Bowlero Corp.

Greetings and welcome to the Bolero Corp. First Quarter 2023 Earnings Conference Call. It is now my pleasure to introduce your host, Ashley DeSimone of ICR. Thank you, Ashley. You may begin.

Good afternoon and welcome to the Bolero Corp. First Quarter Fiscal 2023 Earnings Conference Call. All participants will be in a listen-only mode. During this call, the company may make certain statements that constitute forward-looking statements. Such statements reflect the company's views with respect to future events as of today and are based on management's current expectations, estimates, forecasts, projections, assumptions, beliefs, and information. These statements are subject to a number of risks and uncertainties that can cause actual events and results to differ materially from those described in the forward-looking statement. For further details concerning these risks and uncertainties, please see our annual report on Form 10-K. filed with the SEC on September 15, 2022. The company expressly disclaims any obligation to publicly update or review any forward-looking statements, whether as a result of new information, future developments, or otherwise, except as required by applicable law. In addition, during today's call, the company will discuss non-GAAP financial measures, which we believe could be useful in evaluating our performance. Reconciliations of adjusted EBITDA to net income calculated under GAAP and other non-GAAP measures can be found in our earnings press release and will be included in our Form 10-Q for the first quarter of fiscal year 2023. Throughout today's conversation, you will hear the company refer to EBITDA and adjusted EBITDA. At all times, the company is referring to adjusted EBITDA, as described above, and reconciled to net income in the associated disclosures. As a reminder, this conference is being recorded. I would now like to turn the call over to Brett Parker, President and Chief Financial Officer of Bolero. Please go ahead.

Good evening and welcome to the Bolero Corp earnings discussion for Q1 of fiscal year 2023. I am Brett Parker, Vice Chairman, President and CFO of Bolero Corp. Thank you for joining us today. As always, we value our shareholders and strive to create value for them. To that end, we are looking forward to discussing the strong financial results from the first quarter of our 2023 fiscal year. We are pleased to report that we have continued the positive momentum from fiscal year 2022. 2022 was a transformative year for Bolero, and 2023 will take this company to new heights. We believe this trajectory is particularly important as we head into the second and third quarters of FY 2023, which historically represent 55 to 60% of our annual revenue. Beginning with the highlights, in the first quarter of fiscal year 2023, Bolero generated record Q1 revenues of $230 million and record Q1 adjusted EBITDA of $65 million. Compared to the prior year's Q1, revenue grew $49 million, or 27%, and adjusted EBITDA expanded by $6 million, or 11%. Compared to pre-pandemic performance, revenue was higher by $82 million, or 55%, and adjusted EBITDA expanded by $40 million, or 162%. This incredible performance serves as a testament to three key differentiators. The benefits of QMS, which is our algorithmically powered management system, management's ability to manage in all macro environments, and the continued positive momentum and demand we see in the business. We have seen this strong demand sustained beyond the quarter end. In the first 18 weeks of fiscal year 23, which takes you through November 6, revenue has remained extremely robust, growing 56% versus pre-pandemic levels, with same store revenue increasing 36% on the same basis. When compared to the same time period and prior year, which was an excellent quarter in its own right, FY23 revenues were higher by 30% and same store revenues were higher by 21%. Adjusted EBITDA margin in the quarter was 28.4%, which grew 1,158 basis points versus the corresponding pre-pandemic quarter and reflects our relentless pursuit of world-class operational performance that lies at the core of our company culture. We continue to deliver margins well in excess of our peers. As mentioned, this operational excellence is supported by our proprietary, technologically enabled QMS tool, which focuses on optimizing the revenue generation and cost control discipline across the entire portfolio. This enables us to generate tremendous cash flow from the business. In Q1 FY23, we generated $36 million in cash from operations. The ability to continue to produce large amounts of cash from operations enables the business to self-fund a large number of center acquisitions, new builds, and existing center upgrades and renovations. In the first quarter, we added three new centers. Through November 16th in the fiscal year 23, we have acquired an additional six centers, bringing our total center count to 325. We also have definitive