Hollywood Bowl Group plc (2H4.F) Earnings Call Transcript & Summary

Well, welcome, everybody. I'm Steven Burns, Chief Executive of Hollywood Bowl Group, and I'm joined today by our CFO, Laurence Keen. And via this live webcast, we look forward to taking you through our half year results. The presentation will be followed by a Q&A, and the recording will be available on our corporate website within the next 24 hours. I'll start the presentation taking you through some of the half operational highlights and low lights. Laurence will talk you through our financial performance the half year, our strong balance sheet and some guidance for the rest of the year. I'll then take you through our operational progress, our continued response to COVID and how we are all well positioned for recovery and our strategy for driving longer-term shareholder value. The first half of our financial year has been another very challenging period for the group as it has for the rest of the leisure industry. Where we have been able to trade, however, we've seen significant demand for our offering with no structural changes to the way our customers interacted with our product -- in fact, during the October half term period, we were achieving 86% of FY '19 revenues despite only having 67% of the capacity available due to the COVID restrictions at that point in time. The new Puttstars concept centres also traded very well on reopening and continues to deliver in line with their pre-COVID business plan. And I'll talk you through the performance of those centres in more detail later in the presentation. But through a very proactive program of engagement and negotiation with our landlords and suppliers and very welcomed support from our shareholders. We related to the pandemic with a very strong balance sheet. And because of that support, we've been able to review our capital deployment plans on revenue-generating cost saving and customer experience enhancement initiatives, completing the refurbishments of another 2 centres, installation of Pins on Strings as well as commit financially to a number of exciting new locations for both the Hollywood and Puttstars brands. Two new high-quality locations have been agreed since the placing with a further 3 locations in negotiation for Hollywood Bowl and 8 for Puttstars stars, increasing our overall target of 14 to 18 new centres by 2024. Pre-bookings are going well this week as we reopen our doors to our customers today.

Thanks, Steve. As Steve mentioned earlier, we traded for only 6.5 weeks at the half. And for all of that, we were trading with restrictions from the 10 PM curfew to group sizes to name just a few. After the November lockdown and when we opened into tiers, we were only able to open 37 centres, which then reduced throughout December before on 30 December, the final 8 centres were closed. As you can see on Slide 5, total first half revenue was GBP 12 million, down 82.6% on the same period last year. And later, Steve will talk through a bit more detail on the encouraging trading performance we saw in October half term. As well as trading revenue, we also received GBP 1.6 million of local grants during the first half, with a further GBP 1 million due as part of the restart grants during April, which we have now received. Gross profit margin was enhanced by these grants as well as a higher proportion of boarding revenues during the first half, which resulted in a 90.1% margin. We're forecasting normal margins to return in H2 trading weeks circa 85% to 85.5%. Admin costs reduced by 46% during the first half with employee costs down GBP 9.6 million, property rate reduction of GBP 3.6 million and the reduction in other costs through the management by the teams of over GBP 3 million. We also saw a reduction of 37.2% in corporate costs for the first half as well. I will cover off in more detail in a few slides time, our work with our landlords, which shows our strong relationships with them and the write-offs and deferrals agree. On Slide 6, on an IFRS 16 basis, adjusted EBITDA was GBP 0.2 million with no exceptional costs and depreciation and finance expenses in line with expectations. The business recorded therefore a loss before tax of GBP 14.5 million, and the tax credit was recognized of GBP 2.9 million in the year, primarily due to the losses incurred. The group has committed a reclaim for FY 2020 corporation tax of GBP 0.6 million and then furthermore, the group will be in a position at year-end to utilize the recent budget changes in relation to carryback losses through FY '19, which should result in a further corporation tax refund of GBP 0.4 million, with any balancing taxable losses available to carry forward and offset against future profits. Along with the introduction of the new tax super deduction, which applies for capital investments between the first of April 2021 on the 31st of March '23, -- this will further reduce the group's effective tax rate going forward. Now assuming there's no further changes by the government, we forecast our effective tax rate to be 10% in FY 2022. We've also continued to protect cash during this period of closures, as you can see from Slide 7, and a great boost to those shareholders who supported our recent equity raise. During H1, as I mentioned earlier, we received GBP 1.6 million of government grants, we saw our working capital movement positive of GBP 0.9 million, excluding VAT, with cash centre EBITDA reducing cash balances by GBP 8.8 million, which also included all trade creditors unwinding. We were covered at the end of the half, GBP 1.7 million of VAT from HMRC, which has now been received. And we've continued on the refurbishment