Escape Hunt plc (LON:ESC), a global leader in the growing escape rooms sector, has announced its interim results for the six months ended 30 June 2020.
| Half year ended 30 June 2020 (£’000) | Half year ended 30 June 2019 (£’000) | |
| Revenue | 1,306 | 2,208 |
| Gross Profit | 900 | 1,613[1] |
| Adjusted EBITDA loss, pre-IFRS 16 | (816) | (1,059)1 |
| Loss per share | (11.48p) | (14.57p) |
HIGHLIGHTS
· UK sites were closed from 21st March 2020 for the remainder of the period
· In the 12 week period prior to the lockdown, revenue from owner-operated sites was up 44% compared to the same period in 2019
· Adjusted EBITDA loss in the half year reduced to £816k (2019: £1,059k)
· UK sites in aggregate achieving target returns prior to COVID-19
· Launch of downloadable play at home and remote play games during lockdown generated £53k of revenue in period
· Cash outflow constrained through careful management and use of various Government support schemes
· Basic loss per share (‘EPS’) of 11.48p (H1 2019 loss per share: 14.57p)
POST PERIOD-END HIGHLIGHTS
· Raised £4.1m net of expenses through an equity placing, share subscription, convertible loan note issue and open offer to support continued expansion of the network and provide working capital
· Cash balance of £4.3m at end of August 2020
· UK sites re-opened in July operating on reduced days
- Improved EBITDA conversion ratios benefitting from government support schemes
- Revenue progress encouraging; final two weeks in August representing 89% and six weeks to 20 September representing 72% of the same periods in 2019 respectively
- Site level EBITDA in the six weeks to 20 Sept up 33% on the same period in 2019
· Majority of franchise sites have also re-opened with volumes returning
· Norwich site opened to public on 23 September 2020
· Fit-out work at Basingstoke well advanced and opening scheduled in October taking total number of operational UK sites to 11
· Signed new site in Cheltenham and fit-out work commenced
· Heads of terms agreed on two further UK sites (Watford and Kingston)
· ‘Escape Hunt for Brands’ progress with Netflix Enola Holmes agreement
· Launch of Doctor Who download, print and play game “The Hollow Planet” in conjunction with BBC
· ‘Escape Hunt for Business’ progress with launch of remote play propositions for corporates
· Awarded TripAdvisor™ Traveller’s Choice awards at all eight eligible UK site
Richard Harpham, Chief Executive of Escape Hunt, commented: “The six months ended 30 June may well have been the toughest period on record for leisure businesses with Government enforced closures and consumers wary of socialising as a result of COVID-19. Nevertheless, I am pleased to report strong progress in the period prior to the UK lockdown which endured from 21 March 2020 to the period end, as well as encouraging signs of recovery post period end and significant strategic and operational progress helped by supportive property conditions in which we expect a greater availability of sites on more favourable terms.
“In addition, we were encouraged that, prior to lockdown, all our UK sites had five-star ratings and were ranked in the top four on TripAdvisor™ in their respective cities under fun and games. Our sites have not been open for sufficiently long since lockdown to draw any firm conclusions, however, the evidence to date is encouraging, we are continuing to enjoy very positive consumer ratings, and as a result we are continuing with our strategic priorities in earnest. We are, however, aware of the growing rate of COVID-19 infections and the possibility of further restrictions being imposed which may impact our progress.”
CHIEF EXECUTIVE’S REPORT
INTRODUCTION
The six months ended 30 June may well have been the toughest period on record for leisure businesses with government enforced closures and consumers wary of socialising as a result of the COVID-19 health crisis. Nevertheless, strong progress was achieved in the period prior to the UK lockdown which endured from 21 March 2020 to the period end, as well as encouraging signs of recovery post period end and significant strategic and operational progress helped by supportive property conditions.
Notwithstanding the impact of COVID-19, Adjusted EBITDA loss in the period reduced by 23% to £816k (2019: £1,059k). At a divisional level, site level EBITDA from our owner-operated sites grew 65% to £254k (2019: £154k) helped by the UK Government’s furlough scheme, rates holiday and rates grants. Our franchise business also made a positive contribution of £136k helped by tight cost control during lockdown. As set out more fully below, we carefully managed cash during the period of closure, and together with the new money raised from our fundraising announced in July 2020, this provides the Company with the cash resources with which to continue the implementation of our strategy.
