Hi, all. Welcome to the Forest Hotel and the 2023 Endeavour's Hotel Investor Day. For the few people in the room who don't know who I am, my name is Sean O'Sullivan, and I'm General Manager of Investor Relations here at Endeavour. Before we can commence the proceedings, some housekeeping notes. If everybody hadn't discovered already, the toilets are here to your left. In the unlikely event of an emergency, the exits are on my right and left-hand side, and at the rear of the room where you entered. We'll be having morning tea break at 10:50 A.M., where you can order coffees from the barista in the bistro. You can also access water and self-serve coffee and tea from the back of the room all day. The first question-and-answer session will follow Steve and Kate's initial presentations.
As a rule, throughout the day, given the size of the audience, the number of presentations, and in fairness to all, I will ask any person asking a question, limit themselves to a single question only. Finally, I would ask that everyone turn off their phones or put them on silent mode. I will now hand over to Steve to commence the proceedings.
Thanks, Sean. Everyone hear me okay? This mic on. Thanks, everybody, for coming. When we put the call out to join us at the pub, we do tend to fill the room, so it's great to have you all here. We're gathered here on Gadigal land, and I'd like to acknowledge the traditional owners and pay my respects to elders past, present, and emerging. Endeavour Group operates across Australia on the lands of many different First Nations traditional owners, and I'd like to extend my respect to the traditional owners of all the lands on which we operate and their elders past, present, and emerging. And also pay my respects to any Aboriginal or Torres Strait Islander people who are joining us today.
Before we begin the presentations proper, I'd like to introduce you to the Forest Hotel, which is where we are, and run you through today's agenda. So thanks for coming to the Forest Hotel. It's one of our more recent developments, which we completed in 2020. We chose this as today's venue because it's such a great example of a multi-driver hotel. I encourage you to explore it when you get the chance later on today. I think you'll find that the Forest has multiple great bars, a fantastic food offer, right through to the bistro and the terrace, and in a gaming room, we've got 30 EGMs, as well as an attached Dan Murphy's, so feel free to zip across and stock up for Christmas.
The Forest is therefore the type of pub that really perfectly suits an all-day destination for our guests and certainly, is a great location for us to be meeting today. In February 2020, we brought together the hotel's operations of ALH with the retail drinks operations of Woolworths to create Endeavour Group within the Woolworths Group. In June 2021, we then demerged from Woolworths, and now Endeavour's into its third year as a separate listed entity. I'm conscious that as a very young company in a fast-moving, operating, and economic landscape, we've got more to do to provide insight into key parts of our business. And to that end, we're here today to provide greater insight, particularly into our hotels network, strategy, and operations.
However, before we do that, Kate Beattie, our CFO, and I will provide a brief overview and recap of Endeavour's strategy and our capital allocation framework. I'll also spend a few minutes on Pinnacle Drinks, since this is another area that we intend to continue to grow and that I know there's a lot of curiosity about. We'll then break for morning tea, after which Kate will continue with an overview of the ALH network and economic model. Paul Walton, our Managing Director of Hotels, will then provide an overview of the hotel's strategy. After lunch, we'll go deeper into some of the key aspects of the strategy. Jared Holt, our General Manager of Commercial for Hotels, will cover our hotel's operational growth levers, and Paul will provide more insight on gaming and responsibility.
Then, following a short afternoon tea break, we'll finish with a presentation on the opportunities within the network, and Paul, along with Matt Toohey, Endeavour Group's Director of Property, and Sean Dunleavy, the Head of Format Operations for Hotels. Each section will be structured as a short presentation with sufficient time for questions and answer. The symbol of Endeavour Group is an imprint. Our purpose reflects our desire that the imprint we leave as a team and as a business is a positive one. We're united around our common purpose of creating a more sociable future together. We're pioneering, we're entrepreneurial, and we're always innovating. We connect people through our products and places, enabling great experiences and positive, memorable moments. We're focused on the future. We do the right thing, build our business sustainably, act responsibly, and embrace technology.
We work as one team to contribute to the communities we serve and collaborate with our partners to help build a better industry. This purpose, along with the values and ways of working, enables the culture that will underpin and sustain our ongoing success. I'm proud of what the Endeavour teams achieved in our fairly short time as a standalone company. However, I do want to acknowledge that we clearly have more to do to deliver the performance and shareholder returns that investors expect…. I'm confident that we're well positioned to deliver for shareholders. We've got a fantastic portfolio of brands and businesses, which have delivered growth and profitability. As we go forward, we'll continue to execute our strategy, operating as an interconnected group to drive growth and returns. In a moment, I'll share with you our scorecard, which lays out our new performance targets.
In our core markets, drinks and hospitality, these are underpinned by the resilience and stability that is, Endeavour Group. They're defensive, with spending in our categories remaining steady over the long run, and their regulated nature provides a further source of stability. Our business portfolio is complementary, driving synergies through integrated retail, hotels, and Pinnacle offers, and through our ability to leverage shared infrastructure, licensing, and group capabilities to drive revenue. Endeavour Group, as we currently know it, is young, but our core businesses have a long history of entrepreneurial growth. We've consistently grown our networks, brought complementary businesses together, acquired innovative small businesses that have delivered outsized growth or capability, and delivered organic growth.
Our vision to be the leading platform enabling social occasions sees us building on this legacy, operating as an interconnected group, using the assets and capabilities of Endeavour to succeed in our ever-changing environment. Our vision sees us using the knowledge of customers to address their evolving expectations for meaningful and connected omnichannel experiences, leverage our market-leading brands, assets, and capabilities across digital and data platforms, product leadership, and fulfillment, while driving efficiency as we leverage scale and operate as an end-to-end business. It's also about investing to drive returns and expanding our core business and offerings, creating a virtuous loop of value generation. When we do this, we bring together our assets, our, our customers, and our industry into something greater than the sum of the parts.
We create a platform that will grow the ways which we enable social occasions, through our core businesses, into new markets and new customer propositions, and through partnerships, which will all grow earnings and drive shareholder value. We introduced you to our strategy at our Investor Day in May 2022. While it is the right strategy for Endeavour Group, we realized that one of the most significant opportunities to accelerate growth in our portfolio is to drive higher returns on our invested capital, in particular, in our hotels portfolio. To enable greater focus on this opportunity, we're more explicit in our strategic focus on hotels, capital optimization, and driving growth.
Our strategy has five pillars: creating leading customer offers and brands, driving an efficient end-to-end business, optimizing capital allocation to drive growth, delivering a positive and sustainable imprint, and, perhaps most importantly, enabling and encouraging our One Team to live our purpose and values. Our strategy delivers for shareholders by driving revenue through our meaningful omnichannel experiences, growing earnings ahead of sales through higher margins, driven by our investments in advanced analytics and Pinnacle, and through cost of doing business optimization in both the short and longer term, and delivering further growth and returns through prioritized capital management and allocation, portfolio optimization, and laying the foundation for new earning streams. We're also continuously focused on progressing on our sustainability ambition, with emphasis on responsibility and compliance, and ensuring we have the talent and capability to deliver Endeavour's strategic goals.
I want to spend a little time talking about how we bring the key aspects of our strategy to life and drive meaningful customer experiences, growth, and returns. The key principle behind successful retail and hospitality businesses, or the principles I should say, are enduring. To deliver customers a best-in-class offering that meets their needs, but the demands of customers today are changing very rapidly. We use data to deeply understand our customers and guests, which allows us to create meaningful, omnichannel experiences that meet their needs. We do this by bringing together retail and hotel formats that customers love, innovative web and app assets, and trend-leading products. We curate our brands, our formats, and digital offerings to provide our customers with distinct propositions that serve them across different occasions and missions.
Driving change in our business to meet shifting expectations is critical for all of us in the sectors we operate, and can only be delivered by having the best assets and capabilities focused on improving customer experiences at a faster rate, and again, more seamlessly and conveniently than ever before. Our investments in our digital and loyalty capabilities help us deliver for customers, know our customers individually, and connect with them in whichever way they prefer. We're equally focused on the need to continue optimizing our business to drive sustainable growth in earnings. We do this by first delivering sustainable margin expansion, balancing sales growth and margin to deliver maximum profit dollars. Our investments in Pinnacle, advanced analytics, and retail media all help enable this. Our focus on sustainable cost reduction ensures we're able to invest in our key growth and margin-driving assets and capabilities.
We take a zero-based approach to above-store and venue costs, while also continually optimizing in-store and in-venue to drive supply chain and driving supply chain efficiencies. We've achieved nearly $ 100 million cost reduction since FY 2022, with a cumulative target of over $ 290 million by FY 2026. Finally, the One Endeavour transformation. To transform and simplify our business is underway, and will, over the medium term, ultimately unlock significant simplification and optimization opportunities for productivity and costs. So, moving on to our scorecard. Importantly, we can measure the success of our strategy through our ability to achieve key outcomes, as I'm about to step through in our scorecard. Our ultimate aim is to deliver long-term shareholder value. We've set a target to deliver 10%+ shareholder value, which is EPS growth plus dividend yield per year.
And I want to, I do want to make it clear that this is a through-the-cycle goal, and that in FY 2024, we face rising interest rates and high costs related to inflation, higher costs related to inflation. However, as interest rates stabilize and inflation normalizes, we're confident that we can continue to deliver improved shareholder returns, and we believe that we'll be able to deliver this ambition within a 3-4-year time horizon. We'll do that by executing the strategy that I just touched on. Starting with the first column, the measures here align to the first pillar of our strategy, creating leading customer offers and brands. You can see that the focus here is on customer brands and sales outcomes. In particular, comparable sales growth is a core measure of our success, and we're always targeting positive comp store and hotel sales growth each quarter.
Although we acknowledge that there will be periods of time when market context makes this a more challenging goal, we think a focus on this measure through the cycle is key to our long-term success in our core businesses. Voice of Customer directly measures customer views of our success in delivering great customer experience. In this vein, the lowest liquor price guarantee is a core tenet of Dan Murphy's customer value proposition, and we aim to sustain the actual delivery of this through price leadership, and also customer perceptions of that value proposition. Earlier in the presentation, I highlighted that our brands are a valuable asset for Endeavour. It's important that we remain focused on maintaining and growing these brands, and NPS allows us to track this. The last two measures here focus on our omni-channel customers.
Growing the customer base who use our digital platforms and their sales conversion rates allows us to provide a customer experience for today's digitally engaged consumers, while also improving our understanding of those customers, so that we can continue to create experiences that they'll love. Our membership programs are another key enabler of customer understanding, while also providing value to our customers, and we'll therefore look to continue to grow that member base as well. Moving on to being an efficient end-to-end business. These measures are aligned to our target to grow earnings ahead of sales through investments that deliver sustainable margin expansion and cost of doing business optimization. We're targeting $ 290 million+ of savings from demerger to FY 2026 through the Endeavour Group Optimization Program, or Endeavour GO.
We'll measure our success in increasing our efficiency through our ability to maintain leading operating cost metrics, such as cost of doing business as a percentage of sales compared to our key comparable competitors. Our transformation program will deliver simplification and optimization benefits over the medium to long term. Our ability to balance sales growth and margin expansion has been a key driver for our retail earnings growth. We'll continue to execute on this strategy, and we'll measure our ability to do so through growth in our retail gross profit margin, and apply this lens to our hotels, food, and bar margins, too. Underpinning this, our investments in advanced analytics will increasingly provide the tools we need to optimize our costs and margin. We'll implement use cases to drive price, promotion, and range optimization in our core businesses.
Finally, Pinnacle is an important driver of customer value and choice, innovation and margin expansion, and therefore, we'll continue to invest behind it. I understand that Pinnacle is an area of our business on which many investors have questions, and I'll therefore shortly spend some time on it before we move to the hotels conversation in the latter part of the day. We believe that driving higher returns from prioritized deployment of capital is a significant lever to drive growth above market in our core. Well, we'll also continue to look for opportunities to grow through new ways to enable social occasions. This third column of our scorecard focused on measuring our delivery of these opportunities, and the measures aligned to our capital management framework, which Kate will talk to shortly.
The first measure here, ensuring return on capital for growth investments of greater than 15%, reinforces our commitment to investing only where we can drive growth and deliver returns. Working capital management is fundamental to retail, and we acknowledge that we've got more to do here, and so we're including trade working capital days reduction as a measure on our scorecard. More broadly, it's also important that we continually evaluate our business and asset portfolio to deliver strategic and financial value. Today, we'll provide greater insight into how we're doing this across our hotels portfolio, and how we're unlocking the value of our property portfolio. We'll continue to report against this objective across our business. Finally, we've not lost sight of the need to lay the seeds for additional growth through new ways to enable social occasions.
To that end, we'll continue to partner and invest to deliver our customers complimentary products and offer new ways and channels through which they can shop. We can only deliver great experiences to customers and guests, and value to shareholders, if we have a team of exceptional people focused on driving business performance and executing the strategy. Our culture is critical to our success, and we believe it's a differentiator for Endeavour as a business and a place to work. This culture is brought to life through our commitment to living our purpose, values, and ways of working every day. Through our Voice of Team survey, we hear directly from our team, including on whether they believe we're truly living our values and ways of working. We'll aim to continuously improve our Voice of Team scores in this area.
The safety and well-being of the 30,000 team members within Endeavour is, of course, of paramount importance. We measure this primarily through Total Recordable Injury Frequency Rate, TRIFR, and target continuous improvement here. We also measure overall team experience directly from our team through our Voice of the Team engagement score, and we're really proud that we already have a highly engaged team. In light of this, we're committed to maintaining our team engagement score. However, given the importance of highly engaged teams in businesses like ours, we'll always strive to keep improving. Finally, we're committed to gender equality across the business and measure this both through pay parity and gender balance in senior management. In this area, I'm again pleased that we have a very small gender pay gap and 41% of our senior management are women.
So we'll aim to maintain or improve these measures as appropriate. Moving across the page to our final strategic pillar, I opened today talking about the importance of our imprint as a team and as a business. To ensure we always leave a positive and sustainable imprint, we must deliver on our sustainability commitments. We provide detailed updates on our sustainability progress through our annual sustainability report, but I've highlighted some key measures in the scorecard. Our commitment to responsibility and community is about strengthening our responsibility culture and driving compliance through every part of our operations, and starts with full compliance with our regulatory requirements. We also believe that it's important for the culture that our team undertake training on what it means to lead in responsibility at Endeavour Group.
So we're committed that every team member completes this unique training module within their first year of employment. As a leader, it's important that we also promote responsibility outwardly. With our customer reach and engagement, we aim to reach 5 million people with each responsibility campaign we do. Endeavour is deeply embedded in the communities, in communities across Australia, so we'll increase our support of the communities we're part of through community partnerships and progress on our reconciliation journey. And lastly, on the topic of planet, we'll meet or exceed our target of 100% renewable energy by 2030 and meet our targets on packaging to improve circularity. So coming back to the very last column of this page, which may well be the most important. It really lays out our financial ambition for Endeavour.