program, we spoke about before. We completed the refurbs Steven [indiscernible] as well as 2 Pins on Strings in stores and the full rollout of the lanes seating dividers offer a total CapEx just in excess of GBP 3 million. Finally, a debt service of GBP 1 million in the first half blessed us with cash at the end of H1 of GBP 37.4 million. And as of today, our cash at bank is GBP 37.2 million, and we look forward to adding to that during the reopening period. With the new centres as well as 3 more refurbs and 4 more pins on strings, we forecast total CapEx for H2 to be between GBP 9 million and GBP 11 million. Just as a recap on the proactive liquidity management, what we try to do is ensure that we value support from our stakeholders throughout the process of closure. We agreed an extension to our RCF before the CL bills was announced and then convert it to the government-backed facility to save cost. That still remains undrawn, but still available until the 7 of May 2022. We engaged with shareholders early to give us what we thought was a 6 months of additional headroom, which seemed more than prudent at the time. None of us predicted this would be going on for 14 months. And then after a successful reopening period, we then continue to discuss covenants with our banks, further relaxing the covenants in January when the lockdown was extended, removing the leverage and cash flow covenants for all of FY 2021, as well as relaxing the leverage covenant for FY 2022. We are well within our covenants for March '21 and forecast to be so for the rest of the facilities period. And on Slide 9, I'd like to give you some more detail on our successful negotiations with our landlords. Our plan was to ensure that these negotiations wouldn't become a distraction for us in terms of our strategies and investment into core estate, new centre opportunities, and technological advancements. And therefore, it was imperative with clear to pound not only what is paid written off and deferred, but in the case of those deferments went to so we can relate into our cash flow forecast. Steve and I have been dealing directly with our landlords at each stage of discussions and communications, and we've been focused on ensuring the landlord is clear of our intentions, how we want to work together with them to arrive at an amicable solution for all because it's not there for that we've been forced to close either. And at each stage, we've been asked -- we've asked them to confirm their understanding. And you will recall that we paid our March 2020 rent in full, and therefore, could start discussions on the June onwards rents. And just to recap, over H2 last year, we managed to secure write-offs of GBP 4 million in our rent, that's for the June and September rent quarters. Deferred agreements in terms of payment schedules GBP 1 million and paid 2.1 million, a further $1.1 billion at the end of the half remains deferred and under discussions. Now for H1 of this financial year, we managed to get Litofsof GBP 2.1 million with our landlords. -- deferred further GBP 1.3 million with agreements and paid GBP 3.6 million. That left GBP 1.2 million still under discussion at the end of the past. So therefore, a total of GBP 2.3 million in under discussion. Now we continue with those discussions since the end of the half. And since then, we've had another GBP 0.3 million written off and sign and a further GBP 0.3 million ready to be signed off and written off as well, which would reduce the amount deferred to no agreement on payment schedules to GBP 1.6 million. We've got a clear view on the deferment liabilities and where we are still in discussion. We've assumed payments will be made in H2. And in total, that leads deferred amounts of GBP 4 million plus, back to be paid. We've received more community since the announcement, we're committed to open. So from those landlords that haven't discussed anything with us before, there are now open discussions on concessions. Such that we believe these will be sorted very soon, and we'll be able to give an update in our year-end results. On Slide 10, we lay out the cash benefit seen in H1. So the government support has been discussed before, but this GBP 7.2 million is split GBP 5.6 million of CJRS money as well as $1.6 million of government grants. We have also, as I mentioned earlier, received a further GBP 1 million to date for the restart brands. The cash wave is in relation to the business rates removal, which will continue until the end of June 2021 and then be reduced by 67% capped at GBP 2 million. Therefore, for the group, this is for 5 months, and we'll start paying GBP 200,000 from July with full rates being paid currently with us as of December. We've again extended our amusement supply contract on the back of the closure, which saved us a further GBP 1.2 million during the most recent lockdown. And then finally, the property detail that we discussed on the previous slide. Of the deferrals that you can see in the bottom table, we still have the VAT in paid back with GBP 1.1 million in H2 and the final payments in financial year 2022. And then the rents due through a combination of the unagreed deferrals and the agreed ones. And then finally, as you can see from the balance sheet, and as discussed earlier, we've continued to see trade creditors reduce as the closure has been extended. Whilst the rent deferrals are shown within lease liabilities. We also have a corporation tax debtor use the carryout of losses that I spoke about earlier and expect this to increase further from a carryback and carryforward opportunity in the second half through the crystallization of the new budget changes.