The Company has had to adapt during lockdown and I am very pleased with the resilience the organisation has shown through innovation leading to the launch of a number of new product lines which can be played remotely. This is a credit to our workforce and testament to the creativity and energy within the organisation. We believe these new propositions have a long-term future in our portfolio and will enable us to access markets which we have not previously addressed.
Since the period end, all nine of our Escape Hunt branded sites in the UK have re-opened and trading performance has, to date, been encouraging. We have also opened a new site in Norwich on 23 September 2020 and our site in Basingstoke is well advanced and scheduled to open in October 2020. We have exchanged and completed contracts and are on site at a new site in Cheltenham and are in advanced legal discussions on a further two sites. Further detail on our progress since the period end and on our strategic objectives is set out below.
UK OWNED SITES
Revenue from the UK owner-operated sites was £1,017k (H1 2019: £1,675k) reflecting the closure of sites from 21 March 2020 to the end of the period. The impact of COVID-19 began to be felt in early March 2020, culminating in the mandatory closure of all leisure facilities with effect from 21 March 2020. In the nine weeks to 1 March 2020, revenue from owner-operated sites rose 65% compared to the same period in 2019, and 55% on a like for like basis. As at 1 March 2020, the 12-week rolling average like-for-like sales growth in the oldest three sites (Birmingham, Leeds, and Bristol) was 25% year-on-year, and 59% across all eight Escape Hunt branded sites which were open in the same period a year previously. Our sites had been open for 12 weeks of the current period before facing mandatory closures on 21 March 2020. In that 12-week period, revenue from our owner-operated estate was up 44% compared to the same period in 2019.
Before the onset of COVID-19, the average weekly sales and EBITDA figures for our eight more mature sites were meeting the Board’s site level revenue and EBITDA targets. Notwithstanding the attainment of these targets, like-for-like growth remained strong, operating materially ahead of the mature site like-for-like target and giving us confidence in the potential returns that we believe might be achieved in future. The operational gearing at site level means that as sales increase the relative flow through to EBITDA is higher. This, together with plans to further improve site labour efficiency, provide support for the Board’s belief that the performance in 2019 and early 2020 has established the blueprint for a profitable, cash generative business.
Site level EBITDA in the 12 weeks prior to COVID-19 closures was up around five times compared to the same period in 2019. This included losses in the two weeks immediately preceding national lockdown-enforced closures and before the introduction of furlough.
Our new site at Birmingham Resorts World opened in December 2019 and was trading ahead of plan prior to the onset of COVID-19. Sites at Basingstoke and Norwich were in build, well advanced and due to open towards the end of Q1 2020 but were put on hold once COVID-19 impacted. Activity has since resumed, and we were delighted to have opened our site in Norwich to the public on 23 September 2020. Further detail on our progress since the period end is set out below.
FRANCHISE OPERATIONS
International franchise
As with our UK owner-operated sites, our existing franchise estate suffered significant reductions in revenue due to mandated closures as a result of the pandemic. Franchise revenue in the first half of the year fell to £249k from £533k in the same period in 2019. We were able to mitigate some of this reduction through cost control, reducing costs directly associated with servicing our franchise network by 71%, resulting in the contribution from our franchise network falling only 13% to £139k (H1 2019: £156k).
The environment has been tough for many of our franchise operators. A number are under financial pressure and, where we have been able, we have worked proactively with them to provide support, including granting fee holidays for the fixed fee component of their franchise fees. During the period two legacy direct franchise relationships were terminated, one in Philippines and one in Mexico. For both, trading had not been profitable before COVID-19. At the half-year end our franchise estate comprised 38 franchisee sites in 15 countries compared to 40 at the end of calendar year 2019. Whilst most franchisee sites have re-opened and are again trading, 6 sites had not yet re-opened as at 15 September 2020. It is possible that some of these more marginal sites may not re-open.
Amongst those sites that have re-opened, we have seen encouraging revenue performance in areas such as Norway and parts of France. Australia remains mixed due to the re-introduction of lockdown measures in certain states. We have reached agreement with our Middle East master franchise partner to bring the master franchise in-house which would significantly increase the contribution from that region provided that revenues return once sites have fully re-opened. As a result, the Dubai site will become an owner-operated site as soon as the agreement in concluded, which we expect in the coming weeks. The expected cost to do so is not material to Escape Hunt and we believe the longer-term prospects for the region remain attractive. The individual who has managed the master franchise and the local staff will all remain with the business and continue to run the Dubai site under Escape Hunt ownership and manage the other Middle East sub-franchisee sites as before.
