Bowlero Corp.

Greetings and welcome to Bolero Corp's second quarter fiscal 2023 conference call. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. It is now my pleasure to hand the call over to Ashley DeSimone of ICR.

Good afternoon and welcome to the Bolero Corp second 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 our management's current expectation 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 statements. 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 performance. Definitions and reconciliations for non-GAAP measures can be found in the earnings press release. As a reminder, this conference is being recorded. I would now like to turn the call over to Brett Parker at Bolero Corp. Brett, please go ahead.

Good evening, and welcome to the Bolero Corp earnings discussion for Q2 of fiscal year 23. I am Brett Parker, Vice Chairman, President, and CFO of Bolero Corp. Thank you for joining us today. Simply stated, we had a terrific quarter. We are pleased to report that we have continued the positive momentum from the first quarter of our fiscal year 2023 into the second quarter, one of our most seasonally significant periods. Notably, our growth was strong across various business lines, walk-in retail, leagues, and events, the last of which grew far beyond the estimated $10 million headwind that we faced in the prior year resulting from the Omicron response. During today's call, in addition to discussing our financial results, we will walk through our proprietary algorithmically powered quantitative management solutions, or QMS system, our Money Bowl gamification app, and why we remain extremely optimistic about the business's growth trajectory. Starting with the financial highlights, in the second quarter of fiscal year 2023, Bolero generated record Q2 revenues of $273 million and record Q2 adjusted EBITDA of $97 million. Compared with the prior year's Q2, revenue grew by $68 million or 33% and adjusted EBITDA expanded by $30 million or 45%. Compared to pre-pandemic performance, revenue was higher by $89 million or 48%. and adjusted EBITDA increased by $44 million, or 83%. Net income for the quarter was $1.4 million, and adjusted for a non-cash expense related to the valuation of the earn-out shares, normalized net income was $32.2 million. As we previously announced, revenues surpassed $1 billion on a TTM basis, reaching $1.03 billion, and adjusted EBITDA reached a record TTM level of $353 million, reflecting a 34.3% margin. As we highlighted in the first fiscal quarter, 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 lead in all macro environments, and the continued uptick in demand we see across the business. Subsequent to the quarter end, On February 8th, we successfully closed an amend and extend refinancing transaction to address the July 2024 maturity for our term loan B. As part of this transaction, we received a ratings upgrade from Moody's from B2 to B1 and bolstered our liquidity profile, all in a net leverage neutral transaction. We increased our term loan B to $900 million and extended the maturity to February 2028, upsized our revolving credit facility from $165 million to $200 million and used the incremental proceeds from the term loan to pay off our existing $86 million draw on our revolver. During the transaction process, we tightened terms twice from initial price talk and are pleased to report that we were able to extend our term loan at SOFR plus 350 basis points and 99.5% OID versus initial talk of 375 to 400 basis points in spread and 98 OID. We appreciate the market's support and would like to thank our underwriters and legal advisors who assisted on the transaction. There's another capital markets update worth noting. In the quarter, we repurchased approximately $8 million worth of stock under our authorized stock repurchase program. During Q2, we repurchased shares at an average price of $12.62. Since the initiation of the buyback through the end of our second fiscal quarter, we have purchased 4,528,447 shares at an average price of $10.59, and in so doing, returned nearly $50 million to shareholders. Including these repurchases, we still have roughly $150 million remaining from the initial $200 million authorization. Additionally, With these recent share repurchases, we have now more than offset the dilution from shares issued as part of our warrant redemption program executed in May 2022. Now turning to slide four, in the second quarter, we added eight new centers, bringing our total center count to 327. Since the start of fiscal 2022, we have added 41 new centers to our portfolio, including one transaction that we executed this week. A significant majority of these came with owned real estate as well, which provides long-term business stability and excellent optionality to raise cash through sale-leaseback transactions or traditional mortgages in the future. The pipeline for additional acquisitions remains robust and offers a compelling opportunity to further expand our portfolio. Shifting back to our financial performance, We're pleased to share that the unprecedented demand levels across our business have persisted through the first five weeks of our third fiscal quarter. On slide five of the materials, we have extended the release of center-level data to provide additional context around the evolving macro environment where there is increasing talk of a weakening consumer, inflation, and fears of recession. Despite any macro headwinds that may be in play, In the first 31 weeks of the fiscal year 2023, ending February 5th, revenue growth remained incredibly robust, growing 55% versus pre-pandemic levels, with same-store revenue increasing 35% on the same basis. When compared to the same time period and prior year, FY23 total revenues were higher by 33%, and same-store revenues were higher by 25%. While the results are preliminary, revenue in the most recent 13-week period ending February 5th remains over 50 percent higher than the comparable pre-pandemic period. Our center-level economics, the primary driver of our overall financial performance, remain equally as impressive and robust as our most recent three quarters. As highlighted on slide six, center-level revenue increased $67 million, or 33%, over the comparable prior year period with positive momentum across each of our guest segments, walk-in retail, group events, and leagues and tournaments. Relative to prior year, walk-in retail was up 24%, and events increased a staggering 74%, partially due to the Omicron-related softness in the prior year. Nevertheless, growth reached impressive levels driven by both volume and price. This strong top-line growth translated into continued material growth in center-level EBITDA, which jumped 43% year-over-year and an astounding 63% over the pre-pandemic period, reaching 118 million. Our 44% center-level EBITDA margin increased 298 basis points above the prior year and 352 basis