Hollywood Bowl Group plc (BOWL) Earnings Call Transcript & Summary

Thank you very much. A warm welcome to you, those of you in the room and to those dialing into our 2026 half year results presentation. My name is Steve Burns, Chief Executive, and I'm joined by our shiny new CFO, Antony Smith, who I know most of you around the table have already met. I plan to take you through the key highlights of the half and our operational highlights in both the U.K. and Canada. Antony will take you through the numbers and the financial outlook. We'll then take any questions from the room first and then from those who have dialed in. So, the first half of our financial year has been a record performance for the group with revenues of GBP 141.5 million. That's up 9.5% on the same period last year and up 2.3% on a like-for-like and constant currency basis. Despite the increased cost burden, we converted that revenue growth to a record EBITDA of GBP 42.2 million on a pre-IFRS 16 basis and profit after tax of GBP 22.2 million. In line with our progressive dividend policy of paying 34% of the previous year's full year dividend at the half year, we're proposing an interim dividend of 4.52p per share funded from a net cash balance at the half of GBP 26 million. We're very pleased with the first half of this financial year and made excellent progress in our trading performance, cost control and strategic execution. First, on trading, we've enjoyed a strong performance in both territories. Demand for high-quality family leisure experiences has stayed resilient. On top of that demand, we're using more sophisticated operational levers to support yield and revenue growth. Second, on costs, we kept things well controlled and maintained our disciplined track record of cost management. That has helped us protect margins and more importantly, our fabulous margin dynamics gives us enviable insulation against inflationary and government or macroeconomic pressures. Energy is another major factor in that resilience. We've hedged 76% of the group's total energy needs through to the end of FY '29, which provides meaningful visibility and stability over a key cost line. On strategic progress, we opened a new prime location in Edmonton, Alberta during the half, and it's trading well. The estate now stands at 93 centers, 77 in the U.K. and 16 in Canada. And we've got momentum into H2 with two new U.K. centers and one Canadian center left to open. Beyond that near-term pipeline, we're also accelerating the flow of new centers for FY '27 and beyond, particularly in Canada, as I'll come on to talk about later in the presentation. And finally, capital allocation remains disciplined. We invested GBP 8.6 million of CapEx into expansion, refurbishments and center enhancements whilst maintaining a robust balance sheet. We ended March with GBP 26 million of cash and an undrawn GBP 25 million revolving credit facility, giving us significant flexibility to keep investing in growth and returning cash into a financially resilient. We plan to commence a GBP 5 million share buyback in the second half. H1 has shown strong demand, tight execution and a balance sheet that supports continued momentum into H2 and beyond. I'll now hand over to Antony, who will take you through the numbers.

Thank you, Steve. Good morning, everyone, and it's nice to be here. So, I'll start by taking you through our revenue growth on Slide 6. So, as Steve has already mentioned, we've delivered record revenues of GBP 141.5 million, that's 9.5% up versus last year. In the U.K., sales grew by 9.4%, split roughly 3:1 new centers to like-for-like growth. The underlying like-for-like in the U.K. was a very creditable 2.6% against what was a tough U.K. market backdrop, and that shows the resilience of our value for money proposition. This was delivered through a 7.7% increase in spend per game, offsetting a 3.4% decline in our game volumes. We continue to optimize our yield management and pricing and to grow our add-on sales. New centers in the U.K. are performing really well, and we're delighted with last year's openings in Inverness, Uxbridge and Reading, which are the principal contributors to that GBP 7.5 million of revenue growth from new centers. Canadian revenue of 12.5% on a constant currency basis is almost entirely driven by our new centers. FY '25 openings in Kanata and Creekside as well as this year's Edmonton contribute GBP 3.2 million of additional revenue. Like-for-like in Canada is marginally positive at plus 0.5%, but that does include suffering from some short-term closures in February during major snowstorms on the East Coast of North America. The non-core Striker business saw a revenue decline of GBP 0.6 million in the period, and that was a conscious decision by us to focus our resources on intra-group installations of Pins on Strings and to help build our new centers. This creates long-term value for us as we get access to cheaper capital investment by doing so. There's a small noncash currency conversion adjustment of GBP 0.6 million. So turning to Slide 7, where we show how this revenue growth translates into strong profit progression. So, I'll start by saying I'm showing on this chart our profit progression on a PBT basis. That should be helpful as it deals with both EBITDA movements but also shows where there are increases in depreciation and financing costs that affect the reported profit. You should note that group adjusted PBT refers to a pre-IFRS 16 PBT. That helps exclude the noncash profit compression resulting from our lease profile as well as removing the impact of adjusting items that we don't consider part of the ordinary course of business. If you need further information on APMs and how they reconcile to reported numbers, there's a slide in the appendix that gives detail as well as in the RNS. So, I'll concentrate on the central section of this chart, showing 8.1% growth of adjusted PBT from GBP 29.7 million to GBP 32.1 million. Much of this growth is driven from the excellent U.K. performance, where underlying like-for-like