US franchise
The first site operated by our North American area representative, PCH, opened successfully in Houston in March 2020 shortly before COVID-19 lockdowns were enforced. After a period of closure, the site has since re-opened although local restrictions remain in place.
Since the period end, PCH has made progress towards establishing a site which will serve as a training centre for all franchisees and potential franchisees recruited by PCH. Whilst COVID-19 has delayed the anticipated roll-out in the US, we remain confident of the prospects and are working closely with the team at PCH to support their strategy. In line with our previous expectations, we do not anticipate any revenue from the US franchise operation in the current year.
IMPACT OF COVID-19
We took immediate action in early March 2020 to reduce costs and cut capital expenditure as the potential impact of COVID-19 became apparent. This included cutting all non-critical third-party costs, furloughing over 120 of our staff, implementing pay reductions for all staff, including a 25% pay reduction for senior staff and non-executive directors waiving their fees during closure before themselves being placed on furlough. We received some benefit from Government grants through the rates scheme and continue to benefit from the rates holiday provided to retail and leisure businesses which continues until April 2021. We were able to defer most of our rental payments as well as certain HMRC payments. In most cases, we have subsequently been granted a rent holiday from landlords for some or all of the period during which we were not able to open. As a result of all these actions, we were able to restrict the net cash used in operating activities during the six-month period to £94k, with positive operating cashflow in January and February offsetting approximately £350k of outflow in the remainder of the period. It also reflects approximately £400k of deferrals most of which will be caught up in the months following the period end.
Eight of our nine UK Escape Hunt branded sites re-opened on 11 July 2020, with the final site opening a week later. We took the decision to close the Bournemouth site which had been operating as the MacGuffin Project, as it had been loss making and the site was not suitable to be upgraded to the Escape Hunt format.
NEW INITIATIVES
We were delighted to be able to launch a series of downloadable, print and play games during lockdown. In addition, we launched a remote play format which enables players collaborating remotely to direct a games master around a physical room whilst solving puzzles. We generated £53k of revenue from these initiatives during the period and expect to continue to promote and develop this side of our business.
We have used this new suite of products to further develop our ‘Escape Hunt for Brands’ proposition. In July, we announced the launch of a download, print and play Doctor Who Experience as part of our partnership with BBC Studios. In September, we announced a new brand marketing partnership with Netflix in which Escape Hunt will create and distribute a print and play at home game to coincide with the release of the Netflix Original Film: Enola Holmes.
We have also been developing the range of other remote and outdoor games which we offer. To augment our existing offer, we have recently signed a licensing agreement with a software provider which gives us access to a platform on which we can develop our own digital outdoor game content which we can promote alongside our existing outdoor offerings. We have also secured rights to a number of multi-player games which can be played remotely by larger groups, hosted remotely by Escape Hunt, and which can be marketed to retail or in a corporate or educational setting. The strategy has seen some early success which we hope to build on. By way of example, in early September, we were successful in selling a game to a UK based corporate which will have up to 100 participants playing in groups of five people, all hosted by Escape Hunt. We expect this capability will form an increasingly important part of our ‘Escape Hunt for Business’ and ‘Escape Hunt for Education’ propositions, notably in a post COVID-19 world where many companies, universities and other institutions are looking for innovative ways to keep employees, students and other stakeholders engaged and interacting.
FINANCIAL REVIEW
Group revenue was £1,306k (H1 2019: £2,208k) comprising £1,017k (H1 2019: £1,675k) from owner-operated sites and £287k (H1 2019: £533k) from the franchise network reflecting over three months during which sites were closed. Downloadable print and play games together with remote play contributed £53k to revenue (H1 2019: £nil). Gross profit margin was broadly in line with the comparable period in the prior year.
Site level EBITDA from the owner-operated sites was £254k (H1 2019: £154k) reflecting cost reductions and the benefit received from Government support schemes during lockdown. The P&L benefit from the Government rates holiday and rates-related grants totalled £572k in the period of which £130k was received in cash grants.