The measures in this column build on our ambition to deliver 10%+ shareholder value through the cycle. We'll strive to deliver sales growth above the growth rates of our core retail and hotels markets, which have historically been in the 3%-4% range. However, we'll remain committed to our strategy of driving profitable growth by balancing sales growth and margin expansion. We'll target EBIT growth in the mid- to high-single-digit range and sustainable EBIT expansion. From a capital perspective, first, we'll continue to deliver a cash conversion ratio of 90%-110%, which implies arond $ 900 million-$ 1.1 billion of operating cash flow generation, and we'll fund recurring capital requirements and dividends from this free cash flow. This balance ensures that we're sustainably investing to grow our business while continuing to deliver dividend growth to shareholders.
Our capital discipline and capital management will ensure that we're able to expand ROFE year-on-year. At the balance sheet level, we've consistently told the market that we'll target credit metrics in line with investment-grade credit ratings. We think it's useful to provide more specificity through a target leverage level. Our goal of 3-3.5x lease-adjusted leverage provides us with balance sheet flexibility, while acknowledging that we'll continue to invest to drive growth. I'd also point out here that our current leverage is 3.6x. Finally, EPS growth and dividend yield are the fundamental measures of shareholder value creation. We're targeting high single-digit EPS growth and plan to maintain a dividend payout ratio of 70%-75%.
If we deliver on the measures in this scorecard, we'll reach our target of 10%+ shareholder value per year, and I'm confident that Endeavour can achieve these returns for our shareholders. What our scorecard really does is articulate in detail what we need to do to unlock the next phase of growth. In summary, though, we'll continue our successful strategy of balancing sales growth, gross margin management, and cost control. We'll take a disciplined approach to capital management, allocating capital to deliver growth and shareholder returns, and we'll continue to focus on our teams and sustainability, particularly responsibility and community. The group has a deep commitment to our purpose, vision, and strategy, all of which come together to deliver for shareholders. Thanks for your attention to this part of the session. I'm now going to hand over to Kate Beattie, our CFO, who's going to take you through capital management. So welcome, Kate.
Thank you. Thank you, Steve, and good morning, everyone, both in the room, and thank you to those who are listening in online. I'm going to speak to you about our capital management framework. This is an important backdrop to how we ensure we are delivering the best returns to shareholders from capital invested. The key takeaways I hope you'll get from this session are that Endeavour has a disciplined approach to capital management that is governed centrally. We have a flexible asset base underpinned by hotel businesses that are bought and sold in an active market. This provides ongoing opportunity for portfolio optimization. We have a structured approach to allocating capital across both sustaining and growth investments that aligns to our strategy. Our business, as Steve has noted, is highly cash generative, with sufficient in-year cash realization to deliver both stable dividend flows while also funding our capital requirements.
Our capital management framework begins with that high level of cash, free cash generation in the vicinity of 90%-110% a year, equating to around $1 billion on an annualized basis. It's worth noting this ratio wasn't achieved in FY 2023 due to one-off factors. We expect a normal level of cash realization in FY 2024. Free cash flow is first deployed to dividends with a target payout ratio of 70%-75%, and then to the group's CapEx requirements. CapEx is broken into sustaining and growth capital. Growth CapEx return hurdles are risk-weighted, as I'll detail, more in the next section, with a low-risk investment hurdle of 15% ROI. Surplus cash will be used to pay down debt or return to shareholders.
As Steve covered in our scorecard, we are targeting a lease-adjusted leverage ratio of 3-3.5 times, keeping us within investment-grade credit metrics. This slide breaks down our FY 2023 group funds employed, which underpins our return on funds employed measure. And I am going to spend a little bit time on this slide because there are some important things I'd like to communicate. As you can see, the funds employed balance is substantial, at $ 9.6 billion. Our most material asset class is intangibles. Liquor and gaming licenses total more than half of this balance at $ 2.4 billion. Needless to say, in the industries we operate, access to these licenses is a precondition to trading. The majority of licenses do not depreciate.
What this means is that when we invest in a hotel, there is a one-off cost to acquire the necessary licenses, but once we've made this investment, we generate returns on it for as long as we operate the hotel. This is one key reason why it is preferable to secure long lease terms for hotels. It's also worth noting that on average, the licenses become more valuable over time as the regulatory environment changes and as access becomes more restricted. Owning these licenses, therefore, is an increasing competitive advantage. This is going to get covered more later today in the context of the gaming section. Our second most material asset pool is lease assets. Within the $ 3.2 billion of lease assets, 70% relate to hotels.
The hotel lease weight is driven by the long lease term, with a weighted average lease expiry of 13.3 years. This compares to 8 years for retail. However, hotel leases are different to retail store leases in that they are readily saleable, along with the associated assets, including liquor and gaming licenses, as part of a going concern hotel business. This provides significant flexibility in the asset base. It also provides significant flexibility in our lease-adjusted leverage. Hotel leases are a bigger contributor to our leverage than net debt, but can be readily sold to delever if required. Thirdly, we have property, plant, and equipment, including $ 650 million of freehold assets, the majority of which are hotels. As we will cover later today, there are opportunities to realize further value from development of freehold assets.
So in summary, our hotel portfolio drives a large part of our funds employed base, but these assets have a significant amount of flexibility through which we can drive higher returns on funds employed, as well as bring extra cash flow into the business. Before I leave this page, it is worth touching on trade working capital. We've previously noted that we have room to improve our working capital days. Our retail inventory levels in FY 2023 elevated following post-COVID supply chain disruption. Optimization of trade working capital continues to be a focus area for the business and an opportunity area to drive better return on funds employed in retail. I'll now touch relatively quickly on how we think about deployment of capital to each of retail and hotels respectively. Our retail network includes physical infrastructure as well as core and digital technology.
It also includes the asset base of our Pinnacle-owned and exclusive brand portfolio, including wine production assets. As Steve said, he's going to talk more to Pinnacle in the next section, but in the meantime, it is important to understand that the entire asset base of the Pinnacle portfolio sits within our retail segment, and returns from that portfolio are accretive to our retail return on funds employed. The physical store network in retail has an average age since last renewal of under seven years, so is well-maintained. Our renewal capital investment in retail is intended to sustain portfolio performance with a focus on innovating the customer experience while driving capital efficiency. Within sustaining capital, we also have the investment in core systems required to move off the Woolworths Transitional Technology Services arrangement, which was established on our demerger from Woolworths Group.
This program, called One Endeavour, is expected to take approximately five years. We anticipate funding the program within our capital envelope using free cash flow. It is important to note that while we are categorizing it as sustaining CapEx, it is a key enabler of future optimization of the business, as it will provide us with a simplified and modern technology and data backbone. Growth capital in retail is directed towards new stores, many of which are attached to hotels, and improving the customer experience. Includes investments to sustainably grow trading margin, including through the development of analytical assets that support, for example, our merchandising team with range, price, and promotion optimization. Margin expansion is also underpinned by investment in our Pinnacle portfolio.
In FY 2023, we spent $ 48 million of our retail growth capital in Pinnacle, which included the acquisition of Cape Mentelle, the winery in the Margaret River in Western Australia. It included expansion of our scale winemaking facility at Dorrien Estate, which will drive production efficiency. The returns from these investments will be reflected in product cost, which flows through retail gross margin. We are also investing in capital assets to drive efficiency in retail operations. A current notable example of this is the rollout of electronic shelf-edge labels across our Dan Murphy's stores. In FY 2023, we spent a combined $ 262 million in retail CapEx. We expect FY 2024 to be materially in line with this. Our hotels portfolio has not historically been maintained to the same condition as retail.
Due to the relative age of the hotel fleet, there is, on balance, a portfolio performance uplift that can be driven through investing in renewals, even though a portion of the associated spend would be regarded as maintenance capital. As a result, you will see here that we have included renewals capital in both sustaining and growth under network optimization. Following the material disruption of COVID, we've spent the last year analyzing the portfolio and observing the post-COVID trading performance to determine where our performance uplift opportunities are. We're now building a deep pipeline of renewal investment from which we have been measuring strong returns, which Sean will cover later. As a result, going forward, investment in renewal will take priority over network expansion when allocating capital due to the size of the opportunity that we can see.
We are also activating property redevelopment opportunities to maximize site value, and we are building a hotel customer app, leveraging data and analytics to drive optimization in hotels also. All of these topics will be covered in more detail later today. In FY 2023, we spent a combined $ 248 million in hotel CapEx. This included 11 hotel acquisitions. In FY 2024, we expect total capital or two investment to be below $ 200 million, with a reduction in acquisitions. I'll now speak briefly to the topic of investment governance. Capital investments are subject to a governance process that requires all CapEx that meets certain criteria to be approved at the executive level within Endeavour. This includes growth CapEx, capital outlays of material value, expenditure outside of risk appetite, or expenditure with cross-functional impacts.
All property-related investments are governed by a group property committee attended by the executive team. Investments above defined materiality thresholds require board approval. The performance of growth investments is monitored continuously for realization of returns. The whole investment decisioning process sits within the group funding framework, which is monitored by our board. Growth capital investments, as I've said, are prioritized based on return, weighted by risk, with reference also to our strategy and the size of the opportunity, as well as factors such as interdependence with other investments and our capacity and the timeframe required to execute the project. Our low-risk return on investment hurdle is 15%, and this is typically applied to the second-year EBIT return over the capital investment net of depreciation. The second year is used to give the investment time to mature to full return run rate.
The bulk of our investments fall into lower-risk categories. Our ROE hurdle is a conservative target as it is based on EBIT, not EBITDA, so is a PNL return measure, not purely a cash return measure. On a cash return basis, the return hurdle is typically higher by as much as 2%-4%, depending on the nature of the investment. For this reason, we also cross-reference the expected ROE against the internal rate of return and net present value of the investment to ensure adequate cash returns over the investment life. In summary then, we expect to spend less capital in FY 2024 than FY 2023, with fewer hotel acquisitions. FY 2024 CapEx is currently expected to be in the range of $ 420 million-$ 480 million.
We generate sufficient cash flow in year to fund both dividends and our capital investment requirements. Capital investments are governed under a clear framework to optimize both spend and returns. Our capital management framework supports our scorecard ambitions outlined earlier by Steve, including continued expansion of return on funds employed while maintaining investment-grade credit metrics, including lease-adjusted leverage of 3-3.5 times, with our net debt expected to be stable to reducing as our earnings growth outpaces our capital needs. As I've covered, we have a relatively flexible balance sheet with opportunities to both improve returns on capital as well as let us generate further cash flow, particularly by optimizing our hotel portfolio. Throughout the day, we will cover our growth investment opportunities in more detail. I'll now invite Steve to join me for Q&A.
Sean, you want to run us?
Yep, all right. We're now going to go over to Q&A.
When asking questions, please state your name and the name of the organization that you represent. And please, again, if you can limit yourself to one question per person. David, you want to head up?
Morning, Steve. Morning, Kate and David. David Errington. I'll start off with just a holistic question, and I'm listening to your presentation, and I'm still not convinced that, Steve, to your point t he whole of the company can exceed the sum of the parts. You sought, you said that there were synergies between the business. I'm a believer in conglomerates. I think conglomerates can work, and that the whole of the company can exceed the sum of the parts. I'm losing confidence that Endeavour Group can be that type of company, and I believe that there's probably more value in a breakup than what there would be keeping the group together.
So can you give a bit of an overview, and then others can ask other questions, but why Endeavour is a better value proposition to shareholders by being a diversified company with hotels and retail? Because I don't see the synergies between retail and hotels. In fact, I think they actually have got different skill sets, and I think they're totally different companies, and I think they'll be too different, difficult to manage to get value for shareholders. So can you give a bit of time as to why there's synergies between the two businesses so as that the whole can exceed the sum of the parts?
Yeah. Thanks, David. I'm respectful of your view, and I have heard it before, so I understand where you're coming from. I guess I'm at some risk today of preempting what you're about to see in the upcoming slide set. I don't necessarily want to duck the question, but I think perhaps by the end of the day, we could reassess your perspective, having heard what we're about to tell you about the interconnected nature of the hotel and retail businesses, as well as the interconnected nature of our Pinnacle businesses therein, and the overlay that our group capabilities bring to driving efficiency across the group. So I understand the notion of the potential for separating hotels and retail, and I know it's been done by others.
We hold the view that the, as I said before, sum of the parts is the way to address this business going forward, and that's going to become, I think, more evident through the next session that we discuss. So happy to take the question again, if you like. Not trying to avoid it.
What's the synergy to keep them together, if you may answer that?
Yeah, well, I think we will answer that through the course of today. The synergy of bringing them together is that you've got group capabilities that drive efficiency through them, and you're going to hear from the people that leverage those group capabilities throughout the course of the day.
You're the CEO, you're the glue between the two. You don't want the individuals coming in. I want the CEO, of course, to glue them together.
Sure, and I'm telling you that you're going to get the CEO's view through the presentation in the course of the day. So you're going to see in more detail. It's a similar question to that which you've asked us before. Again, I respect the question. Allow us the time to go through the how we see the interconnection being more valid than the separation.
Good morning, Bryan from JP Morgan. Just on the $ 150 million over five years, obviously, there's some things out of your control, in hotels, particularly the regulatory environment. Just thinking through the drivers of that, because it's certainly more than my expectations over that five-year period. How much of, how much are you factoring in, in terms of regulatory change, or are you assuming the status quo there? And given that's going to be in the higher up ROFE part of the hotels business, being gaming, if that is being factored in, what does it imply out for ROFE from that 10.2 level you had in FY 2023 by the time you get to FY 2028? Thanks.
I'm at risk of that. Because everyone's had the opportunity to look forward through the paper, I'm at risk of answering every question the same way, so I don't intend to do that, nor sound facetious in giving you that answer. But the team are going to talk through that in more detail, so I appreciate the question, and I'm happy to come back to it. I was hoping that perhaps maybe it was a somewhat forlorn hope that we could focus the conversation on the stuff that we've presented in preempting, rather than preempt the stuff that's coming up. But, I'm not avoiding the question. I think we're about to answer it, Bryan, so thank you. Another one up the back.
Yes. Hi, Tom, from Barrenjoey. I mean, it's a similar question, because you've seen regulation for the last 20 years in gaming. I think it'd be naive to assume that there's going to be none going forward. I mean, that, I think it's probably the biggest question that the company faces, and everyone in the room wants to understand it. So what is the company's expectation on regulation? And how do you plan to navigate that? Because it's a lot easier for a private company, too, and you guys have obviously got your, you know, ESG hats that you've got to wear, but I'd be really interested in your perspective on that.
Yeah. So, I mean, at 20 to then, 20 to 10, we've got a long day ahead of talking specifically to that question. Paul's going to delve into the detail there, and everybody gets very upset with me when I steal their thunder. So I can answer your question, but I'm going to allow the team to do that for us. And if you have had the chance to flip through the presentation pack, you'll see that we've outlined the nature of change to regulatory, the regulatory landscape in relation to gaming over the last couple of decades. And we've also tried to correlate that with the continued growth of the category. As you know, we, as operators and the industry, alongside government and regulators, have sought to continue to make it available in the most responsible way.