centers grew by GBP 1.5 million and new centers contributed a further GBP 3.4 million. Canadian like-for-like centers saw a small decline in profits at GBP 0.6 million as the 0.5% sales growth wasn't quite enough to offset inflationary pressures on input costs. Our new centers in Canada are performing well and contributed an additional GBP 1.3 million of profit in the period. Our recent capital investments in growth, notably new centers have grown the depreciation of our fixed assets by GBP 0.9 million and interest revenue has reduced by GBP 0.2 million as we deployed some of last year's surplus cash as buybacks in the second half of last year. And finally, you'll see a GBP 2 million increase in corporate costs. That includes a small GBP 0.1 million FX translation, which is noncash, but the corporate cost investment comprises 3 things, which are all investments in growing the business for the long term. Firstly, we've upweighted marketing investment. Secondly, we've invested in our people capability to drive long-term growth and identify future opportunities, including investing ahead of the curve in our Canadian leadership team. And finally, we've accelerated our pipeline, meaning we've spent a little more on external advisers to secure the right assets for our business. Moving to Slide 8, where I'll briefly take you through the balance of the P&L. I've already taken you through most of the drivers of the movements in profit, but there are a couple of things to draw your attention to. Firstly, you'll see I've made a slight change to naming conventions. I'm now referring to group adjusted EBITDA after rent. And to be clear, this is exactly the same as EBITDA pre-IFRS 16 but moves away from describing our core business with reference to an accounting standard that's been in place for 6 years. As I've already mentioned, PBT is on a pre-IFRS 16 basis. I've already described that 8.1% increase in PBT, which is a really strong drop-through from 9.5% revenue growth. But I'll call out a couple of additional items on this slide. Gross profit, which I'm describing here on a reported basis, is growing a little more slowly than revenue at plus 7.8%. This is impacted by an 18.5% increase in center labor, and there's a 50-50 split of that. You have the labor increase you'd expect from the extra centers and volume, and you have the inflationary pressures from national living wage and national insurance increases. And while these pressures are unwelcome, our labor ratio remains at just 20% of revenue. And you can see from the overall P&L that even at this level of inflation, it's manageable and doesn't significantly impede profit growth. Finally, on this slide, below adjusted PBT, you can see two layers of adjusting items. The first is the profit compression of GBP 1.6 million, which is a function of our depreciation and interest on leases being higher than the rent payable. This is a non-cash profit compression, hence, why we continue to discuss PBT on a pre-IFRS 16 basis. And the second are adjusting items, which we consider to be outside the underlying business. GBP 3.3 million of adjusted items comprised a GBP 0.5 million accrual for the contingent acquisition of the Canadian business and a GBP 2.8 million impairment of one of our U.K. bowling centers, something I'll cover in a little more detail on the next page. Last year, adjusting items included a GBP 1.6 million income from a historic insurance claim related to COVID-19. The result of PBT reported for the year was GBP 27.2 million, GBP 1.1 million and 3.9% behind last year. So turning to Page 9, and I'll give a bit more detail on that impairment. So, this slide shows our last 12 U.K. bowling center openings, capital expended and the right-of-use lease asset added to the balance sheet. As you can see, on average, we've spent GBP 3.6 million per center and recognized the right-of-use lease asset of GBP 2.2 million, a total of GBP 5.8 million investment for the center. On the whole, our return on investment for those centers has been excellent. ROI shown here is the annual EBITDA generated divided by that original capital. Return on investment is an average of 26% across these 12 centers. But of course, as with any multi-site business, you do see a range. The lowest returning center on here still generates cash, but as you can see, the returns are single digit. An impairment test requires you to discount cash flows and compare against the carrying value of the asset, including the lease. And with a pretax weighted average cost of capital of 13%, this particular center at single digit is therefore unable to support the carrying value on the balance sheet. As such, we've taken a GBP 2.8 million impairment, GBP 2 million of the capital spend and GBP 0.8 million of right-of-use assets. This is, of course, a non-cash item in the period, reflecting historic asset values, and we remain confident in the quality of our new openings and the ability to generate returns. In this instance, for one center, we have got it slightly wrong. But in the other 12 and indeed, the rest of the Bowling estate, we've got it right. We remain confident in investments. So, moving on to cash flow on Slide 10. So I've aligned the slide left to right according to our really clear capital allocation policy. So, starting with our group operating profit, we add back depreciation, amortization and adjusting items, which includes the IFRS16 profit compression of the difference between rent paid and the depreciation and lease interest on the right-of-use asset. Our working capital cash outflow of GBP 4.5 million is a combination of cash outflow from payment of some of the deferred consideration on the Canadian acquisition and some timing differences. Rent costs from the property portfolio were GBP 12.1 million, replacing the depreciation and interest charges, and then we have GBP 4.6 million of maintenance capital in the period. These elements are combined to give us GBP 30 million free cash inflow before investments and shareholder distribution. It's a very healthy 71% conversion