Central costs, including costs allocated to owner-operated sites and the franchise network in aggregate fell 24% to £1,359k (H1 2019: £1,788k). The cost reductions came from temporary salary reductions as outlined above as well as cuts to all non-critical expenditure during the lockdown period. The success of all our head office staff working from home has led to a decision to exercise a break clause in our head office property lease which will now terminate in Q1 2021 and is expected to lead to savings thereafter of over £100k per annum. We will in future make use of more flexible working arrangements whilst providing a location in central London for colleagues to meet and work together when necessary. We are also looking closely at all central costs as we seek to permanently reduce costs in other areas.
Group Adjusted EBITDA loss reduced to £816k (H1 2019: £1,059k).
| Six months ended June 2020£’000 | Six months ended June 2019£’000 | |
| Adjusted EBITDA | (816) | (1,059) |
| Amortisation of intangibles | (1,078) | (1,055) |
| Depreciation | (1,111) | (995) |
| Share-based payment expense | (5) | – |
| Operating loss | (3,010) | (3,109) |
Group operating loss was £3,010k (H1 2019: £3,109k) and the total comprehensive loss for the period was £3,073k (H1 2019: £3,200k).
Cash was carefully managed in the period, with net cash used in operating activities of £94k (H1 2019: £1,569k). The movement was helped by £720k of positive working capital and other non-cash movements. Approximately £350k of this was as a result of a reduction in receivables, largely the collection of amounts held on the balance sheet at 31 December 2019 which was expected, and also a reduction in pre-payments due to deferrals. Most of the balance of movement in working capital can be attributed to deferred payments relating to property, HMRC payments and deferred revenue which arose from games which had been booked prior to lockdown most of which have been converted to vouchers for future use. Since the period end, certain of our landlords have granted rent holidays for some or all of the period of lockdown. The benefit from this will unwind over the remaining course of the respective leases, whilst other deferrals will be cash settled in the months following the period end.
£634k (H1 2019: £734k) was invested in tangible capital expenditure including fit-out work at both Norwich and Basingstoke, games production for Norwich, Basingstoke and some advance purchases for Cheltenham, and the production of our new Doctor Who game, A Dalek Awakens, which was launched in March 2020.
The Group had £1,114k cash on hand at the end of the period (H1 2019: £3,922k). Cash has subsequently been boosted by the fund raising which closed on 1 July 2020. Cash on hand at the end of August was £4.3m.
STRATEGY
We have set out a five-point plan to build shareholder value:
1. Roll-out of owner-operated network through direct investment
2. Deliver US Franchise network in partnership with PCH
3. Sustain and support growth in existing franchise network; sign further master franchise agreements
4. Broaden the product offering and market reach
5. Invest in infrastructure to improve efficiency and scalability
In the medium term, we aim to get to 20 UK owner-operated sites and have a longer-term ambition of 50 sites. We have made good progress since the period end. On 23 September 2020 we opened our new Norwich site to the public. Work at Basingstoke is near completion and the public opening is planned in October. We have exchanged contracts on a site at the Brewery Quarter in Cheltenham and the first games have been delivered to site with installation due to commence shortly. Similarly, we have agreed heads of terms and are close to exchanging contracts for a site in the Intu Centre in Watford and games are under construction for installation there too. We are in the process of finalising legal documents for a site in Kingston where likewise we have agreed heads of terms. In all three of these most recent sites, we have been able to secure terms which we believe are substantially more favourable than would have been the case pre-COVID-19. We have a further pipeline of sites under discussion, a number of which are in locations which would previously have been too expensive or unavailable. Our intention is to agree deals in which the landlord shares a greater proportion of the trading risk thereby reducing the operational gearing and downside risk to Escape Hunt.
The US is key to our ambitions for our franchise business and we are working closely with our area representative, PCH, to support them in their efforts to begin to roll our Escape Hunt franchises in North America. As mentioned above, PCH has made progress on their plans to establish a site that will serve as a training site for franchise applicants.
Focus on the existing franchise network is currently on supporting their recovery from COVID-19 closures.
Our plans to broaden the product offer and market reach are progressing well, with early successes in our remote play games, ‘Escape Hunt for Business’, ‘Escape Hunt for Education’ and ‘Escape Hunt for Brands’ propositions as outlined above.
In regard to our infrastructure, the development of a more advanced games management platform is now complete and will be rolled out at new sites as they are opened and in existing sites where it is practicable to do so and is expected to lead to greater labour efficiency. Work has also progressed on other projects including data management and our e-commerce platform.