So we're very considered and very committed equally to progressing the responsibility agenda, and I think in that respect, we're very aligned with quite a number of government and regulator perspectives. So we think the two can coexist and have done for quite a long period of time. So we will talk to that in more detail as well.
Yeah. Shaun Cousins, UBS. I just want to talk about your CapEx governance slide, or your broader view on capital. In fiscal 2023, you had the Victorian gaming licenses. You didn't manage working capital well. I'm just curious, was that capital governance framework actually in place in fiscal 2023? Because I struggle to see how that's consistent with your actions, in terms of you knew you had Vic CapEx coming through, and then you bought 11 pubs. I'm just curious, is this a line in the sand where now you're going to be following it more, and you didn't do that in 2023? Or we had fiscal 2023 was actually applying that CapEx governance sort of program, please?
I don't think that what we're intending to say there was that there was a mea culpa historically. What we're saying is that we apply those disciplines, and we are about to talk you through the acquisitions that were made and the progress that they are making in terms of their returns. So you'll judge them on face value, and Kate will talk to that in a moment. So, what we're trying to give you is confidence about the look forward. Kate's also mentioned the fact that we're going to focus more of our capital back into our network rather than outwardly expanding it inorganically, in the case of hotels. So again, you'll get more of a sense of that. So that wasn't the intention of the slide, Sean.
I respect the fact that you might have the view, but the gaming license cost was well known for a long period of time. So the two just come inside of the expansion of the network and the license cost. Do you wanna, you want to add to your question?
Yeah, sorry, but if you knew you had the Vic Gaming and you knew you had these other imposts, then isn't there someone internally to say, "11 hotel acquisitions might be a great idea, but maybe let's have a few less of them, so that we manage our overall net debt and then make acquisitions later on when we don't have that step up?" I'm just curious, was there a broader allocation decision to say, "Hey, let's just hold off some of these acquisitions so we manage our net debt a wee bit better?" I'm just curious, there didn't appear to be appropriate oversight at that time in 2023.
Yeah, I again take your point. I think the availability of appropriate hotels is something you've got to be opportunistic about. So we're not running the business for a single year, we're running it for the long term. I respect your point about the outcomes for interest costs in FY 23. It's been much discussed and acknowledged by us and the flow-on impacts to the current financials. So we certainly pass on more than we buy in terms of hotels. We're just inclined to pass on a few more in the current context. So I understand your point.
I think maybe if I might add, when our net debt remains within investment-grade credit metrics, and that's always been our target. We also have material debt headroom, so a net debt, debt position per se, is not something that is of great concern to us, as in, we don't think it's extraordinary relative to the settings that we manage our business to. We also, as we've said, you know, have since we've demerged continued to fund both dividends and our capital investments through free cash flow. The cash outflow that occurred last year wasn't related to our choices about where to invest. It was more related to catch up in other areas, including installment tax payments that had been delayed following demerger.
Hi, it's Ben Gilbert here from Jarden just here. Steve and Kate, just interested in reflections upon since you've actually demerged from Woolies. It does, and obviously, the questions in the room are probably leading to some of this, feels like it's really been pushed in the last couple of months. Maybe some of the news and agitation, et cetera, that's happened. Just maybe any sort of key reflections since you demerged, what would you have done a little bit differently? Have you actually accelerated a lot of these plans in light of some of the events over the last few months? And also, in sort of around that shared services comment with Woolies, obviously some big numbers you've still got coming out of there. Would you, in hindsight, have taken on many of those? Are you accelerating some of that? How much of that is the crux of the cost out sitting within the group?
I think, as I said, in my opening remarks, it was, it has been a, a fairly, challenging time for any business, not least of all, one that's executed one of the largest demergers in Australian history. So, you know, what we've tried to do is remain focused on the operational execution of the business, while we've had to, try and support the market's understanding of the business. And that is, I think, essentially what we're saying is the gap that we're trying to fill in the conversation we're having today, and that's which we want to have ongoing, is to help everybody understand the approach that we've taken to the business, the extent to which we think it's been, effective or not.
We acknowledge that elements of what we've done could have been done better, and that's why we've outlined a scorecard that articulates how we're going to judge our performance, and importantly, what the shareholder returns should look like off the back of that. So, there's been an awful lot happened in that 2.5 years, and as I said, the years that preceded that in preparation for the demerger. But scale demerger obviously impacts of the changing marketplace that we're all created through the pandemic. And shareholder expectations, which are not exclusive to our largest shareholder. We've got shareholder expectations that traverse a number of people in this room and beyond, that we're working hard to address in terms of explaining our strategy going forward.
Okay, just the shared services piece as well, which I think is a big chunk of that.
Yeah, sorry, I didn't talk to it. It's something that underpins the delivery of the business at the moment in terms of supply chain and technology, and those are the two largest chunks thereof. We've had some elements that have rolled off. They are supportive of the business, and they don't inhibit the business, they enable the business. And Woolworths is being a good partner in terms of helping us find ways to transition from the technology platforms, and we'll continue to have good conversations about the way the supply chain is supported. Beyond that, there's obviously the important arrangements as it relates to the co-located stores, and that's something that we think needs to be enduring, and of course, the Everyday Rewards program.
But net-net, these are all positive for Endeavour Group and Endeavour Group shareholders. They do account for a large value of transactions between the two organizations, but they are enabling, and they are done on a commercial basis. So, it's, it's something that will continue to change, and we'll continue to update the market on as we transition. And the most material transition underway is that of the technology side of things. Craig?
Hi, Craig Woolford from MST Marquee. I assume you won't address this later on, so let me try and ask it around, hotel, retail store growth. So in your leading customer offer and brands, the emphasis is growing comparable store sales and hotel sales. You're obviously pulling back on hotel acquisitions. There's nothing that specifically talks about store openings on retail. Is, you know, what should we expect around, that on, on the retail side of the business?
We haven't added it there specifically, but I think we're on the record saying between 8 and 12 Dan Murphy's and 20-30 BWSs is generally the range that we operate in, and that's net of closures. We don't tend to close Dan Murphy stores, but we do have to keep the network up to scratch in terms of BWS. So you've often got a sort of 40+ openings with 10-15 closures. So that we expect to be something that's enduring. Yeah.
If I can add, then with the hotels, there was a question earlier, like, what did change in your mindset around hotel acquisitions? If they were good to do 12 months ago and not, you know, worthwhile pursuing now, what has changed?
Well, I mean, what has changed in part is the capability and the confidence that we have in improving the fleet we've got. So we knew in the short term that it wasn't going to be, we weren't going to be able to quickly get back into our own network and improve it as much as we might be able to expand it. So it's always a balancing act of the pace with which you're expanding versus improving. Just for clarity, we're not saying that we will cease expanding the network. We will buy pubs, so please don't think about these things in absolute terms.
We're just adjusting the ratios so that as we build the capabilities, and I think you're gonna hear from some very capable leaders in the business shortly, we've grown our confidence on the returns that we can get from improving or deploying capital back into our network to improve it. You're sitting in a hotel that's representative of that.
Hi, it's Lisa Deng from Goldman Sachs. It is a question on one of your pages that has been presented, so page 30. I'm interested to see, we've talked about the book value of the, you know, $ 650 million freehold asset, and also the $ 2.4 billion, the current gaming licenses. If we were sort of to mark-to-market based on the current environment, you know, do you have an idea of, or a view on, on what the mark-to-market value of those ones would be?
No, we don't, is the short answer. I mean, the value in the market does continue to move, of course, and we will consider that as and when it becomes important to us to do so. For example, on disposal of an asset. But we don't internally run a mark-to-market model for them.
We are going to touch shortly on the growth trajectory that we see, particularly in gaming entitlements. But, no, is the short answer as Kate said.
Phil Kimber from Evans and Partners. My question is just, it's on slide 24. You've basically given some guidance from FY 2026, and there's a footnote in there that says, you know, talks about the interest rate and inflationary environment. So I as-- I understand in FY 2024, you've, you've given us some guidance around interest, but I was surprised in FY 2025 why that guidance might not have started in 2025. Why does it take until FY 2026?
I think what we're really trying to say with the FY 2026 guidance is in a normalized economic environment, and I think at the moment, there's a degree of jury out on when that's going to take place. We think it's assuming we will be in a full, normal level of, you know, the normalized level of CPI and inflation through the FY 2025 financial year is, I'd say, far from given at the moment, hence why we've said that. Should the cycle finish earlier, of course, that gives us some tailwinds.
That's why we're not giving you specificity other than to say that it's going to continue to improve, and we aspire to reach that level from 26 onwards.
Great. Thanks.
Good day, team. It's Ross Curran from Macquarie. Steve, can you just talk us through a little bit about your stakeholder management over the last 12 months or so? It seems your relationship with your major shareholder has gone a bit, a bit sour. Certainly the regulation, the regulators around gaming in most states have got a bit worse as well. Can we just talk about your relationship with Woolworths? And as you pull away from a shared service with Woolworths, how does the rest of the relationship fall out there? You know, is there a risk that maybe you start getting charged more for the shared DCs, or that they reset your rents in the attached stores? At the moment, it seems you get quite a lot from that relationship with Woolworths. So as you pull back from it, are you putting the rest of the relationship at risk?
Look, I think foundational to the relationship with Woolworths is the coexistence of our teams. And I don't mean to be glib when I say that, but if you take yourselves out of a model or a conversation about the financials and put yourself into the places where our teams work, they are together working to serve the same customers in the same place. And that, don't underestimate that human connection as it relates to the broader relationship we have. We've got a shared history and to a degree, aspects of our culture, cultures are similar in that regard. There are arrangements across the 26 partnership agreements that were struck under merger that do have trigger points in them. Yes, absolutely. The things, for example, like the coexistence store arrangements, are very long dated.
They run for decades, but we're already having conversations with Woolworths about how we might adjust for those into the future. Both initiated in some instances in these arrangements by Woolworths, sometimes initiated by us. So there is an ongoing dialogue in connection to all of the partnership arrangements, but notably, we continue to roll off a number of arrangements. So that 26 is already in the vicinity of just slightly over 20. But it's not the number, it's the quantum. And I touched before on the supply chain and technology side of things. Those are the ones that are the most material. The technology transition is the most important in terms of the work that we've got ahead. The supply chain side of things is a very sustaining arrangement, and for the most part, it's a commercial one.
There's one of the tenets of the partnership agreements being struck in the first place was that we would be no worse off on the point at which we demerge. So that's enduring, and we continue to work with Woolworths on ways to adjust all that are relevant on a sensible commercial basis to meet the needs of both of us. But there is a genuine intent around supporting one another in that partnership, and I'd acknowledge Woolworths in their approach to that. So, it's ongoing, and we'll keep the market informed as to the progress and changes we make as we go.
Right. Is there any more questions at the moment? Okay, thank you. So if that's the case, we'll continue to move on. Steve's got a presentation around Pinnacle Drinks.
Yeah, thanks, Sean, and thanks for those questions. Again, apologies if you felt we didn't answer the question at the moment. There is an intent to do that, so I'm sure you won't hesitate, David and others, in coming back on your question in due course. One of the things I omitted to do in my introductory remarks was introduce Lukas McKay, who leads our operations for our hotel business. He's certainly Australia's most experienced and accomplished contemporary hotelier, so it was remiss of me not to have acknowledged Lukas in my opening remarks. You'll hear from Lukas shortly, and he'll give you a sense, I think, of how we're going about our integrated operation in hotels shortly.
But before we get to that, I wanted to touch briefly on what we're doing with the Pinnacle Drinks business, because I know it's a topic of some interest among investors. It's a key part of our business, but it doesn't actually get much airtime since the results for Pinnacle are incorporated into the retail segment. It is a large, growing, and profitable drinks supplier in its own right, with a market-leading wine portfolio. The success of Pinnacle is driven by customer insight-led brand building and a unique integrated value chain, and our ability to drive strong returns across the wine portfolio. Crafting brands people love is the essence of Pinnacle Drinks. Our key brand-building capability, when combined with Pinnacle's other assets and capabilities, allows us to deliver some of the world's leading brands to our customers.
In the next short while, you'll hear me talk a bit about this capacity, probably more than once, because it's so important to what Pinnacle is and does. It's useful to remind ourselves of the scale and growth of Pinnacle. Pinnacle delivered $ 1.8 billion in sales for Endeavour last year, with sales of Pinnacle products through our retail stores up 60% since FY 2019, and is the number four branded liquor supplier in Australia. Customers love Pinnacle products. 7 out of 10 retail customers bought a Pinnacle product in FY 2023, and customers are more loyal to Pinnacle products than other products in the same category. While you can see that Pinnacle operates across the range of core liquor products, wine, wine is at the heart of Pinnacle.
Pinnacle is actually the number one retail wine supplier to drinks retailers in Australia, noting the significance of our network. Wine's a unique category. Customers have much larger brand repertoires than in other categories in drinks, and they're looking for both choice and help navigating that choice. Our ability to craft a brand portfolio of consumer-led brands allows us to meet customer needs and deliver a profitable outcome across commercial, premium, and luxury price points, which makes it unique in itself. Our leadership in wine is enabled by our deep understanding of consumer preferences. We draw insights from that retail customer knowledge, allowing actionable insights that are rapidly turned into commercialized new products. And we've built a deep portfolio of over 300 wine brands through our team advocacy and digital capabilities. Pinnacle Drinks value chain, end-to-end, is unique globally.
We bring together our insight-led brand building with supply and production and an unbeatable distribution network to enable rapid brand development, remove risk, and drive profitability. In terms of supply of our own brands, we do, we do own select strategic vineyards where it's important for estate authenticity or for access to tightly held super premium supply. This is less than 5% of our supply, with the majority premium supply sourced as grapes from long-term growers, and our commercial wine is sourced as bulk. From a production perspective, we've got a commercial premium winery in the Barossa, three estate wineries, three bottling sites, and a packaging and material supply business. Importantly, we also partner with over 300 suppliers across both our own brands and exclusive brands owned by them. Owned by them, excuse me.
In terms of distribution channels, we've the long and obvious partnership between Pinnacle, BWS, and Dan Murphy's, and now a strong partnership with our ALH Hotels business. Over the last few years, we've also grown our external domestic sales and our export capabilities through further strong partnerships. As I said earlier, Pinnacle is profitable at all price points, and in fact, Pinnacle was built on the commercial and premium segments. Premiumization's a continuing customer trend in a relatively flat wine market, spearheaded by credential-led brands with place, people, and winemaking credibility. As customer preferences have changed, we've evolved our portfolio, expanding into the high-margin, fast-growing luxury space. Paragon Wine Estates, our luxury brand portfolio, delivers margins 10+ percentage points higher than the category average margins.
This part of our portfolio is growing at a much faster rate than our premium or commercial segments. Reflecting our integrated value chain and partnership approach, we've got a fit-for-purpose production model for each part of the portfolio. We've got an asset-light model for commercial production and a mix of owned assets and partnerships for our premium portfolio. We've built our luxury portfolio through the acquisition of iconic brands and vineyards. We brought those together, those luxury brands together, to create our Paragon Wine Estates portfolio. Excuse me. Since 2019, we've acquired five Australian wineries and brands to grow our premium wine presence. These brands joined earlier acquisitions, such as Isabel Estate in New Zealand, to form Paragon Wine Estates.