purchase agreements to acquire an additional three. Since the start of fiscal 22, we have added 38 new centers to our portfolio, and in so doing grew the center count by approximately 10% on an annualized basis. A significant majority of these came with owned real estate as well, which provides long-term business security and excellent optionality to raise cash through sale-leaseback transactions or traditional mortgages. Results in these new centers have been very strong and the anticipated returns are in line with or better than prior center additions. The pipeline for additional deals remains robust and offers a compelling opportunity to further consolidate and grow the industry. Beyond the financial performance, there were other operational initiatives that we launched this quarter which give us additional confidence and excitement for the company's future. We successfully initiated a pilot of a skill-based gamification app called Money Bowl that we believe can transform the performance of our centers by deepening engagement with our guests. Money Bowl is an internally developed app that enables guests to bowl in challenges for cash or other prizes depending on the location. Money Bowl uses proprietary algorithms to determine odds on certain challenges which range in difficulty from as easy as breaking 100 to as difficult as billing an exact score. We believe that, in addition to an enhanced guest experience, visitor frequency and in-center dwell time could increase. With that, I'll move into a more detailed discussion of the results in Q1 fiscal year 2023. During the quarter ended October 2nd, 2022, we established new high watermarks for both first quarter and trailing 12 months revenue, and adjusted EBITDA. Revenue continues to materially outperform pre-pandemic levels, both in total and on a same-store basis. Despite all the well-documented macro cost pressures, we continue to produce very strong margins, with a Q1 FY23 adjusted EBITDA margin of 28.4% compared to 16.8% in the comparable pre-pandemic periods. As previously noted, we continue to generate prodigious levels of cash from operations, which positions us favorably to continue to execute our growth strategy. Driving this performance in the quarter was very strong revenue growth. Top line increased by 27% year over year and surpassed pre-pandemic levels by 55%. Same store sales also rose 20% compared to prior year quarter. This increase was supported by continued strong performance of walk-in retail, notable and accelerating growth in event revenue for the third consecutive quarter, and a strong recovery in league revenue. The dramatic increase in event revenue and the rebound of leagues have the potential to support substantial continuing revenue growth and have resulted in an acceleration of revenue expansion through the week ended November 6th. Furthermore, We recently increased prices across the portfolio, and we expect the impact of these increases to further materialize in the months ahead. We continue to monitor customer response, of which we have seen none thus far, and input costs to inform further price changes. Adjusted EBITDA was $65 million in the quarter, which represents an increase of $6 million, or 11% year-over-year. and an increase of $40 million, or 162%, relative to pre-pandemic performance. We reported a net loss of $34 million for the quarter, which includes a $41 million non-cash expense related to the valuation of the urinal chairs. Adjusted for this non-cash expense, net income would have been a positive $7 million. In addition, we generated $36 million in cash from operations in Q1, Consistent with our history, we continued to reinvest in the business and further optimize our capital structure to maximize shareholder value. As of May 18, 2022, we retired all the outstanding warrants and reduced ultimate dilution in so doing. Furthermore, we began returning capital to shareholders under our previously announced $200 million buyback authorization. Through October 2, 2022, we have repurchased almost 3.9 million shares at an average price of $10.26, returning $40 million to shareholders in less than seven months. The aforementioned buyback has retired 91% of the approximately 4.3 million shares issued in the Warrant Exchange. As we highlight on page four of the materials, we are proud to report that our store count now stands at 325. which includes the addition of nine new centers since the start of the fiscal year and 38 new centers since the start of fiscal year 2022. Additionally, we have executed definitive purchase agreements or leases to add another eight new centers to our portfolio in attractive markets across the country. Our growing footprint continues to improve our presence in and around top MSAs and simultaneously opens up new markets for us. We expect the momentum in our acquisition activity to continue as the pipeline remains as robust as ever. On page five of the materials, you can see