BOARD CHANGES
I am delighted that we are today announcing the appointment of John Story as a Non-Executive Director who joins the Board with immediate effect. John brings a wealth of experience to the Company, having held a number of senior positions in both private and public companies. We look forward to his positive contribution. Adrian Jones, who is based in Malaysia and was one of the original management team which established Escape Hunt prior to its acquisition by Dorcaster and Admission to AIM, stepped down from his position on the Board as a Non-Executive Director at the end of May 2020. We mentioned at the time that we would appoint a UK based replacement.
POST PERIOD END TRADING AND OUTLOOK
Trading in our UK owner-operated sites has been encouraging since we re-opened in July 2020. We initially chose to open sites on Thursdays to Sundays only, with the exception of the Summer Bank Holiday on 31 August 2020 and have since extended our opening from Wednesday to Sunday. In the first eight weeks after re-opening, sales have grown from an initial level of around 25% of the equivalent week’s sales in 2019 to over 90% of the equivalent prior year sales in each of the last two weeks of the first eight-week period. September has, as expected, seen the pace of recovery soften, although sales in the six weeks to 20 September were nevertheless an encouraging 72% of the same period in 2019.
Additionally, helped by the Government’s flexible furlough scheme and our reduced operating hours, we have been able to operate sites significantly more efficiently with lower labour cost ratios than we have historically been able to achieve. As expected, the first four weeks following re-opening generated site level EBITDA losses as the level of sales was not sufficient to cover fixed costs, including property. However, in the six-week period to 20 September growth in sales resulted in a positive site level EBITDA which was approximately 33% higher than the site level EBITDA in the equivalent six-week period in 2019. Whilst the period under consideration is admittedly short, the performance is encouraging, in particular the significantly higher profit conversion ratios achieved. The experience has also served as an impetus to re-look at our labour scheduling models to see how we might be able to continue to achieve the same level of efficiency without the benefit of Government flexible furlough. Whilst it is unlikely that we will be able to fully replicate the flexibility offered by the current flexible furlough scheme, we are optimistic of being able to improve our overall labour cost ratios at site level once furlough ends.
We believe it likely that many smaller competitors will not survive the economic downturn. In contrast, the strength of our balance sheet following our recent fund raise gives us considerable resilience and opportunity to make market share gains as a result.
Our teams worked very hard to ensure that all our sites could be considered ‘COVID-secure’ on re-opening, and it has therefore been tremendously encouraging to see consumers returning with confidence. Perhaps the most pleasing aspect since re-opening is the fact that we have continued to receive five-star reviews in all our UK locations. In August we were delighted to be awarded Travellers’ Choice awards in all eight of our sites which have been open for more than 12 months by TripAdvisor™. Each year, TripAdvisor™ combs through reviews, ratings and saves from travellers everywhere and uses the information to award to the very best. The awards place all our longer standing sites in the top 10% of attractions worldwide. We were equally delighted that our newest site at Birmingham Resorts World, which only opened in December 2019, and is therefore too new to be eligible for a Traveller’s choice award, was ranked the top attraction in Birmingham and the West Midlands, and number seven across the whole of the UK.
We believe conditions in the property market are also moving in our favour, as we are seeing a number of opportunities in desirable locations on attractive financial terms. We expect these conditions to underpin the attractiveness of our UK site roll-out strategy.
We are, however, aware of the growing rate of COVID-19 infections and the likelihood of further restrictions being imposed, whether national or local, which may impact sentiment and performance. Indeed, since the tightening of local restrictions in areas such as Birmingham, Liverpool and Manchester, it has been evident that our sites in those locations have underperformed other parts of the network.
With the exception of six of our thirty eight sites, our franchise network has also re-opened. The rate of recovery varies in different parts of the world, but overall we remain confident that key regions are recovering and will continue to perform in future. We remain positive about the prospects for our US business through PCH.
We were encouraged by the performance of our business prior to the pandemic and by the fact that at that time, all our UK sites had five-star ratings and were ranked in the top four on TripAdvisor™ in their respective cities under fun and games.
Given the possibility of further restrictions being imposed, we expect Covid to have an ongoing impact on our performance for the foreseeable future. However we remain very confident that our strategy will deliver our expected levels of growth and performance once life returns to normal.
Richard Harpham
Chief Executive Officer
29 September 2020