When considering acquisitions, we looked for assets in premier regions with significant luxury segment growth potential at $ 30-per-bottle price points, plus underinvested heritage brands with the opportunity to grow brand equity and premiumize their portfolio architecture. Existing export capabilities, including distributor relationships, access to supply, vineyards or grower relationships, for example, in attractive or underrepresented markets, and the opportunity to generate cost synergies in overheads, including bottling and winemaking. We deliver growth and returns from these acquisitions by leveraging existing capabilities to build and improve the brand credentials and drive penetration across our retail network. Realizing cost synergies through our vertical integration and, over time, growing brands into new markets, for instance, via exports and via our external domestic customers. Our luxury winery acquisitions deliver returns above investment hurdles by around the 3-year mark.
Isabel Estate was acquired in 2014, and Chapel Hill, which we acquired in 2019, are both typical examples of our investment in this luxury portfolio. Isabel Estate crafts premium and luxury Sauvignon Blanc, which is Australia's largest white wine segment and fastest growing variety globally. Chapel Hill has strong heritage winemaking and grower relationships and a leading McLaren Vale portfolio. We've grown both, both brands' sales by a factor of 3, and both are consistently delivering 15%+ returns on investment, with new and exciting growth opportunities to come. In fact, these two often reach the 20s. Pinnacle's a leading customer-led drink supplier and an important and strategic part of our business. And while we had Q&A there at the end of Kate's session, I'd welcome any specific questions in relation to Pinnacle before we before we break for morning tea. It was a bit rapid fire, but open to any questions.
Hi, Steve. Craig from MST. So just, you, I think you said category margins are 10% higher from Paragon than the business average. Is that across the whole wine category?
Yes.
Right. And when you look at, you know, what we, a lot of the analysts in the room, what we, and investors in the room, we're covering Treasury Wines, we can see, you know, they're a wine business with 20%-ish, 20%-25%, profit margins at EBIT. As a retailer, you're gonna get that wholesaler margin, manufacturer margin, and the retail margin, so it should be a significantly margin-accretive part of the business. My actual question is: how do we reconcile the 60% growth in Pinnacle Drinks over the last four years with the EBIT margin profile on the retail side of the business? 'Cause it doesn't have that strength of EBIT margin trajectory that would coincide with the, I guess, the rich margins you would have on Pinnacle Drinks.
Yeah, I think what we're saying is, excuse me, it's early days for the luxury side of the portfolio, Craig, which obviously has the highest returns from a margin standpoint. So in the event that we're successful in building that, you should see more flow through to the bottom line. But I think, about a month and a half ago, when we provided an update to the market in response to the investor questions we were getting, we talked about the growth in our gross margins. So respect the fact that it doesn't flow through, the increase that we're getting in gross margin doesn't all flow through to the EBIT line, given the investments that we're generating to deliver it.
What we are saying is that we can see further opportunities for growth in our existing retail businesses, so expect to see it continue to help with that aspiration we outlined in the scorecard of expanding our gross- or expanding our EBIT margins. But it's also an element of charting new pathways for growth for the organization. So we're very early days with this, and I don't want to overegg it, but we do have a good partnership that enables sales domestically to other retailers and restaurants and on-premise outlets, as well as a growing partnership in the international space, particularly in North America. So you'll see it and it's part of the reason why we separated the specialty businesses in our last update, was because increasingly we want to be able to talk to the growth vector that sits inside the Pinnacle business from an external sales standpoint.
Steve, it's Lisa from Goldman. So just more on that, Paragon opportunity. Like, it's 7% of our mix currently. Can you tell us a little bit about the actual revenue contribution to the $ 1.8? And, you know, putting in that domestic as well as overseas lens, where would you see that in the next five years, and is China an option as well?
Yeah, I'm very cautious not to overegg China, because we haven't had a material play in the China market. And as positive as we are about the great work that the federal government's done in negotiating the removal of tariffs, we're biding our time in terms of being able to say anything in relation to that. I think that on slide 41, we outlined the mix and the breakdown. That's the sales mix, yeah, on slide 41 is the wine sales mix. And it's very early days, frankly, for us in maximizing the potential of the luxury portfolio that sits inside Paragon Wine Estates.
So we talked about some of the more mature brand assets that we've got in Isabel and Chapel Hill, but some of the more recent acquisitions, for example, Cape Mentelle in WA, still very early days. In fact, you know, that wine is only now, excuse me, materially flowing through our own network, and that's before we capitalize on LVMH, did obviously a good job of getting that wine distributed globally, and we're tapping into those pathways that which we acquired through that acquisition to try and build not only Cape Mentelle, but other brands on the international front.
Qualitatively, can you kind of give us how much they're distributed, like, together, Paragon, within our own assets? And, like, how much are they distributed now?
How many distributed?
As in, like, for example, how many points of distribution across our network or, you know, however you measure distribution within your own assets?
Yeah, I might take the question on notice and get one of the merchants to,
Yeah
T o tell me what the number is.
Okay.
But it's fair to say. This is true for every product that comes to Endeavour Group Retail. Not every product is distributed in every store. So it's a number less than 100%, because we only try and put the right things in the right places. But that might seem obvious to you, but a lot of suppliers turn up and suggest that we should range their product in every store across the network. We don't. I'll get you the answer, 'cause I don't have it off the top of my head.
Thank you.
There is room for growth, though, is the short answer, yeah. Not only in distribution, but also in brand architecture. As we build new products, as we understand customer needs, and we build new products to meet them, that's the opportunity as well. Dave?
Steve, look, my question is following on from a first question in effectively what's holding the company together, and that's a bit of a statement, I suppose. I just don't understand why you need to be a full-fledged wine producer. You know, I've covered wine for a long time. There's only one wine brand that makes money, and that's Penfolds. The rest don't make money. They just make up the numbers, and they lose a lot of money. So I'm trying to understand, why do you need to be a fully integrated wine producer when you've got Dan Murphy's and you've got an oversupply of wine? You've got wine producers absolutely on their knees. Why don't you just use your leverage as Dan Murphy? You're spending shed loads of capital on other businesses. I mean, 500+ CapEx.
You had a terrible year in 2023 with cash flow. Why don't you put your cash back into renovating your businesses, do things simple, and that gives us investors a clear message as to what you are? Because listening to this presentation, it just confuses me as to what Endeavour Group is.
Yeah, well, I'm sorry that that's the case, David. I wasn't intending to confuse you. I was trying to elicit the explanation that actually Pinnacle, as an integrated part of the group, delivers material value. And that's what it has been doing. And I think what I've just tried to explain is that you're wrong, actually, about the fact that there is no other wine company in Australia that's making money. Pinnacle is materially a wine company, in fact, the largest supplier of wine to retail in Australia, and it derives material profitability. We just haven't told anybody about it, and that's what we're starting to do here, is unpack some of the detail that sits behind it.
As I just explained, it's a very unique model where we take the needs of the customer and link them very, very quickly and directly with the production side of things, and in so doing, remove material risk from the side, from the winemaking side of the business. The risk for winemakers is having somebody to buy their product. We know who's gonna buy our product before we make it, and that is central to our point about an integrated organization. We take people who stand in stores and in pubs, we connect the data that we gather on our customers, and we link that directly with our winemaking teams and our viticulturalists who are making decisions about where they deploy capital to buy another vineyard or another brand. We know that we are undersupplied every time we do that. So we have a very unique model globally that is delivering returns for shareholders, and you should feel confident about that rather than confused. And I'm happy to continue the conversation to bring further clarity to it, but it's unique.
Owning the production facilities, owning the bottling facilities, it's very capital intensive. You're very happy that that generates a great return on its own if it wasn't for Dan Murphy's?
Yeah, it's important though, David, that you pay attention to what's on slide 45 in terms of the capital light model we employ in the lowest margin segment that is commercial. So you'll see on that slide that we say it's asset light. We use partnerships and co-packing. And just while we're talking about the way you're phrasing your question, we don't take advantage of anybody on their knees. Thanks anyway. We are a big contributor and a participant in the Australian wine industry. Its positive future will be a contributor to our positive future. So we partner with growers that invest their family's money in growing grapes, and we give them comfort that they've got a place to sell them through us. And we can give them that surety because we know what customers are buying. So we're in partnership. We're not here to take advantage of anybody.
We're here to give customers what they need to invest shareholder capital appropriately to deliver the returns that people deserve. It's an integrated model. It could not exist without the connection between both retail and the Pinnacle business. It would fall into the categories that you talked about before, of businesses that don't make money. It didn't become the largest wine company in Australia serving retailers because it doesn't make money. It does, and as I explained, customers love these products. In the event that customers don't love these products, we don't love these products, and they don't exist. Very quickly, it's our version of fast fashion in the wine category.
It's Tom from Barrenjoey. Just following on from Errington's question, how much money does Pinnacle make? Or what are the returns, or what is the kind of retail margin if you just looked at it, like, standalone without Pinnacle? Like, how do you give people confidence that there is this synergy there? Because we can't see the numbers, obviously. I hope you guys have, I assume you have the numbers, but it'd be just great to share some of those.
Yeah, I mean, we're not going to give you the detailed PNLs other than to say it delivers, as we've explained on the capital expectations that we have for these sorts of investments. I talked about two examples, said it was 15+. It's in the vicinity of 20% returns on those investments. It is part of the special elements of Endeavour Group that make it unique and, you know, deliver on that interconnected point that David was making. So, it's a profitable business. It is a market-leading business. The fact that Dan Murphy's has a lowest liquor price guarantee, which is automatically indexed against every other competitor in the market, puts it in a very tough position. It's a tough business to run. Ask Tony Leon, who effectively started it.
You have to spend endless hours making sure that you are covering the cost of delivering the lowest price in the market. Pinnacle is one of the ways that we do that, as is bringing in new products and managing our costs effectively, and a variety of other things that retailers have to do. So it underpins, actually, a lot of the customer-facing benefits that you get through a lowest price guarantee as well. But I'm not going to give you today the detailed breakdown of the PNL, other than to say it's the largest retail wine supplier in the country, and it's very profitable.
Do you disclose how much capital is involved with Pinnacle, or a range of, you know, the capital, or, like, a percentage or?
Yeah, I think that's a fair question. I think we can bring more color to that, so let me.
Phil Kimber, E&P. Steve?
Sorry.
You're right. I just wanted to I mean, I get a lot of questions, and, you know, you read the papers. There seems to be a lot of questions and commentary around Paragon within Pinnacle, and I was just looking at the slide there. So I think you said wine's 54% of the Pinnacle business and Paragon, 7%. So I'm assuming Paragon's, like, 3 or 4% of the Pinnacle business. Is that have I got those, got that right, or am I. Is there some volume value?
Give or take. Yes, it's over-indexed in, in the market narrative, underindexed in the financials, if that's your point.
Yeah, yeah.
Yep.
Just trying to understand. So the rest of the business is really a source of brand, private label, for want of a better word, business, as opposed to owning wineries and making wine and running a wine brand.
No, I'm very deliberate in being clear that it is not a private label business. It's a branded manufacturer of drinks, and that is one of the key elements that makes it unique. It is distinct from a program that you would see in a supermarket, per se. So I think perhaps it's got something to do with our historical association with Woolworths, that people think about it the same way. It's nothing like what a supermarket does. As I said to David, it's more akin to fast fashion. It's about building brands that people have an affinity with, or acquiring brands that have pre-existing histories and maximizing their potential. It's a branded drinks manufacturer. Branded drinks manufacturer. The largest wine brand and drinks manufacturer in the country, servicing retail.
We take our products to retailers around the world and partner with them with the same mindset that we partner internally around understanding customer needs and then building products that meet them. So, that I'm just trying to emphasize the unique nature of this thing, and why we thought it was important to talk about it today, was because of the lack of understanding, which is down to us, because we haven't provided that insight as to what the thing is.
Thanks.
Bryan Raymond, JP Morgan. Just following on from some of the other capital-related questions. Maybe to be more specific, how much inventory do you have in Paragon and then the rest of Pinnacle, in that business? And then just a clarification, the 10% higher margin, just confirming that's gross margin you're talking to on that one?
It's a better. Well, the problem is that when you're looking at the retail EBIT margin, you're looking at the blended retail and Pinnacle EBIT margin. So again, I'm not going to unpack the breakdown of how the EBIT margins are separated, derived, and so on. You'd have to add in the amount we invest in the lowest price guarantee, and so on.
The comment on that, is that a gross margin comment, or is that an EBIT margin comment?
It's at least 10% better at a gross margin level.
Yes
A cross the board in Pinnacle. Yes, that's right.
Okay.
But again, we're not going to give you sufficient data that you can build a model today that breaks that down. The inventory challenge, or the inventory question that you've got, we haven't got detailed in these materials either, but I'm happy to take that one on notice as well. I haven't got the number off the top of my head, so.
We don't inventory by which part of the business the inventory sits in. But of course, as a manufacturer, there is an inventory.
Inventory, so
That's right.
Yeah.
It all sits within the retail-reported inventory number at the end of the
But I understand the rationale behind your point, and let me have a think about what we can give you in terms of better visibility.
Just another way to frame it. The ROFE on Pinnacle, is there a way to give us any color on that with respect to your 15% target on the low I assume it sits at the low, lower end of the spectrum. Like, would it be materially in excess of 15% or below this point?
I think Sorry, am I on? I think, it's important to distinguish the 15% return on incremental funds invested metric from group ROFI. What we've said about the Pinnacle portfolio is that the portfolio return on funds employed level a ll of that, all of the funds employed at the Pinnacle business are posited inside the retail funds employed number, and the returns on the Pinnacle element of that are accretive to the retail ROFE. So they boost, they improve retail ROFE, as opposed to if we didn't, to David's question, if Pinnacle didn't exist, return on funds employed in retail would be lower than it is.
But you're seeing an amalgamated number?
We've seen an
Good point. You'd like to see a split-out number. I understand your point.
Yeah, but it must be retail, where are you up today, from retail?
We're not giving you retail excluding Pinnacle, and we're not giving you Pinnacle excluding retail. I understand your question. Yeah. So sorry, we're not providing that level of detail today, but I understand your question.
Steve, Ben from Jarden. Just the sales number, is that a wholesale or retail number?
That's the retail number.
That's the retail number.
Yeah.
If you look across in terms of penetration, because presumably your wine penetration in Dan's is probably well over 50% for Pinnacle, and then ex wine, I know it's probably going to be in the teens, something maybe below. How do you think about the ex-wine opportunity? So I think if you look at, what, probably more than five of the top 10 growing brands in liquor stores at the moment, they're RTDs and coming out of the fridge?
Mm.
And who knows where they're from and what's in them. But what are, what are you guys thinking about in terms of that space? Because in theory, you talk to fast fashion. That's the fast fashion element of liquor. Turning over, you could probably make some pretty decent margin. Not a lot of brand equity, they seem to churn through with seltzers and tequilas.
Mm.
and all that sort of stuff. Is that an attractive part for you to play, and are the margins in that space pretty attractive as well?