from the GBP 42.2 million group adjusted EBITDA. In this half, we've invested a relatively low GBP 3.9 million on completing Edmonton in Canada and commencing work on Cardiff in the U.K. as well as some smaller revenue-enhancing investments. We anticipate 2 to 3x that spend in the second half as we have two openings in the U.K., one more in Canada, and we commenced build on our pipeline for the first half of FY '22. And finally, in the period, we returned GBP 15.3 million to shareholders from the final dividend from FY '25. We've announced a 4.52p interim dividend today, a cash outflow of GBP 7.5 million in H2. And in addition to that, we've announced a GBP 5 million buyback program to be executed during the second half. Overall, trading in the first half generated a total cash inflow of GBP 10.7 million to leave a cash balance of GBP 26 million. And finally, turning to Slide 11 and our outlook for this year and the midterm. So while we don't give a formal forecast, we can give some guidance about how we see the landscape over the balance of the year and beyond into '27 and '28. So, while the consumer market remains challenging, we know that we do have a really strong customer proposition. We have a long-term proven track record of like-for-like growth and expect to continue to do so through yield and capacity management, add-on sales and modest inflation through our dynamic pricing. We see good like-for-like potential in Canada as we continue to improve that proposition. Our costs are well controlled, and our business model provides resilience against inflation. Labor is a relatively low percent of revenue at around 20% and energy is well covered into the future. Corporate costs are slightly ahead of the growth curve, but these will get fractionalized by the continued growth in our centers. Overall, we don't expect inflationary pressure to significantly impact our overall profit margin. We have a good track record of converting sales growth to profit growth and expect self-help initiatives to offset market headwinds. Our capital allocation policy remains consistent. We ensure our assets are well maintained. We typically convert free cash flow at 65% to 75% of EBITDA. And the balance, we invest in growth and return to shareholders to give an attractive yield. We have good visibility of our pipeline over the next 18 months, and we can see a modest acceleration in the long-term four centers per year stated targets. In the second half of this year, we anticipate our investment capital to be 2 to 3x in the first half and have today announced we'll be launching the GBP 5 million buyback. Overall, we expect to deliver in line with expectations. I'll be happy to answer questions at the end of the presentation, but I'll hand you back to Steve now to take you through the operational highlights of the year.

Thanks, Antony. We'll take a look at what's been driving the growth in both the U.K. and Canada. And turning to Slide 13. We look at the key highlights from the U.K. performance in the period. Strong revenue momentum, compelling value proposition, disciplined cost control and continued progress on growth and engagement. On U.K. revenue, we delivered GBP 118.4 million, which is 9.4% growth, 2.6% like-for-like growth. A big driver behind that performance is the value for money offer around GBP 26 for a family of four. We're staying accessible, and we're also leaning harder into digital demand levers to keep customer flow strong to support yield. On investment and expansion, we're continuing to execute the prime location strategy. We've got two new U.K. centers due to open in H2, and we have a strong pipeline for FY '27 with two further centers slated. There could be three if the landlord enabling works go in our favor. Customer metrics are another standout in the half. We achieved record results on both our Net Promoter Scores and blended service scores, a great value for money experience delivered consistently is the mantra for our operators. As with service, our people metrics moving in the right direction, too. We've seen record engagement scores, low turnover, record internal promotions plus external recognition with another Sunday Times award as one of the best big companies to work for. Overall, we've had resilient demand, disciplined execution and have a platform to build on during the second half. Slide 14 lays out the main levers we're using to protect and grow revenue even in a tougher volume environment. It's a mix of smarter pricing, more targeted demand creation and better in-center execution. At center level, the first lever is revenue optimization through price position, staying competitive where we need to, but being deliberate about where we hold or increase price. We're using more targeted campaigns to bring the right customers in at the right times rather than relying purely on broad-based promotions. We continue to refine our dynamic pricing framework to protect peak periods and avoid giving away margin when demand is already there while still using price tactically to stimulate off-peak visits. We have some exciting new trials and technology to further enhance this key growth lever as we move into the summer months. On promotions, the focus is being more selective, using offers where they genuinely drive incremental visits or spend and avoiding activity that just dilutes yield. We're also leaning into amusement investments and targeted upsells through the use of AI in our proprietary booking system to increase in-center spend and when capacity allows, encourage more customers to add one more game, one more activity or one more purchase once they're already on site. The game volume decline that we've experienced on a like-for-like basis over the last 2 years has been due to the normalization of trade posts the bounce experienced in '22 and the increased competitive environment. That was arrested during the half. As ever, there is a delicate balance between volume and price and the improvements in our digital capabilities are helping us remain the go-to family entertainment operator in the markets in which we trade. Disciplined cost control is a core organizational priority and continues to support margin resilience and our strong cash generation. There has been persistent inflationary pressure, including labor costs, utilities, rates increases, I could go on. But we've proactively managed these headwinds through detailed operational management as well as benefiting from a business model that is structurally well insulated against external cost volatility. 