the recent trends in bowling center revenue. As mentioned on our last earnings call, this extended release of data is related to the assessment of the waning impact of COVID, the general return to office trend, and the evolving macro environment where there is increasing talk of a weakening consumer, inflation, and fears of recession. Despite any potential headwinds, we continue to materially outperform pre-pandemic levels and continue to outpace FY22's revenue generation. More specifically, since January 2022, our revenue has consistently outperformed pre-pandemic levels. This growth accelerated in February, March, and April and has been steady other than week-to-week variances due to anomalies such as calendar shifts and weather since. This momentum has continued into the beginning of our busy season. While the results are preliminary, the revenue in the most recent week, which ended November 6th, grew an impressive 57% compared to pre-pandemic. We have seen our strong top line performance translate into continued double digit growth in adjusted EBITDA as demonstrated on page six. Adjusted EBITDA margin was 28.4%, which surged almost 1200 basis points above the comparable pre-pandemic metric driven by revenue growth, our proprietary technology-based solutions that allow us to continually optimize performance, and the operating leverage of our business. Relative to Q1 and FY22, adjusted EBITDA margin decreased by 415 basis points. This short-term margin pressure primarily resulted from the reinvestment in normalizing staffing in order to maximize results in the coming busy season. In addition, as we have previously noted, Q1 FY22 adjusted EBITDA margin was unseasonably high due to pandemic-related staffing shortages, which have since reached more stabilized levels. Management's view on annual margins remains unchanged, and this seasonal normalization comes ahead of our seasonally largest Q2 and Q3, which we note experienced hampered demand in FY22 due to the impact of Omicron and a new wave of COVID restrictions. Moving on to page seven, we wanted to provide additional context around our record-setting revenue and adjusted EBITDA performance for this quarter. From a seasonality perspective, Q1 is typically a lower volume and margin quarter. We believe the pre-pandemic revenue curve remains the most indicative view of typical seasonality trends in our business, with Q2 and Q3 historically serving as the largest quarters, accounting for 55 to 60% of annual revenue and 65 to 70% of annual adjusted EBITDA. This year, the rebound in revenue we saw in the first quarter vis-a-vis event and league supports our confidence heading into the second and third quarters. We never lost focus on our goal of providing delightful guest experiences for our guests and are now well positioned to do so through fiscal year 2023. Our overall financial performance is largely a function of our center-level economics. As highlighted on page 8, center-level revenue increased $50 million, or 28%, over the comparable prior year period with positive momentum across each of our guest segments. walk-in retail, group events, and league tournaments. Center-level EBITDA grew 20% year-over-year and an astounding 95% over the pre-pandemic period, reaching $86 million. Our 38% center-level EBITDA margin increased 753 basis points above the comparable pre-pandemic period. Page 9 lays out cash flows for the quarter. The company generated $36 million in cash from operations during Q1 of FY23, growing almost 13% versus the prior year. This prodigious cash flow provides support for our center acquisitions, building, and the conversion of centers, as well as the continued optimization of our capital structure, including share buybacks. The company finished the quarter in a very strong cash position with balances of nearly $110 million even after investing $62 million in growing and improving our footprint. Please note that it is typical for cash to decline in its first fiscal quarter due to the seasonal nature of the business, combined with the benefits of completing construction projects of all types in the seasonally smaller first and fourth quarters of each year. In summary, Bolero's Q1 FY23 performance continued to significantly outpace pre-pandemic levels. We set new records in terms of revenue and adjusted EBITDA generated in a first quarter across the company's multi-decade history. We are proud of the results, which demonstrate the continuation of the positive momentum and exemplary annual performance we achieved in fiscal year 2022. Fiscal year 2023 is off to a strong start, and we believe the company is poised to continue its strong performance through a combination of organic growth and new center additions going forward. Thank you for your time, and I look forward to presenting again next quarter. We will now begin a brief Q&A led by our chairman, founder, and CEO, Thomas Shannon. Operator, please open the line for questions.