Yeah, thanks, Ben. Appreciate the question. It's harder to get confidence around an appropriate return on capital if we were to invest in the production sides of those categories because of the lightning-fast nature of change that you're seeing in them. So, you know, we're in conversations with some of our largest long-standing brand owners in the beer and spirits space, and they're really suffering because they haven't been able to keep pace with the changing rate of customer demand. And you're seeing new brands come through all the time. So, we leverage that to our advantage in the wine space, given customer repertoire. And that point I made probably too quickly about having to create a big enough brand portfolio, but then also help customers make choices.
Customers are much more willing to be led by our communication, be it our advertising or by our teams in stores, on what a good wine is and, you know, examples of things that other people like and so on and so forth. Whereas it is a much more pure brand exercise in particularly RTDs and to a degree and certainly beer and to a degree, spirits. Although you're seeing sort of proliferation in things like gin and so on. So don't miss the point that, like, slightly less than half of our business is in those categories. It's slightly more than half that is wine.
So we're over indexed on the wine category because we have a higher degree of confidence in the return on capital that we'll get by investing in production assets and so on in the wine space. We just don't have that same degree of confidence, but we are in it. It's a very asset-light way that we're in those other segments. So we leverage off partners in terms of others having distilleries and breweries. We've avoided the temptation, and I've called it as a temptation because there has been much discussed internally of setting up breweries and distilleries. So if we were to ever embark on it, it would be entirely at the craft end of the spectrum, not at the scale end of the spectrum. So that's the reason why.
Steve, you got Richard Barwick here from CLSA. Can we talk about the, what Pinnacle actually means for EBIT margins within retail? I think Craig asked the question before, and I think your answer was effectively, you're seeing the Pinnacle impact at the GP line, but not necessarily at the EBIT margin line. You also talked about the, it's sort of helping, perhaps contribute or perhaps even funding the low price positioning. Can we get to a situation where Pinnacle's actually additive to your EBIT margin? Or is it, or should we be thinking about it as: yeah, it, it is actually contributing to the low price positioning, it is covering your costs, but it's actually not going to lead to your EBIT margin expanding?
Yeah, thanks. I think I should somewhat correct maybe the interpretation of my answer, or my answer to Craig. What I was talking about was the grossing, the gross in gross margin since FY 19 in the charts that we've shared previously. When you look at our EBIT compared to our competitors in the retail space, it is a material gap which we enjoy compared to anybody else. In context of a very large part of our business offering an automatically indexed lowest price on predominantly branded product. Most of what we sell is highly branded product. Offering an automatically indexed lowest price guarantee is a very powerful but relatively expensive exercise. It's what gives you the scale that Dan Murphy's enjoys. The fact that we're able to generate an EBIT margin so considerably greater than the next player in the market is materially contributed to by Pinnacle, as well as a number of other things we do. So it is there, but I was referring to the change since FY 2019.
I understand that in terms of providing that margin that's superior to competitors. But if we're looking forward, is that a margin that is effectively going to be staying where it is? Or because if you balance it up, Pinnacle's, the growth in Pinnacle is super strong, outpacing everything else, and yet margin hasn't moved.
I think we outlined on a scorecard our ambitions for EBIT growth and that being driven by margin growth. So I'd point you back to that, and that's our long-employed strategy, which we're going to provide more color on. So, what we're saying is that we do believe we can continue to expand EBIT margins and gross margins at sustainable levels, at sustainable rates, to deliver that shareholder value growth that we talked about there.
Shaun Cousins, UBS. Just a question on Pinnacle Space. It's circa 18% of sales, and it's grown 60%. What proportion of space within the store does Pinnacle take up in terms of. And have you seen, you've had that tremendous growth since 2019, have you seen a significant increase in the proportion of space in-store allocated to Pinnacle as well, please?
Yeah, it does, as per the stats I shared, overtrade somewhat, so we get a higher efficiency on average out of a Pinnacle product. I haven't got the specifics of space, Sean, to hand, but as you build more products that have more resonance with customers, they demand more space on your shelf. So I'm sorry, I don't have a specific, you know, number of SKUs or space in-store necessarily.
18% or less than the 18%?
I would expect it to be less than the growth rate because of that over-indexation in velocity that we get out of these brands. Noting that a lot of them have been at the commercial and premium end of the categories.
The growth, I'm talking about growth, not SKUs.
Yeah. I'm asking about the proportion of sales today is 18% of space. Is it higher or lower than 18 allocated to Pinnacle? I haven't got the data off the top of my head. I would expect it is lower, is what I'm trying to say, because they are operating at a higher velocity on a spot on the shelf, you get more throughput of those products versus the relatively long tail that they exist in the rest of the portfolio.
Right. If there's no more questions, we'll go to morning tea. Morning tea will be served in the bistro area, which is through these doors, past the gaming bar, and then to your left. If that confuses anybody, there'll be somebody to help point you in the right direction. The morning tea will go for 30 minutes, so if we can see you all back here at, and ready to go at 11 A.M., that'd be fantastic. Thank you, everyone.
Thank you.
Right, we're going to start again. Just for everybody's, we have taken the feedback, and we are putting the temperature up a little bit. Got a lot of comments that not only the temperature, the questions are a little bit cold, but so is the temperature. All right. Yeah, so it's Kate and then Paul.
Okay. Hi, welcome back, everyone. I'm now going to take you through some information that is really important to understand our network and our strategy. The key points I'd like you to take away from this section are that our hotel and retail portfolios are deeply interconnected. We make hotel investment decisions based on the value that we can generate from all revenue streams attached to the hotel license. Endeavour has a unique set of capabilities and assets that enable us to maximize the returns from a hotel license. Good returns can be generated from all revenue streams in different combinations, and we have plenty of room to improve the portfolio returns through both investment and divestment. So as this slide shows, our hotel and retail networks are deeply interconnected. The significant majority of our hotels have attached retail liquor stores.
38% of our group's 1,701 retail stores, as at the end of FY 2023, are attached to hotels. In combination, approximately 45% of our total Endeavour Group sales come from the income streams generated from hotel licenses, including retail. In the state of Queensland, the regulatory environment is such that you can only operate retail liquor stores attached to a hotel license, and as such, Queensland accounts for almost 30% of combined retail and hotel sales. However, we also have an extensive combined network outside Queensland. Almost 20% of group sales are associated with hotel licenses outside Queensland, including 174 retail stores. This is important to understand as investments in hotels, when we make them, are made on the basis of the returns from all of the revenue streams that can be generated from that license, including retail.
We call these Cash-Generating Units. Endeavour is uniquely positioned to maximize the value from hotel licenses. Our portfolio is not constructed in this way simply due to licensing requirements. We have the most recognized and most profitable retail network in the country. We can drive superior retail performance, fractionalizing hotel license, lease, and property costs. We can derive operational scale benefits, for example, from group-wide supply relationships that support trade buying and promotional activation across the network. A notable example of this is beer buying. Operational scale enables efficiency of investment in areas such as team attraction and retention, compliance, training, and technology. Property investments can be driven efficiently on a whole of site basis.
We can leverage group capabilities, for example, in areas such as Endeavour X, to support digital asset development and customer engagement, leveraging our deep customer understanding to drive compelling offers across both hotels and retail. And we can leverage group advanced analytics and optimization capabilities to support network-wide operational optimization. We also have the scale to support internal sub-brands through which we can drive efficiency, such as Nightcap for our accommodation offer. This enables scale efficiency from repetition across areas such as design, construction, operations, technology, and sourcing. And very importantly, we can invest behind leadership in compliance, deploying national programs to support responsible service in both gaming and alcohol under our rigorous responsibility framework. These scale benefits and synergies drive value beyond the sum of the parts. Here you can see our share of sales nationally for each sales driver for our combined hotel and associated retail portfolio.
Retail has the highest sales share at approximately 65%. Bars and food represent just under 20% of sales, and gaming 15%. Accommodation, although minor, is growing share and is one of our opportunity areas for brownfield investment to drive growth, as we're going to cover later in the day. It is worth noting that in the state of Western Australia, there is no gaming. Without the returns from gaming, our hotels in WA, combined with retail, deliver a somewhat lower EBIT margin than the national average. However, have a higher return on capital investment, as shown on the bottom left of this slide. This is primarily because of the capital cost of gaming entitlements outside of WA. This overall picture supports our investment thesis that we can deliver strong capital returns from mixed driver businesses in multiple combinations, leveraging our unique group assets and capabilities.
However, not all of our portfolio is delivering returns equally. Now that we have experienced a year of uninterrupted post-COVID trading, we have reviewed the returns on investment in our integrated hotel and retail portfolio from a number of lenses, including trading margins, absolute returns, and returns on funds employed. We exclude new acquisitions that have not yet had time to trade to their full potential, and assets from which there is expected to be material redevelopment upside. With this framing, we consider approximately 80% of the network to be moderate to high performing and 20% of the network to be underperforming. This shows that we have opportunity to lift the average portfolio performance, and we will seek to do this through operational optimization and renewal or redevelopment, or potentially through divestment.
To realize this upside, we are prioritizing the highest returning opportunities first, balanced with speed to value realization. To recap then, we have a deeply interconnected network of retail and hotels, and are uniquely positioned to maximize the returns from a hotel license, leveraging the total of our group assets and capabilities. We can deliver good returns from multiple combinations of revenue streams, and we have the capacity and flexibility to improve the average returns of the portfolio through both investment and divestment. I'll now invite Paul to come up and speak about our hotels strategy specifically.
Thanks, Kate, and welcome, everybody. I'm Paul Walton, MD of Hotels. Isn't it nice to be in a pub and talking about pubs? Pubs don't have graphs, they don't have models, they don't have matrices or frameworks. Instead, they're real. You can feel it here. They've got hot food, they've got cold beer, good music, sticky carpets, and it's where you meet your mates and your family. Like a second living room, and really, the soul of Australia. I've worked alongside pubs and worked alongside ALH for most of my career, beginning with Lion back in 1999, delivering kegs on the back of a truck in Sydney.
Then managing accounts hotels in WA, and then finally wrestling with Steve, actually, as my customer when I was heading the Endeavour account and national on-premise for Lion as well. After Lion, I worked for global consumer goods leaders, Nestlé and Mars, in e-commerce and GM roles, and then found my way back to liquor with Pinnacle Drinks and most recently, I've been working with Pinnacle for five years, leading the Pinnacle Drinks business through a period of sustained growth. And over that time, established the Paragon Wine Estates business and also worked really closely with ALH on building the product range. Early this year, I made the jump from,
I should have worked out how to use this. Okay, there's one button. I'll know, I'll know which one to use. There we go. And earlier this year, sorry, I made the jump from wineries to pubs. I think you can see my smile in this picture. This was Steve and myself at the Kirribilli Hotel. That was last Thursday at Ausmusic T-Shirt Day, where we're supporting bands, which are a large part of what we do. And I think my, my, my smile there says it all. Really, really, really loving the role, so it's fantastic. And just remember that wooden bar for later, because I'm gonna come back to it. So today, as you know, we welcome you to the Forest Hotel.
I couldn't think of a better pub to kick back in while we tell you our story. Of the enormous opportunity we, as a team, see in the ALH business, which is well-positioned for balanced growth in a large profit pool. It's recently emerged from COVID with a strong base platform and a new operating model, and with a long runway of both organic and capital-driven growth opportunities, which will enable us to drive accelerating EBIT over the next five years. To start things off today, let's watch a brief video. As you can see on the screen, the ALH purpose is creating pub experiences locals love. I think the Brook Hotel, which was in the video from in Mitchelton, Queensland, is an outstanding demonstration of ALH's ability to do just that. Since reopening in May this year, it's become our best performing new Dan Murphy's.
It's become the number 3 food pub in the ALH network nationally. It's become the number 9 beverage venue in ALH nationally. Gaming has grown, and it's achieved 81% accommodation occupancy at $ 170 a night. Performance is running well above hurdles, and this is all in what is just a typical Brisbane suburb. I think our incredible opportunity at ALH is to leverage this model and to scale this capability across 350 pubs across Australia. As we all know, Australians love pubs, so there's lots of them, and the aggregated market is really big at 200, sorry, at $ 25 billion. Australians also love owning pubs, so it's a fragmented market, with the top 5 operators owning less than 20% of venues.
For many years, Bruce Mathieson Senior traveled the country buying the best pubs to create what we consider now an unrivaled fleet. Bruce had some foresight. He bought pubs positioned in the biggest and most structurally resilient segment, the mid-market, which allows for great balanced businesses. Now, clearly, scale and operating in the largest market has its advantages, but a pub is not a bottle shop. They're different shapes and sizes, and their essence is reflecting the local community and inviting them in. You can't just roll out the same box across the country. For many years, the ALH operating model recognized this by running a decentralized, state-based model with lean support, with the pubs given performance targets each year and the freedom and the accountability to chase it. As a network built rapidly through acquisition, this simple model worked really well. Australian pub-goers' expectations are lifting.
The competition is getting better, and technology is moving at pace. Running a network of 349 individual pubs is no longer enough. A year ago, we started developing our segmentation model, a long, detailed, iterative process, spending time in our pubs, talking with our teams, and really understanding how our guests are using them. The goal is to keep the local pub brand and identity, but overlay a framework to understand the characteristics of each segment. This allows us to benchmark and then work with the venue managers in creating venue-level business plans and support them with peer cohorts and toolkits to improve. You can see on the screen the different segments that we've segmented, with inner city, suburban, regional, destination, and entertainment, and then we've got three levels of affluence in each of these as well. Take the Kirribilli pub.
If you remember back, where Steve and I were resting on the traditional wooden bar. Its segmentation is inner city. So that is premium, it's F&B led, and it's mixed gender balance. When we benchmark Kirribilli against the inner city segment, the turnover, so, turnover per square meter, is actually pretty good. It works hard, but the food and beverage margins are well below the cohort and where they should be. And when you look at it, this is because it operates more as a suburban bar. It's got a strong male skew, and it has a standard bistro menu, so we're not taking the opportunity from the premiumization. The opportunity in, in, in the Kirribilli is to renovate in a classic art deco bar style and potentially have some spaces that are interchangeable across food and beverages.
Premiumize both the bar and the food menus in the process, and then open up the second floor to create a more vibrant, female-friendly space that creates a whole new occasion to visit. The result will be significantly higher margins, significantly higher turnover, and an even happier local community because we're meeting their needs. Of course, alongside our unrivaled fleet, we have 12,000 team members who are central to bringing to life our purpose. The good news is we have a really engaged team, with ALH voted as the number two top employer in Australia this year by Randstad. A driver of this is the focus we put on growing our teams, both in terms of training development and also mapping career pathways. Within the hospitality industry, we've got more scope to do that than anybody else.