70% of Group's revenues are not subject to cost of goods inflation, providing us with some meaningful protection. Labor productivity continues to be managed at a granular center level basis, ensuring service standards are delivered while controlling payroll costs with U.K. center payroll remaining below 20% of the U.K. revenue and Canada below 26%. Our energy costs are largely hedged, and we're expecting 16% of what we need from our on-site solar. Significantly reducing our exposure to market volatility and providing excellent forward visibility on a key cost line. On Slide 15, we look at the continued evolution of the estate and why the Group remains strongly positioned despite an increasingly competitive backdrop. Experiential Leisure continues to attract new entrants, but Hollywood Bowl is structurally advantaged given its leading brand, customer appeal and continued investment in the customer proposition. When a new competitor opens in the markets in which we trade, we, of course, expect some impact on volumes and revenues. But as we've seen in the last 18 examples where this has happened, trade performance normalizes and improves from the third year onward. And that's because of the strength of the model, particularly our price accessibility, pace of innovation and the quality of our estate. We have the best locations in these shared catchments. Alongside that resilience, we continue to see attractive growth opportunities through the new center rollout, where returns continue to be encouraging, as you saw from the slide that Antony presented earlier. The U.K. pipeline is progressing well, and we remain disciplined, prioritizing prime locations and return quality over simply adding volume. In the near term, we have two additional centers planned alongside four further committed sites for FY '27 and '28 in the U.K. and remain on track to deliver on our 95-site target by 2035. So, turning our attention to Canada on Slide 17, we're really pleased with how things are going across the Atlantic and Splitsville remains an exciting growth opportunity for the Group. We have one more center to refurbish from the original acquisitions. We're currently on site completing a major GBP 3.4 million refurbishment of Richmond Riverport that includes the removal of eight bowling lanes to accommodate a larger amusement offer and the installation of Pins on Strings. The new centers we've opened closely mirror the U.K. property strategy, so co-location with retail and leisure in high footfall locations, supported by a strong local demographic. And we have one further site due to open in the second half in Canada. The brand is now gaining traction with the large institutional landlords, and we're being offered some fabulous space now we've demonstrated the quality of our product. We'll open five sites now in FY '27, an upgrade from the two previously communicated. And with a strong balance sheet and a bolstered senior leadership team with a new Territory CEO, we've got ambition to keep this momentum. On Slide 18, we've been driving sustainable profitable growth in Canada since 2022 when we acquired five sites that we grew to 12 through acquiring existing centers to build a presence and a platform in the key geographies that we wanted to trade. We've since been building on that platform, opening new greenfield centers that closely mirror the Hollywood Bowl format whilst ensuring they remain relevant for the Canadian market and Canadian consumer. In 2022, the Canadian business was 3% of revenues. In the half, Canada is now 16% of revenues and with those numbers set to grow as we accelerate our new opening pipeline. Whilst there are still numerous potential acquisition opportunities, the returns that we're generating from the new centers are much more compelling. The four new greenfield sites are generating an average site level EBITDA 39% higher than the platform assets. As you can see on the slide, the new sites are averaging CAD 1.8 million EBITDA and revenue of CAD 5.2 million, whilst the platform assets post their refurbishments are generating on average CAD 4.3 million of revenue and CAD 1.3 million of EBITDA. We invested ahead of the curve in Canada into a support center for long-term growth, and we now expect only modest increases in corporate costs between now and FY '28 to facilitate the accelerated growth. So, on Slide 19, I've pulled out some of the country highlights. In the half, we delivered 12.8% revenue growth like-for-likes of 0.5%. Now these were impacted through a number of center closures in Toronto due to the severe winter storms with a relatively small estate out there concentrated around the Greater Toronto area, the loss of revenue had a big impact on the like-for-likes. As a comparison, a listed peer posted negative 8% like-for-likes over the same period. The new centers that you've seen from earlier in the deck are performing nicely ahead of expectation. The new center we opened in Edmonton, Alberta got off to a strong start, and our new site in Barrie, Ontario, that will open in the second half of the year was starting to take shape when I visited it a couple of weeks ago. So, in summary, it's been another very successful period for the group. We are the market leader in the experiential leisure sector and with our value proposition continue to generate strong demand from our customers. Due to our difficult to replicate operating model, we're well insulated from the cost pressures and inflation and have plenty of growth left to come and a balance sheet that supports that growth ambition.