on weathering oil, floods and recent investor concerns.
And there are no further questions at this time. I turn the conference back to Eric Affeldt for closing remarks.
Thanks everybody for participating in the call today, especially in light of again recent comments that frankly were unfortunate and misguided and a lot of misinformation floated around and we appreciate your patience.
Following today’s earnings call, we will be attending the following conferences and events before our next earnings call on May 9th, we will be attending the Wells Fargo Leisure and Gaming Conference in Las Vegas and on May 24th, we previously postponed and have since rescheduled a bus tour of our reinvented Atlanta Clubs that will be hosted by Stifel. On June 21st, we will be attending the Jefferies Global Consumer Conference in Nantucket.
We look forward to speaking with many of you over the phone on or subsequent investor meetings and conferences and as a final reminder, I just want to reiterate we are ticking off the season. We are thrilled to be in season. Please tune in this weekend for the golf channel and you’ll see the Las Colinas County Club that I just mentioned which is hosting the LPGA volunteers of America, North Texas shoot out.
It’s the only LPGA event in Texas. It’s a great course. It’s a great club at a great course sponsored by a great organization, The Volunteers of America. And then next week also on the golf channel, one of the champions tours, most favorite events relative to the players comments anyway, that’s the Insperity Championship at the Woodlands Country Club in Houston. So please tune in again if you want to see what our clubs look like and how they are responded to by professional golfers as well as the media, please tune in both on the golf channel, the LPGA this week and next week the champions tour. Thank you all.
This concludes today's conference. You may now disconnect.
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