Over the past eighteen months, we've deliberately gone about building a leadership team that balances deep hotels experience with new capabilities from leading companies in other industries. These include loyalty, network transformation, team development, merchandise renewals, and property development. What really stands out across this team is the love of the industry and the passion for pubs. Since emerging from COVID and the demerger, we've gone about deliberately changing our operating model and resetting the business. We've renewed our commitment to responsible gaming. We've built up our next levels of operational team, retaining existing team and recruiting key roles from leading hospitality businesses, both beverage and food. We've segmented our network. We've started implementing new commercial frameworks and approaches in our venues. We've started adapting the Endeavour GO cost optimization program for hotels, and we've begun leveraging our group digital and analytics capabilities.
All this has meant that we've emerged from COVID in a very strong operating position and created positive momentum with accelerated revenue growth. What really excites us, though, is the long runway this business still has. Since rolling up our sleeves and starting on the journey, the opportunities have become even clearer. We can lift up performances across venues, including the underperforming 20% that Kate was talking about, with standouts like the Brook highlighting the opportunity across our fleet. Our guest understanding can be improved, and our retail experience demonstrates the upside available as we improve our insights through loyalty data. We have legacy systems and processes, including manual and standalone systems, and over 1,000 venue policy documents, which create an efficiency prize through simplification, integration, and automation.
Our retail business has developed industry-leading digital and advanced analytics know-how that can be applied to many more use cases in the hotel world. There are significant opportunities across property and fleet to unlock value via renewals, redevelopments, and divestments. What makes ALH truly unique is the breadth and the depth of these opportunities, and our sheer size, which can support unlocking these in an efficient and a scale way. It's these opportunities that we think form the basis of a compelling growth model that ALH has available. From an organic growth perspective, Jared and Lukas will take you through the operational growth pillar, which consists of initiative to grow revenue and improve margin, and initiatives to target efficiency and reduce our operating cost.
From a capital-driven perspective, Kate, Sean, and Matt will take you through the network opportunities, including the criteria for acquisition and divestment, the significant opportunity in renewals, and the exciting development pipeline across our fleet. The final growth pillar is responsibility and gaming, which I'll, I will lead you through. We include this in our growth model because we see looking after our communities and our guests and doing responsibility well as an absolute table stake for growth. Which brings us to the money side slide, literally. We believe this growth model offers a step-change growth opportunity of 6%+ CAGR over the next five years, an additional $ 150 million+ in EBIT on top of FY 2023. This number would comprise the total EBIT growth over the period, as we assume market growth is offset by the current high-cost inflation.
We also see the benefit ramps up over time. Without knowing the precise regulatory changes, we believe this also incorporates the number of the known changes. The growth will be split somewhere equally across lower capital operational growth and capital-driven renewals and acquisitions, and will be brought to life by our experienced team, accelerated by our group capabilities, including Endeavour GO, Endeavour X, advanced analytics, property development, and renewals. And at the end of the five years, we see an even more balanced business profile across the drivers. And on top of this, we've identified a series of one-off property developments across the network that Matt will begin to share. Overall, a really tangible and compelling opportunity. So I'd like to thank you for joining us in the Forest Hotel and listening to our our hotel story.
Hopefully, you see the enormous opportunity we, the team, see in the ALH business, which is well positioned for balanced growth in a large profit pool. It's recently emerged from COVID with a strong base platform and with a long runway of both organic and capital-driven growth opportunities, which will enable us to drive an accelerating EBIT growth over the next five years. Thank you, and on to questions with Kate.
Okay.
Hi, Paul. Hi, Kate. Lisa Deng from Goldman Sachs. Question on page 65. Congratulations on a strong team. I just wanted to understand a bit more with clarity, how the different roles potentially could be differentiated or overlapping, including yourself, Lukas, Mark, so GM of Transformation, Mario, GM of Portfolio, Jared, GM of Commercial, then Sean and Matt, potentially. Like, what would be some of the key individual KPIs?
Yeah, I'll, I won't go into specific KPIs, but I can talk you through. So Lukas leads our the majority of our 12,000 team in venues as head of operations. Sorry, Jared leads our commercial, which would in the retail world be best thought of as merchandise, so our buying teams and our commercial things like pricing, et cetera, et cetera, within the business, and procurement. Phil is obviously marketing. Mark leads our transformation. So if you think about all of the things we're going through, we are going through a significant transformation as we run the business. Mark and his team are leading that transformation in terms of the initiatives, like a project office through the business.
And then, from a property perspective, we have Sean, who's leading our format operations, which is renewing of our hotels and brings that capability across from Spirit in his own world. And then Matt, who's looking after property overall, with a primary focus on the development of the properties and the value we can create there. And then finally, Mario, who was doing the managing director role, has rejoined us, which is fantastic news because it's great to have his experience and his knowledge of the businesses. He's looking after our portfolio piece, which is thinking about from a hotel specifically, on acquisitions, divestments, and things in that space as well.
Okay, so how would Mario and Lukas potentially work together, for example, or overlap or different? Like, what would their what's the decision, I guess, right, for either Lukas or Mario, for example?
So Lukas' role is every day running the hotels. So he looks after our 12,000 team, which serve our guests and manage our hotels. And then Mario looks at, from a hotel's perspective, what are the right hotels for us to be acquiring, divesting, and, you know, and should we be prioritizing those for development, for example, in terms of as we look at them.
They answer those questions?
Correct.
G'day, Paul. It's Tom from Barrenjoey over here. Hey, how are you? Can you go to page 63, where you do the segmenting the hotels?
Sure.
I don't think we've had that kind of disclosure before. Are you able to pull that up just so we can, we can look at it? Sorry.
I hope so.
I'm just really interested to understand how the margins differ across those different segments of hotels. And I guess the reason I ask is, gaming revenues have no COGS. They have very little costs, and so when you lose a dollar of gaming revenue, you know, a lot of it drops through the bottom line. And I think it'd just be interesting to understand how the, yeah, I guess, the margin profile across the different hotels looks, and is it different? I think you said WA was a bit lower margin. Understand it's higher ROI, given the intangibles there from the licenses. But, yeah, just some clarity on that, I suppose. And then we can always assess, you know, what that means if the regulation happens, if it doesn't happen.
Yeah. It's a really difficult question to answer in a simple way. And the reason being is that, number one, you know, you can say, I think the statement there is that gaming pretty much drops to the bottom line. Everything is interconnected in our hotels, and I think, you know, the presentation Kate took you through demonstrated that. So in order to run a gaming room, it needs food, it needs beverages, it obviously needs support, it needs, you know, the venue teams, it needs support officers. So it's not necessarily doesn't drop out because, you know.
Our learnings in Victoria, because we've had to shut our hotels, or we've chosen to shut our hotels for a number of hours, is there's actually some significant savings we can make at that time as well, from gaming. In terms of margins across, it's probably intuitive, but every hotel is different, because it each has a different mix of food, beverage, and gaming. Obviously, at a gross margin level, accommodation and gaming are going to be fairly similar across the group. But what you'll tend to find is inner city and affluent suburban will have better food and beverage margins, and regional and lower affluence entertainment will have lower food and beverage margins as well.
The net margin for the hotel will depend upon the mix.
But if, if someone says, "Right, instead of buying a, you know, instead of putting $ 5 in a gaming machine, I'm going to buy a schooner," like, you, you make a lot less money off that, right? So I guess I'm just trying to understand how, how it might look if gaming revenues are flattish and you get inflationary growth in food and bev, what that does to the, the margin profile. Because I think what you're saying is the margins are expected to expand, and that, that's what I can't really get my head around.
Yeah, and I think, well, I think what you described is less. There's less ability for us to change our margins in gaming. We can grow it, and I think, you know, Jared will talk to some of, you know, some of the capabilities we have to grow the gaming area above service as well. But that. What you describe is actually the opportunity. We have significant upside in food and beverage margin. And I think, again, both Jared and Lukas will talk you through that. That's where the big opportunity for us is to grow food and beverage and also increase the margin because there, there's an opportunity there.
Paul, Kate, David Errington. I'm following, I suppose, on from Tommy's question, but I'm very titillated, if you like, for that $ 150 million worth of growth, that EBIT growth. That's a very nice number, but I need to know a little bit more as to how it's going to be delivered. And I haven't quite got that connection yet, so we can walk out of this room with the confidence, because that's a pretty punchy number that you're going out with, close to $ 600 million by 2028 in EBIT. So I just need to know where it's coming from. And as Tom said, you've got gaming regulatory. I doubt gaming is going to grow, so it's obviously going to come in food and bev. So I know that you've got this, you've got operational growth, limited capital, renewals and acquisitions capital.
Can you give us some examples, please, to bring it to life so that we can understand it? Because at the moment, it's numbers, it's concepts, but can you give us a bit of an example so that we can actually grasp how you get that prize? Because it's a big number, and we're going to hold you to account on it. Now we need to know how you're going to get it.
Yeah. So firstly, we're, we're happy to be held to account because we absolutely believe it's there, and we can see it. I'm not going to go into all of the details because Jared and Lukas, as well as Sean and Matt will. But it is absolutely, we've got significant cost opportunities. As we say, food and beverage margins, we've got revenue growth opportunities, and we've got renewal and property development opportunities that all add up. It's across the board to a number which is $ 150 million plus.
It's not exciting me, Paul. It's not exciting me.
We've got a whole table of people that are going to come and excite you in the next session. And we'll go through that detail.
I'll give you an example. In Melbourne, I'll give you an example. I mean, everyone in Melbourne knows the Duke of Wellington. It's doing $ 11 million sales revenue. It's nowhere near the site of Young & Jackson's. Young & Jackson's is your pub. That'd be lucky to do eight. So clearly, and it's nowhere near the quality, but you guys just don't have the vibe in there. You walk in there, and it's nowhere near, but Young & Jackson's, which is owned by AVC, and you just don't get it, you just don't have the vibe. So how can we have confidence that you're gonna go and get that 150? I still haven't got the confidence yet that you're gonna deliver it.
So if we can revise at the end of the presentation, we've got a team of capability here with deep experience.
Patience is all we're asking.
David, that's why I brought Lukas, Jared, Sean, and Matt, is because, you know, they can talk you through in detail their capability and what they can bring to the table and how they're gonna change it.
It's Ben here from Jarden. Sorry, I asked about the $ 150 million number as well. Maybe two parts. One, is this gonna be included as a KPI within all the management REM? Presumably it is, because obviously it's a big number that's been put out there.
Yeah, Ben, well, this is included in our five-year plan, and the pieces that contribute to that will be in the REM, which is part of the way we incentivize.
Just a second, maybe ask you in a different way. Is the market's been relatively benign. I think you've probably grown your comp growth to your pubs is probably somewhere between 1% and 2%. You've got inflation that's running mid-singles. How much of that 150 do you think is in your control, i.e., is this just gonna come down to the management team's execution as opposed to market growth, regulation, not changing these sort of things? Like, if you sat here today and said, "Look, if we execute well, that nothing's in the bank, but it's all gonna come down to us actually executing these 10, 20, 30, 40 points," is it - is that how you see it?
Yeah, we've been realistic on both market growth and inflation. As I said, you know, given where the environment is at the moment, we think they largely offset each other with a bit of fleet decay. It's okay over the next period of time because of this high inflation environment. So all of this is within management control. All of it requires the plans for us to put in place.
All right. Thank you.
It's Bryan Raymond, JP Morgan. Just again, on the $ 150 million question, the seventy-five mil there, that's capital driven, as you referred to it on the slide. Just going back to a comment Kate made earlier around the CapEx, split coming down to. Well, the CapEx coming down to sub $ 200 million this year. Obviously, fewer acquisitions are in that number. Just thinking about what sort of growth CapEx you're thinking about on an annualized basis over that five-year period to achieve the fifteen mil per annum or seventy-five mil over five years, and the ROFE that falls out of that.
You want to answer that?
Yeah, I think, I mean, obviously at a high level, we will prioritize the capital towards the highest returning opportunities first. We're not gonna provide, at this point, the five-year growth CapEx numbers, but we will continue to operate our funding within the free cash envelope that we've spoken about. So our intention will continue to be that we'll generate sufficient free cash, both through the uplift that we deliver and through trading of the broader business, to fund the growth ambitions as expressed in the $ 150 million number.
Okay. Right, but that $1 5 mil per annum should be generated at a 15%+ return on funds employed. Is that a fair assumption?
That's right. That's a fair assumption.
Okay. If I can just sneak one more in, just on where you talked about the kind of laggard portfolio, the 20% at the bottom. How of your hotel network, how do you define that 20%? Is it sub a certain threshold on ROFE, or is it an EBIT margin, or what is it that comes in to call that a laggard? And I just noticed you talked about potential divestment there. That would help solve your balance sheet issues as well if you could divest some of those, whether they're leasehold or freehold. As you say, leaseholds are saleable. What's the opportunity there to kind of solve two problems with one in terms of ROFE and balance sheet?
Yeah, well, I'd say we used a number of metrics to define what was underperforming. It included relative EBIT margins, growth potential, so we did consider, you know, where to from here and how much opportunity have we got, and also return on funds employed. And I think it's safe to say that our task with that portfolio is to think about can it be improved through operational levers, through investment, or what's the next opportunity to move that venue on? So yes, the second part of your question is spot on. You know, I think there's an opportunity to both return, improve return on funds employed and potentially bring some cash back into the business through optimizing not just the bottom end, but optimizing the fleet overall and thinking, you know, diligently about every site.
I mean, every site, I mean, Paul's sort of spoken to the fact that every site is a standalone business, effectively. So we have to think about the trading dynamics of every site, both currently and the potential from that site, and work out what's the best way to deploy capital to the highest use, whether it be by, you know, optimizing the site performance or thinking about divestment and reinvesting that capital elsewhere.
Shaun Cousins, UBS. Maybe just further to Bryan's question there. Within the lagging hotels, are they more gaming focused and don't have a prospect of getting better in food and beverage? I'm just curious around what are the attributes on a mixed basis. If we think about the upside for your EBIT, seems to be very skewed to food and bev. Do the laggards have problems or, you know, an inability to grow food and bev? I'm just curious if you could describe them in terms of what products they seem to do well at and moreover, challenge that.
Yeah, unfortunately, I don't think there's a generalized answer I can give to the question, because every pub's unique, and we are looking at the unique trading circumstances of every pub to decide how we categorize it.
I think it's fair to say, though, that if it's lagging, and we don't think we can improve it through food and bev, that that's probably one that we'd have on our divestment list.
Yeah, and but just you provided EBIT guidance. You've tripped up in the past, I think, on net interest. As you're doing, half of your upside is going to come out, or pardon me, uplift is going to be coming out of refurb and acquisitions. Could you maybe sort of tell us how much, you know, you're expecting an uplift then in your net interest there according to this? Sorry, I'm just curious, in that EBIT's not going to flow to the bottom line. It's going to get absorbed a little bit more with a step up in net interest on the back of this investment, please.
So as I said earlier, we're not expecting that our capital requirements will outpace our free cash generation requirements. We're not expecting the investment we are going to make in the hotels portfolio will grow net debt.
Hi, Craig Woolford from MST Marquee. Just coming through on the, I guess, the renewals. Firstly, is the 50% uplift that you're looking at from renewals/acquisitions, is that assuming you only have to do those lagging portfolio of pubs? Or is part of it about what you do with the moderate and other part of the portfolio? And is there anything you can give us in terms of what rules of thumb the industry or your own business uses on a renewal? Like, where does the uplift come from in terms of sales? Does it typically get a 20% uplift in sales? How should we think about that?