Thank you, Laurence. Now although the pandemic has slowed elements of our strategy, our simple but effective growth strategy does still remain relevant in the post-pandemic era. Despite the lockdown, we've remained very focused on both our organic growth plans and our investment lead strategy. We continued with our centre Refurb plan and have enjoyed real success in bolstering our new centre pipeline, doubling the number of new centres we were looking to open pre-pandemic. We've also continued the investment in cost saving and IT improvement capital projects. On Slide 14, to casting our minds back to the first reopening at the beginning of the pandemic back on the 15th of August, as permitted by the guidance with DCMS and Public Health England, all bowling centres had to open with only 50% of the lanes being used. We were opening during the school holidays, one of our peak trading periods. And therefore, given these restrictions, it was important to ensure we could utilization across all day parks. And then customers were with us to drive spend per game. Now given our focus on sales, service and safety superiority, we were pleased to see spend per game up 7% during those first 2 weeks of reopening, which coincided with the last 2 weeks of the August school holidays with shoulder period utilization increased and the business performing at 69% of prior year during the August period. The focus at the time was not just on the reopening but also on how we could work within the 1-meter plus guidelines and increased lanes available through the introduction of very high-quality lane seating dividers, this enables us to open up every line. Now during the last month of our financial year in September, further restrictions we've introduced, all of which have the potential to impact on trade. So things like the rule of 6 overall capacity restrictions 10 p.m. curfew that was introduced as well as cable service for all alcoholic sales are just a few examples of the headwinds that we were dealing with. By the time we got to October half term, 28 centres were benefiting from our high-quality land seating dividers as well as the new distinctive bowling balls for alternate lanes. Minimizing the shared use of equipment and increasing overall group capacity available to 67% of all lanes. Now while spend per game was down due to the overall capacity restrictions by which I mean number of people in the bar, diner and crucially, the amusement areas. We saw a strong increase in game volumes across all day parks, such the October half term from 86% of prior year, as highlighted on the bridge shown on the slide. There were a number of those centres that have got the lane seating dividers in place so we're actually performing better than 2019 numbers. Now during the 11 weeks of reopening pre to the November lockdown, our performance top line is good. Demand outstripped supply during the peak trade periods and costs were really closely managed. But as we got closer to Christmas, more restrictions on trade were put in place particularly in the geographies that we have a large number of centres, meaning only 37 centres saw any trade at all post this November lockdown pre-Christmas, and then those final 8 centres that we're still cleaning on and able to remain open were required to close in line with the national lockdown hospitality on the 30th of December. Looking at the Puttstars centres on Slide 15. As with the Hollywood Bowl Centre, the Puttstars brands also had a very limited opportunity to trade during the first half of our financial year. But the data we did manage to generate has confirmed we've created an offer that is valued by the customer group we've targeted. We have some elasticity on price and the trial centres are well on track to deliver against the forecasted return on invested capital on a gross CapEx basis, and that figure will only improve with the economies of scale as we have more centres and learn more about the product and start bringing the fit-out costs down. Just in terms of some context to the performance of the Puttstars businesses, we have compared the first 3 Puttstars centres with the Hollywood Bowl average to the game on food, drink, amusements and the core activity, which is Gulf versus the coactivity of bowling. It's worth noting we're seeing on average Hollywood Bowl customers ball 1.2 games the average golfer, however, is playing 1.9 games on average. Now taking that into account, the Puttstars centres are generating broadly the same level of spend on ancillary areas per person of the Hollywood Bowl Centre. And as you can see from the price comparison chart on the right-hand side of the slide, the price point is very