points relative to the comparable pre-pandemic period. On a consolidated basis, as shown on slide seven, adjusted EBITDA margin was 35.5% and surged almost 685 basis points above the comparable pre-pandemic metric, despite some input cost inflation that we highlighted during last quarter's conference call. This growth and margin expansion were driven by three factors, decades of operational experience and the implementation of these learnings through proprietary technology systems. revenue growth helping to realize the inherent operating leverage in our business, and world-class talent across our organization, all of which enable us to continue to deliver margins well in excess of our peers. As we explained during our last earnings call, we strategically invested in increased staffing levels in our first fiscal quarter ahead of our seasonally significant second and third fiscal quarters. That investment has clearly paid off given the robust revenue growth we experienced in the second fiscal quarter. To provide additional color vis-a-vis our record-setting revenue and adjusted EBITDA performance this quarter, let's turn to slide 8. From a seasonality perspective, Q2 is one of our two most significant quarters, aided by favorable weather conditions and elevated demand during the holiday season. We continue to believe that the pre-pandemic revenue curve remains the most indicative view of typical seasonality trends in our business. As mentioned earlier, we surpassed $1 billion of revenue on a TTM basis, even if we exclude the $15 million benefit of the 53rd week in the fourth quarter of FY22. This year, the rebound we have seen in both the first and second quarters vis-a-vis event and league revenues support our confidence heading into the second half of the fiscal year. We remain focused, as always, on our North Star long-term value maximization of the enterprise by providing delightful experiences for our guests. we remain well positioned to do so going forward. As we reflect on how we have been able to achieve these stellar results, we thought it would be helpful to provide more detail about our proprietary algorithmically powered and cloud-based management software, QMS. Let's move to slide nine. At our core, we are perpetual tinkerers on a relentless pursuit of performance optimization, and QMS is a key tool we use to implement such improvement on a daily basis. In short, it is Bolero's operating system. Now, let's walk through it in more detail. There are three core silos to QMS. The first is a best of best benchmarking tool where each of our centers is compared against a relevant peer group across roughly 20 revenue and cost metrics. This benchmarking quantifies the maximum potential dollar impact of closing the gap across these various revenue and cost parameters versus the top performing center in its respective cohort. Silo number two is a force-ranked optimization engine in which the system ranks the optimization opportunities in order of potential dollar impact. Finally, silo three is how we transition from ideation to execution. More specifically, the third silo houses our learning management system and all relevant resources that a local manager needs to implement the changes at each respective center. All managers in the organization have access to QMS and can track how any individual center is performing, which exemplifies the data transparency that is core to our operating ethos. Perhaps most importantly, QMS is a self-reinforcing competitive advantage because each new level of operational excellence that we are able to achieve raises the performance bar for all centers in the peer set in future periods. Additionally, we believe QMS has significant third-party commercialization potential, which we continue to evaluate on an ongoing basis. Last quarter, the other technology initiative that we highlighted was the launch of our gamification app, Money Bowl, which is designed to boost guest engagement as measured through additional visits per year and games bowled per visit. As a brief recap, Money Bowl is an internally developed app that enables guests to participate in challenges to win cash or other prizes, depending on the location. Money Bowl uses proprietary algorithms to determine the availability and payout levels on certain challenges commensurate with a guest skill level, which range in difficulty from as easy as breaking 100 to as difficult as bowling four strikes in a row. As shown on slide 10, Money Bowl has now been rolled out to 37 centers, or approximately 11% of our footprint, and has reached over 10,000 downloads thus far. While it is still too early to draw definitive conclusions or share results, we are encouraged by the preliminary indications. On this slide, we have shared screenshots of the low-friction sign-up and lane connection process. As a reminder, we have not designed this tool to be a profit center in and of itself. Rather, we believe the true value add is enhanced customer engagement, which ultimately will increase wallet share and or average ticket size. all of which is virtually 100% contribution margin to our bottom line. To further expand the addressable audience, we are also working on a free-to-play version for younger bowlers and other bowlers who are not open to engaging with the Real Money product. These tools, QMS, Money Bowl, and several other proprietary tech-enabled systems, including GEMS, our group event management system, our labor management system, and our lane-side ordering kiosks, are part of our differentiation as demonstrated through our financial performance. Now turning to slide 11. In addition to our best-in-class margin profile, our business is highly cash flow generative as maintenance capex has historically commanded less than 2% of our revenue. In Q2 of FY23, we generated $106 million in adjusted cash flow operations versus $49 million in the comparable prior year period. The company finished the quarter in a very strong cash position with a balance of nearly $90 million. Consistent with our history, we redeployed this significant cash flow across our portfolio to self-funded center acquisitions, share buybacks, new builds, and existing center upgrades and renovations, all of which have a multi-year track record of producing attractive returns. In summary, Bolero's Q2 FY23 performance continued to significantly outpace the pre-pandemic levels and those of last year. We set new records in terms of revenue and adjusted EBITDA generated in the second fiscal quarter over the company's multi-decade history. We are proud of the results, which demonstrate the continuation of the positive momentum we have realized since we lifted as a public company in December of 2021. Fiscal year 2023 has only continued to strengthen the momentum we experienced in fiscal year 2022, and we believe the company is poised to continue scaling 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.