I think it's a question it would be good to ask Sean to address a bit further on, because he's going to talk more to the pipeline of renewal opportunity. But I think to answer your question at a big picture level, the renewal investment will be across the portfolio. It's not just relying on investment in lifting the bottom end. And the returns from renewals, the pipeline of returns from renewals that we think we can generate are above the 15% return on average. Recognizing, as we've said, and we'll cover it a bit more later, that there's a degree of fleet decay that needs to be caught up as well. So remember I said earlier that in our hotels portfolio, the renewals capital we categorize as both stay in business or both sustaining as well as growth. So in some venues, there'll be a combination of those factors, but on average, we're expecting above 15% returns on the incremental dollar invested in renewals.
With that fleet decay figure, is that the lagging or is that a different measure you're referring to there?
So fleet decay applies across the network. We have outperforming pubs that still need material capital invested.
What's the average refurb cycle? How often should a pub be updated?
If you don't mind, we'll get to that when we get to the property section of the day.
G'day, it's Ross Curran from Macquarie. Again, sort of coming back to Sean's question a slightly different way. Can you refresh our memory on the Charter Hall owned pubs? Because from memory, there's a big step up in rent in FY 2028 comes through that portfolio, and whether that rent step up in that book is included in this guidance.
Yeah, there is a step up in a portion of our portfolio based on a market rent review in 2028. I think worth recognizing that is five years away, so exactly what that will look like will, will depend on the trading circumstances of those specific pubs at that point in time. I'd also say some of those sites are part of what we would regard as good leasehold development opportunities, and we have a very constructive relationship with Charter Hall in relation to thinking about how we're going to partner together to realize some of that upside.
So I think there's, there's still quite a lot of, you know, water to pass under the bridge as we, as we move through the next five-year horizon to that point. The $ 150 million plus that we've put out is we're not, we're not . I guess we're comfortable putting that out on the basis that a market rent review in 2028, to the extent it materializes, is not expected to be materially detrimental to the performance of the portfolio.
Okay, and then I guess as a follow-on, how many of the hotels in the network are where you want them to be today? Like, it, it what proportion are absolute perfect, this, this one's humming?
I think maybe again, we've got some good data in the property section that would give you a sense from a property perspective, and I think through the operational section, we'll talk to operational improvements. So maybe again, it's probably . maybe we don't want to avoid the question, but maybe can we park it until we've been through the next couple of sections, and if you still feel there's something unanswered at the end, we can come back to it, if that's okay? Go, Raf.
This is a question for Paul. Paul, you talked about a new operating model for the venues now. Can you just give us a sense of what's actually, I mean, everyone's talking about capital, but surely there's a lot of stuff you can do which doesn't involve capital. And can I just ask how much of your revenues, for instance, is coming out of kind of events and stuff, which clearly is a big part of running a pub?
Yeah, that, I think that's a difficult question because the events can take many, many different forms, and Jared's probably best informed to talk about that. But, I think it's probably another question for Jared, when Jared has his session, because he'll be able to talk through that. I'm sorry, I'm not trying to hold back. I'm just, I don't want to steal his thunder.
Uh, okay.
I think he's the best person to talk that through.
I'll ask it in a different way: How many salespeople do you have inside the pubs business?
The venues and events you're talking about? We have a very tight entertainment business that has three people in it, and then we have a very small amount of events. People, again, it wouldn't be more than 10 across the country because they tend to be cross-roles, either within hotels or within hotel subgroups.
Thank you.
Phil Kimber from Evans and Partners over here. Just on the food and beverage opportunity, how should we think about that? Is that, do you think your pubs on average are underperforming in a sales sense in food and beverage, and so it's going to be a sales-led improvement, or is it cost and efficiency? And then you know, we've done some work, and I know there's a lot of averages and analysis that and assumptions being made, but it does look like versus your biggest competitor, your food and beverage margins are quite a bit lower. But how does it work when you're more a gaming-focused pub? Is there a trade-off, and you have to accept lower food and beverage margins if you're gonna have a big gaming business?
Probably just start by answering your last question, which was, I don't think there's a trade-off. I think they actually support each other. If you can do food and beverage well, then it helps because you have more people coming through, and you'll have more people at, you know, that will also do supplementary gaming as well. In terms of the opportunity in food and beverage, well, I think it's all of the above at the moment. We run our hotels very much as individual venues or have traditionally. We've been changing that over the last 18 months, so none of this stuff is completely new. We've commenced the journey, and we're seeing the traction start to happen.
So we will see it, see it through cost benefits, and there's all sorts of, you know, through aligned buying. Potentially in the future, things like commissary kitchens, so shared kitchens, you, you achieve efficiencies. We'll be talking through things like rostering to trade. I, I think we'll, we'll see it through improved margins, and that's ensuring that we've got, you know, really, really, you know, tight key value items, but then premiumizing our menu, so we've got right, right architecture in menus. Applying sub-brands, you know, and I'll give you the. The Hemmes use a really good example, which is, you know, Totti's, for example. And we have opportunities for those sub-brands across our, our, our venues. And, and then I think also just lifting turnover as, as you get the right offer. I think across the board, there's opportunities in food and beverage, and it will help our gaming as well. It will help our accommodation. They all work together.
Hi, it's Lisa. Just a follow-up question. On one of the synergies, the key synergies was beer procurement, I think we talked about. So, a little bit more color, is procurement done with retail and pubs together? And how much, roughly, from a value or a volume perspective, would the group procurement actually be for the pubs? And on directionally, how much would our pubs be able to procure for relative to a mom and pop, you know, a single pub, from a benefit perspective, like a percentage benefit?
I feel like I keep deferring. Jared would be the perfect person to
Is this on?
Yeah.
Yep. If I don't answer all your questions, it's because I've forgotten. Firstly, we procure separately. I sit on the merchandise leadership team with Tim Carroll, who is our managing director of merch. But importantly, both on and off play different roles, right, in the beer space, right? So we're bulk beer, and it operates differently in the way that we interact with our suppliers and the way that we interact with our guests. But a lot of insights can be shared across both, right? Our guests share the occasion across retail or hotels, and a lot of the insights are born in the hospitality industry and then feed into retail, right? COVID changed that a little bit, but we're normalizing back out of that.
In terms of your question around mom and dad businesses versus ours, we're a business at scale. We're the largest hospitality business in the country, so obviously that comes with a unique opportunity around our buying power. But we're not gonna go into specifics, and to be honest, I don't know what mom and dad buy for. They might be really, really good at their jobs, right? So I think importantly, you know, we sell a keg per minute of our operating hours, right? We have a good amount of volume within our business, and that gives us an opportunity to put the best value in front of our guests.
We can afford to be very competitive with
100%, yeah.
Mm-hmm.
And that competitive nature is something that we monitor, and something that we brought into play within our business around 12 months ago, around how we're pressure testing against our competitor set.
But you procure separately, but for example, is it a joint negotiation between?
No
You and Tim with Asahi, with Lion? Like, do you jointly negotiate even though it's p rocured separately, for example?
Yeah. So we don't. I don't know if Steve?
Well, they're very different. But
This is my point.
Across multiple channels. So when I'm
You'll need the mic for these people on.
Sorry, can you. Thank you. When I'm talking to Asahi, I'm obviously talking to them on behalf of the whole group, similarly, Tim. But when Jared's talking to them, he's talking to them about keg beer. So we talk to our suppliers about the partnership that we can generate together to benefit both of us. It's not a favor, you know, we're bigger, we get more type of exercise. It's what can we bring to the table for you? What can you help us with, and how do we make that work for both of us? And we have a great partnership. Actually, I would say our best partnership is with Asahi, and they've won our Supplier of the Year in the last year, I think it was.
Put another way, like, would Jared's pricing be better than AVC, leveraging the retail that we have?
We don't know.
We don't know. Okay, interesting.
We don't have facts on the purchase price of-
Okay
any of our competitors, be that in retail or hotels.
I got it. Okay, thank you.
So while we have time, I'd like to throw in another one. It's Ben, Ben from Jarden. Ask about data. And in theory, and maybe to Ari's points before, I would have thought, particularly when you tie Pinnacle in and you look at your retail business, there's a big opportunity to drive loyalty through your, your registers, tie purchases in. You get $ 2 off if you drive, if you try the X, Y, Z product, and then go and cash this in at Dan's. Where are you at with that capability? And if I were to look at it, that's probably one of the big competitive advantages you guys have got, being a portfolio business versus your peers, and it doesn't feel it's being explored as much as it could be at the moment.
No, it's a good question, and you're right. Traditionally, we haven't. I think Jared's gonna share a fantastic example that we've recently done, which has kicked that off in terms of using our joint capabilities. And we're launching Pub +, which is our new app, which is really a tool that will help our guests understand the pub, what's on offer, provide them promotions, discounts, et cetera. And the trade is that we obviously will have the data around how they use our pubs, and then we'll be able to choose how much do we then link that, you know, link that knowledge with BWS, with Dan Murphy's, My Dan's, and then start to look at cross opportunities. So, we haven't done it traditionally. We have started, and we'll really start to accelerate it from March, when Pub+ launches.
And just one more from me. Just as you look forward, following again from Tom's question, as you look at your gaming share. When you look, and you've obviously got your five-year plan you put out, you know, and put some great numbers around it. Do you see gaming being higher, lower, or the same share of your business? Revenue.
I think naturally, in terms of share of the business, you naturally say, if we're gonna—if we think there's an acceleration, you know, an accelerated opportunity in food and beverage, then gaming would naturally reduce. And I think that's where I spoke about a more balanced business. It is a balanced business already, but even a more balanced business. We still expect and hope to grow gaming market share because of the number initiatives we've got placed, in place in terms of, you know, our analytics capabilities and our service capabilities that we're gonna be continuing to develop. But we do expect food and beverage will grow, and accommodation at a faster rate than gaming.
Thank you.
Okay, we're going to break for lunch now. There'd be two more, at least two more question times to come, so plenty of opportunity with some further information being made available to ask a lot more questions later in the day. Now, for the first time in this is my probably 25th Investor Day amongst different companies, we're actually running early. And so what that means is lunch won't be available until 12:15 P.M. But we'll extend the time available. So basically, if you come back here at 1:05 P.M., then we'll kick off then.
So lunch, you've got a little bit of spare time to get organized, et cetera, make phone calls, and then lunch will commence in the bistro, sorry, in the stag area, at 12:15 P.M. So the stag area is, again, you go past the bistro into the main area of the bar and out onto the terrace area, and that's where lunch will be served. Anything else? Pardon? Oh, yeah, you can order drinks in the bar if you just show your bracelet, et cetera. And I think that's it, and I'll see you back here at 1:05 P.M. Okay.
Hi, everyone. Okay, so we're going to commence the afternoon session. For the record, we're going to go straight through, so we're not going to have afternoon tea, but afternoon tea and coffee and water remains available back of room for anybody who wants one. But we've got momentum, so we're just gonna keep on forging on. So we have Jared and Lukas coming up now, and I'll turn it over to you, Lukas.
Thanks, Sean. And welcome back, everybody. I trust you enjoyed your lunch. Just a shout-out to Rosie, the publican here at The Forest, and Raya, our head chef, and Kate, the function manager, and the whole team at The Forest for putting on such a great day today and also putting on an amazing lunch. So if you're around, anyone, thank you. I also want to apologize. I'm the one who's asking for the air con to be so low. A number of reasons. Number one, it's hot. Number two, I sweat in a cold shower, so. Number three, I'm a publican about to embark on public speaking. And probably the most important reason is I'm about to do that public speaking with Jared, so hence why the air con's on so low. My name is Lukas McKay.
I'm the General Manager of Operations at ALH. In a nutshell, my role is to contribute, to develop, and implement our strategy and lead our team of 12,000 amazing people operationally. I love pubs. Pubs are dynamic, pubs are fun, pubs are exciting. Yes, they can be challenging, but there's always something happening in a pub, and that's why I've been in the industry for 23 years. I've been fortunate enough to work for ALH for 19 of those years in all areas of the business, from the position which I'm privileged to hold now, all the way back to 2005, when I was standing on the door at New Brighton Hotel in Manly at 3:30 A.M., helping security or checking in a patron in accommodation at the Melton Hotel. I just love this industry.
The people that work in this industry just amaze me. The fact that this industry has a rich history of over 150 years is what's made me stay in this industry for so long and hopefully for many years to go, to come. There's just something special about a pub. In my opinion, it's the cornerstone of the Australian culture. Whichever side of the bar you're on, everybody loves the pub. Anyway, I'll hand over to Jared to introduce himself.
Are we good? Yep. Thanks, Lukas. I'm glad we made up some time. His intro tends to go for a little while. My name is Jared Holt. I'm the General Manager of Commercial here at ALH Hotels. My team and I lead the commercial strategies across food procurement, beverages, gaming, and entertainment. I've been with ALH for a little over 12 months now, crossing over from our retail side of the business, where I was Head of Beer for Dan Murphy's and BWS for a little over three years. I joined Endeavour after a seven-year stint in liquor retailing, working both with Thirsty Camel Bottle Shops and with the Coles Liquor Group. Prior to this, my first 13 years of my working adult life were all in hospitality. I started as a glassie at the Heat Nightclub in Melbourne.
Some of you might have been there back in the day, working as a glassie first and then a bartender, before working across nightclubs around Melbourne, before having the bright idea with my brother to open our own venue when we were 21 and 22 years old. I then went on to run more businesses throughout Melbourne, including a festival business and bars over in London as well. I come from a family of hospitality. My uncle and my brother are in the industry, and my first home was actually one of our pubs called the Mitcham Hotel, where my dad was the publican. It's really awesome to be given the opportunity to take you through our operational growth levers. Green button. Cool. It's a really cool business, this one, if you just take a second to think about it.
We're unique in the market with our presence in hospitality and also our retail footprint. We have unrivaled customer, transactional, and competitive data. We have an incredible team of in-house capabilities, such as our advanced analytics, digital, and tech teams. All of these give us a unique platform for growth against the market. All are powered by the 12,000-strong hospitality team, full of knowledge and passion for our industry. Today, Lukas and I will outline a plan to leverage these strengths. We'll focus on sustainable initiatives that boost revenue and margins and effective cost out of the business while enhancing the guest experience. These initiatives account for around $ 75 million of the five-year EBIT opportunity Paul highlighted earlier. They're less capital intensive than our renewals and acquisitions plan and deliver operational growth from five key initiatives.
The first is how we've brought a national approach to the way that we activate for our guests through what we call a trade plan. How we're going to enhance our guest experience through our digital platforms, how we're leveraging analytics to drive data-led decision making and at pace, how we're applying the new segmentation framework that Paul took you through earlier, using benchmarking to unlock F&B opportunities. And finally, Lukas will take you through his roadmap of sustainable cost improvement. These initiatives are crucial for our five-year EBIT goal and often intersect one another, adding value to each other. So let's jump into it. The first initiative I'm going to take you through today is the creation of our national trade plan. A trade plan essentially is marketing, operations, and commercial, all being aligned, planned, and organized in how we put the best offer to our guests.