competitive the quality of the differentiated offer and present some opportunity for a more sophisticated yield management approach as the centre start to mature. I'll turn to Slide 16. Following the successful placing in March, we were able to resume our revenue-generating and cost-saving capital investment program, making full use of the enforced downtime. We completed the refurbishment of our centres in Basildon and Stevenage before reopening. The refurbishments in both centres included the relocation of the diner creating space and enlarged and enhanced amusement offer as well as the installation of a number of proven digital enhancements and operational efficiencies, helping manage labor costs without crucially compromising the customer experience. Three further centres will be refurbished during the year, with both our Glasgow centre benefiting from a refurbishment and our centre in Cheltenham of having the amusement area expanded. We will also be able to start detailed plans for the refurbishment of our site in Liverpool, after some very lengthy delays and changes to the original site plan. So rather than knocking down the existing bowl, which was the original plan and then relocating it with the leisure offer on the park the new plans, the surrender 20,000 square foot of new space and then fully refurbished the Bowl in its existing location, saving over GBP 1.5 million of the expected spend as well as seeing significantly less disruption to trade. Now this will start on site during financial year '22. Our stated plan of using our buildings to generate as much clean energy as commercial to do so also continues at pace. With a further 3 solar installations planned for the second half, meaning we will have 5 centres with a solar array on the buildings generating 872,000 kilowatt hours of clean energy a year. Now this amounts to 5% of our total energy requirement for the year. On Slide 17, we just set out the technical excellence and innovation, and we've used the downtime created by the pandemic to continue the rollout of the new Pins on Strings technology with installations in 2 centres during the half as we continue to execute the rollout strategy to those centres that have machines nearing the end of their useful economic life as well as in storing the technology into our new openings and locations where recruitment and retention of technicians proved challenging. Plans are in place to install the concept into 4 more centres in the second half of the year, mean we'll close the year with 24 centres benefiting from the technology and 37 centres still to benefit from the guaranteed minimum 30% return on the average cost of GBP 250,000 to install. with an average of 6 centres benefiting from a Pins on Strings installed per year going forward. All centres should be complete by FY '28. We also used the opportunity to lock down presented to accelerate the install of the new scoring system that we have worked with the supplier to develop, meaning the rollout will be complete 3 months ahead of schedule and ties in perfectly with the deployment of our new CRM platform that will go live in half 2 as we continue our investment and development in our customer relationship management, trying to keep pace with changing customer communication preferences using the latest and most innovative methods and technologies. Joining up the digital journey of the investments that we've made in our in-centre merchandising, giving us the ability to tailor the upsell prompts to the ever-changing demographic we have visiting our centres during our long opening times as well as highlighting the healthy competition unique to our offer with the digital leader boards. The pandemic accelerated the number of trends that we're developing, including the shift to online bookings from walk-up and telephone during the pandemic affected opening periods, we saw online bookings jump to 75% from pre-pandemic average of 40%. Now whilst some of that is bound to unwind as things get back normal, the learnings made during this period have resulted in a whole host of changes we will be making to our online customer journey and rolling out in half 2 to make the customer journey as slick and barrier free as possible that will in turn reduce our average transaction costs and drive up the average transaction value. Across all of these projects as well as refurbishment solar installs, we expect to be spending between GBP 6 million and GBP 7 million of capital expenditure, and we continue to forecast a return on refurbs and Pins on Strings installed of at least 30%. We -- so turning to the expansion of our estate. On Slide 18, the retail landscape has changed dramatically during the pandemic with a number of trends that were developing pre-pandemic accelerated, as a consequence, landlords are looking to increase their exposure to experiential leisure, changing the very retail-focused schemes to provide a more holistic destination. And they want an industry-leading offer run by high-quality businesses with strong covenants. And that's where we come in. As a consequence, we've seen a big inflow of new opportunities. Only a handful, however, are of the quality that we look for will enhance the profitability of our estate that will fit within the rent and service charge parameters we're able to offer when signing long leases and looking for businesses that will be profitable for the duration of the lease, rather than driving for just short-term scale. Now in addition to the 8 centres reported on our pipeline that are signed, we've worked really hard to negotiate on a further 11 centres that are advanced heads of term stage or in legals, of that at least 3 of which we're confident we'll be on site on before the end of 2021. I leisure retail landlords have not been collecting a huge amount of rent over the last 12 months and are therefore less able to offer cash contributions. They are, however, able to offer significantly longer rent-free periods. This does mean that opening these centres will demand the capital requirements circa GBP 4 million to GBP 6 million this calendar year, but the overall returns that we get will still be in line with our historical performance. Slide 19, we just set out the pipeline, which, in addition to the centres previously disclosed, we've added Birmingham Resort World. That's a great location on the same part of the NEC with a solid mix of lifestyle, leisure, retail and entertainment. It's going to be a 20,000 square foot centre with 17 lanes. The other addition to the pipeline is Harrow Puttstars, that's located adjacent to a very popular cinema that's just undergone a big refurbishment and is in a very successful retail scheme. We're expecting to be starting on site at both these locations during half 2 as well as starting on line Hollywood Bowl Belfast with all 3 openings scheduled to commence trading in FY 2022. Now today, we reopen our doors in all but one of our centres across the United Kingdom with Hollywood Bowl Glasgow Springfield's Kees still required to stay closed. And it's certainly been a long time in coming. We view the time that we've been close to prepare our business, our team and our safety protocols to ensure we're in the best shape possible welcoming our customers back to our centres, our very talented marketing team has put together a very detailed relaunch plan that operates in ways as confidence to return to indoor venues built. As the market leader, we once again enjoyed substantial national and local media coverage through a well-thought drew and executed PR campaign. The COVID secure operating model, we refined prior to the second lockdown is our new normal with unique bowling balls for every lane, minimizing the shared use of equipment, coupled lane seating dividers designed to fit seamlessly into the environment. We've enhanced cleaning regimes. We've got COVID Marshalls for peak periods, all to ensure compliance in a very customer-centric way. The senior team and I have all been out on the road over the last 7 days, relaunching our cultural induction for all 2,000 team members and delivering immersive operational training to ensure all of our team have real clarity of purpose aligned goals and objectives, and that's been backed up with a new team member incentive program that rewards our team for displaying the behaviors that we know our customers value. So in summary, we're ready and waiting to welcome back our customers in a safe environment that's been meticulously prepared to maximize capacity and profit whilst delivering the quality of experience that we know our customers are looking for. We made good use of the lockdown period, completing the refurbishment cost saving and business improvement programs that were in our plan. Our team have been well supported during the long periods of lockdown, both financially and through our online engagement programs, and they're ready to hit the ground running. Our new centre pipeline is exciting, doubling the size of the pipeline. And with our new formats, we are very well placed to capitalize on the changes we're seeing in shopping centres and leisure schemes. We have a solid investment program, well mapped out for the remainder of the year and remain very confident that with our affordable customer-centric offering, we're well placed to bounce quickly back from the effects of this pandemic.