It sounds pretty simple, but let's think of it another way. Historically, we had an individual pub creating offers, as they know their community better than, better than anyone, really. We had our state ops teams and state programs running offers over the top. Think of things like our charity drives and our food specials. We had centralized teams in beverages, wagering, entertainment, running state offers, national offers, venue-specific offers. We had marketing campaigns running socials and point of sale for all of this activity. We had our suppliers coming to us with offers. Yep, state-based offers, national offers, and venue offers. You're starting to see the flavor of what I'm getting to here. This is just a sample.
In isolation, they're all productive, but when laid on top of one another and not in a coordinated approach, we become inefficient for our venues, at times, ineffective for our guests, and we're not actually leveraging our scale to its full potential. A centralized view is just that. It gives us visibility and capability to land each of these offers in a way that complement one another and zero in on how we, how we elevate key big occasions. Doing this well also enables us to leverage our size and scale, and it, and it, and it enables us to leverage our cross-sell opportunities, partnering across the 1,700 strong network of retail stores, unlocking a critically unique asset to Endeavour. A great example of this, right now, if you go into a Dan Murphy's or BWS, we're partnered with Lion and produce 200,000 cases of James Squire.
On every carton of beer, there's a $ 20 voucher, and on every six-pack, there's a $ 5 voucher. You simply make your purchase, go online, and we'll send you a prepaid cash card that can only be spent in one of our pubs. With a forecast redemption rate between 5% and 10%, we're going to be pushing an incremental 20,000 guests into our pubs this side of Christmas. Green button. Our next initiative is all around guest experience. It's why we do what we do. It's how we drive more spend, more frequently. We've all had that really great hospitality experience. The publican knows your name, she knows your favorite footy team, or has your Friday night favorite drink waiting at the bar before you've even had a chance to say hello. This only happens by knowing our guests, and it generally only happens in your local.
We want to enable that hospitality and personalized feel with every guest interaction we have. I talked earlier about data being a key strength for Endeavour. This is true. However, historically, for our hotels business, we haven't had a platform to enable us to capture guest data in a way that's engaging, leaving us with a relatively small data set to appropriately segment who our guests are, how they interact with us, and more importantly, how we get better for them. Later this year, we'll be launching Pub +, a new app-based digital platform that is poised to set new industry standards with a focus on personalization, communication, member offers, and benefits. Pub+ will give us capability to create a far more sophisticated promotional program, unlocking cross-sell opportunities that I talked to you earlier on.
It will reward our guests for repeat visitation with a points program and member-only offers. It positions us at the forefront of leveraging data. It will give us the richest single source of guest data in the industry, supporting critical decision making on revenue management, guest experience, and a more seamless approach to our responsibility framework. With 350 pubs, Pub+ creates a unified brand presence that connects our network and over time, connects our other brands, such as Nightcap and Live at Your Local, changing our ability in how we communicate and how we market. In time, Pub + will consolidate all of our in-venue digital touchpoints, creating a far more seamless experience for our guests. As a business, we've got significant runs on the board in this space when you think of Dan Murphy's and BWS.
My Dan's, two years ago, brought forward a personalization engine, creating individual and relevant content and product offers for our customers. Engagement is high. It has over 5 million members, driven by member-only offers and all underpinned by enabling the famous Dan's Price Guarantee. Pub+ replicates that principle, but with a hotel's value proposition and unique engagement model. What does the future look like for Pub +? Picture yourself booking a 6:00 P.M. dinner at your favorite pub. Earlier on that day, we send you a push notification with an offer on your favorite beer, favorite cocktail, or favorite wine. We've essentially created your own personalized happy hour, and in return, we've extended your occasion during that visit with us. Doesn't really get a lot better than that for me. The next initiative is how we're using analytics to drive data-led decision making.
Our first case study is gaming, using advanced analytics to optimize our game selection, delivering the right mix of games to our guests. It's critical as a large operator, we balance player needs and experience with player protection. So we're increasingly doing this with a more systematic approach, using new capabilities, supporting teams to continue delivering great guest outcomes, but with far more accuracy and with a much faster pace. Think of this as really simple category management. I'm going to give you an example, and that example is the cinema industry. To be relevant and optimize its output, a cinema needs a mix of offers. Think thriller movies, comedies, rom-com, action. It needs different ways to experience, such as 3D, IMAX, independent, and gold class if you're Lukas. Our consideration set is really very similar in gaming.
We need a mix of type, a mix of game types, such as Dollar Storm or Dragon Train. We need features, themes, different sounds. We need different experiences, such as our room layout, our space, our lighting, and even a chair type. Both industries equally have a heavy reliance on technology and innovation, but both have a cult following for the classics. Critically, both are underpinned by atmosphere and service. Over time, analytics helps us crunch all of these factors, giving best offers and experience to our guests. To give you a live example, historically, our gaming team has used manual spreadsheets to crunch over analytics over 12,500 machines.
With the current case study we have in play at the moment, we've created tools that have helped that team deliver 2.5 times the volume of changes to last year, while also delivering significantly better outcomes per change. Discovery is underway for our next use case, looking at all things promotion, price, and range for our beverages driver. We'll take learnings from work already underway in our retail space over the past 12 months. With more than 350 pubs, we have 1,100 bars, and in those 1,100 bars, they each offer a different occasion for our guests. Across our draft beer range, we have over 9,000 taps to optimize, so it's pretty easy to see how data analytics can support our range and price and optimize well into the future.
The future of advanced analytics is that it's our gateway to one-to-one promotions through Pub +. This will take time, but with the core base of clean data and the right algorithms, true personalization can be realized for our guests. Our next initiative is around our approach to F&B through segmentation, food and beverages. Earlier today, Paul talked you through our new approach to segmentation. We're using segmentation to enable benchmarking a pub's relevant cohort. The benchmarking identifies inconsistent venue performance, looking at things like sales, cost, ASP, margin, and even things like Voice of Team and Voice of Customer. It also informs our thinking on refreshing menus, reducing waste, and pressure testing our pricing relevance. When we apply a simple principle, lifting underperforming venues up to their segmentation benchmark in margin, it shows an opportunity of $ 15 million-$ 20 million in F&B. What does this look like?
Essentially, we pick a pub like The Forest that we're in today. It's segmented it as a suburban high affluence. It's performing, it's performing in indicators such as weekly sales and trade GP against week is really strong. But when we benchmark it against its cohort, its trade GP is actually down 200 basis points in beverages. Once we get under the hood of it from there, we realize that it's really running a regional pub cocktail list. Its draft ASPs are out of whack compared to its affluence levels, and its product mix isn't right for the local area. Making simple tweaks to improve this across 350 venues has significant value. A live example, we've recently just launched our new cocktail list. Our old cocktail list had 1,587 different recipes, and it had 47 different ways to make an espresso martini.
Lukas can make 46 of those, and he said earlier, he's happy to show you all afterwards how to make them. We cut this list down to 50 carefully selected recipes, then further broken down by segment. Our benchmarking allows us to easily identify our pubs that have great cocktail expertise and let them keep doing what they do best. This leads to better deals and improved margins, quality of ingredients, and consistency over the recipe that we do. Quality and consistency equals better revenue and better margin. We can be more effective with our pricing, but still maintain that value that we want to deliver to our guests. In food, we're rationalizing our menus, we're rebalancing our menu mix, and we're focusing on our ambition to deliver the best pub classics by segment.
These deliver almost 50% of our covers, and our covers are over 17 million covers a year. By focusing our strategic priorities and rebalancing our menus, we've reduced our menu size by 25%. Why is that important? It removes operational complexity. It allows our head chefs to focus on local and authentic, and the pub classics that I mentioned earlier. It has supported reducing our pantry list, or our list of available items, from 50,000 down to 21,000, enabling us to best buy the quality ingredients that we need by segment and enabling our Best Buys program of work. This reduction has us on track to deliver 3 million by the end of the financial year. Now over to Lukas, who will probably help you fall asleep after your lunch.
Thanks, Jared. Probably need to turn the air con down after that intro. Also thanks for making that sound all warm and fuzzy, mate. Effectively, you've just told everyone in this room what my to-do list is for the next period of time, so I appreciate that. As you can all see, respectable sledging is a core part of pubs. Anyway, I'll now take you through all the hard work that the operations team do. Another crucial aspect of hotels' operation performance is the delicate act of managing our operating costs while maintaining our high levels of guest service. Our pubs are busy. Our people are busy. There's always so much to do in a pub. Over the years, our systems have organically grown to a point where they're starting to become inefficient.
Thankfully, we're now in a position where we can start mapping out a simplified, systematic approach to make it user-friendlier for our teams. Between these two key programs of work you see on the slide, we have the capability of unlocking substantial cost improvement in a way that is conducive to the environment of venues trading. So how will we do this? Endeavour Go looks at the tasks that our venues complete on a daily basis and finds ways to optimize the way in which they're sequenced. Our teams perform a wide variety of work outside of serving our guests, like restocking fridges and taking deliveries, resetting furniture, various administrative tasks, et cetera, et cetera. These are the tasks that Endeavour Go sees as opportunities to sequence and optimize to make it easier for our teams.
We're obviously doing this in a way that does not impact the guest service levels, and I'll go into a bit more of a case study on the next slide to demonstrate this. Excuse me. All of the opportunities that Endeavour GO continues to identify really couldn't happen without Capacity Management, which was launched in July of this year. Capacity Management is the tool that we're using to bring all of this together and to make sure that everything we're implementing has the right level of impact on operations, while ensuring that our team and our guests are always front of mind. Given the peaks in our trade and the support tasks that our teams are required to complete, Capacity Management is all about ensuring that when our guest needs us, we're there for them.
By its nature, it's also a great way for us to manage the complexities of the hotels business and ensure that our forward planning and organization is always on point. Finally, it's always an opportunity for us to look at improving our Voice of Team results. It's been really great to see the success since it, since it was implemented in July, and I'm confident we'll see further success in the future. The One Endeavour transformation is all about synergizing our systems and simplifying our manual processes for our teams. Our business has grown, but it's grown by mergers and acquisitions. Trust me, I've been involved in a lot of acquisitions over the years in New South Wales alone, and I've seen firsthand how some of these systems have been introduced into our operations. In other words, we have a few too many systems in play.
Don't get me wrong, the base systems that we have and the process of, the processes that we have in play are great, they're sturdy, but we're now in a position to where we're able to start simplifying them. A great example of this is our food safety digitization project, which has transformed a manual, handwritten food safety diary into a digital system. The manual food safety diary was used to record manual temperature checks, activity and cleaning logs, and recording deliveries twice daily. By digitizing this process, it means our managers and chefs have more time to spend with their guests as we're removing these manual processes. Annualized, our projection is a reduction of 15,000 hours across the fleet, which gives time back to our chefs to focus on the service they provide to the guests, on, whilst maintaining the highest levels of compliance in this area.
This is obviously a significant operational change, and the feedback that we have received to date shows that it's been very well received by our teams. Cost management in our pubs is largely driven by our optimization team, both at a group level and at a hotel level. It's great to see Endeavour GO and our hotels team working collaboratively together to be able to map out our path moving forward. As I mentioned before, Endeavour GO looks at the tasks that our venues complete on a daily basis and finds ways to make it easier for our teams and to drive cost improvement. One of the initiatives that has delivered promising results in FY 2023 is our benchmarking rostering exercise, which categorizes venues based on the size of their team, trading hours, and operational complexities.
From the findings of the benchmarking exercise, we've been able to provide venue support tools to manage their forecasting effectively. One of these tools is Roster to Trade, which was released to venues in September and has seen great success since its implementation. In a nutshell, Roster to Trade allows our teams to ensure we've got the right people in the right places at the right time in all of our pubs. Roster to Trade allows our operations managers and state managers greater visibility of sales and wages forecasting and a more consistent approach across the board. Another win from improving our rostering practices has been the reduction in our overtime occurrences, pleasingly saving over $ 1 million so far this year. Most importantly, we're enhancing our guest experience with the ability to accurately roster based on trade predictions that adapt quickly to guest demand.
This is tracked and monitored through our Voice of Customer program, which excitingly continues to grow positively, sitting at an all-time high for hotels at just under 8.7. A shout-out to our teams for the focus that they place on this. Reduction in labor hours has been a huge opportunity for our optimization team, and they've undertaken a complete review on our stocktake and cash management processes. Just through the review on stocktakes, we found the number of stock counts, frequency of stock counts, and recounts before were excessive, and by restructuring this process, we've achieved a labor reduction of about 1-2 hours per venue per week, depending on the stock holding and the size of the venue, obviously.
Now, 1-2 hours might seem small, but it actually equates to about $1 .5 million in wages, and ultimately, it's more time that our people get to spend with our guests. We've also reduced the cost associated with our non-value services within operations. This includes things such as trade waste and cash collection. As I mentioned before, it's all about finding efficiencies for our busy teams. So looking into the future, labor will continue to be our core focus. We'll be using productivity metrics and analytics to streamline and standardize processes across this business, with the intention to significantly reduce manual processes. Again, making it easier for our teams so they can spend more time with their guests.
To achieve this, we'll be taking a close look at our venue admin processes and procedures, as well as heightening our focus on our kitchens and optimizing food preparation periods around our service times. To put things into context, as Jared alluded to, we serve about 17 million meals a year. Anything that we can do to systemize our kitchen operations makes it better for our teams and makes it better for our guests. We've got many mid-sized opportunities, including activity-based rostering, which is the final stage of our rostering evolution. Again, putting it into context, our managers in our busy pubs can do up to 24,000 steps a shift. That's half a marathon. I should do more operational shifts. Activity-based rostering, we'll be able to map this out amongst other metrics to produce a roster that is conducive to the operational needs of a pub.
Eventually, this will all be automated. Think about it this way: a venue with 150 team members will eventually have an automated roster that has all their peak trading times clearly identified and scheduled appropriately. That's gold for a publican. Other mid-sized opportunities include a thorough review of our third-party security and our non-ticketed venue entertainment. To sum it all up, what Jared and I have gone through, our pubs are special, and our people are amazing.
The opportunities we've highlighted focus on driving revenue and improving margins and operational efficiencies in the business to make our pubs even more special and allow our teams to be even more amazing. Through the case studies that Jared and I took you through, we've demonstrated the effectiveness of these approaches. By focusing on guest satisfaction and optimizing internal operations, we will produce long-term gains over the next five years and beyond. Thank you, everybody. I'll hand over to Paul.
Thanks, Lukas and Jared. I think you'll all be glad to hear that after those two extended introductions, I'll save you the time because I've done it before. So I think in this presentation, I'll be sharing with you an understanding of the gaming player and the gaming market. I'll be sharing an overview of the evolving regulatory landscape, including some of the more recent announcements, as you've heard from state governments. And finally, I'll be sharing our deep commitment to responsible gaming and compliance, highlighting a number of our key initiatives. I'm going to start by asking a slightly revealing question, and throw it out there. Who plays pokies regularly? Put up your hand. I reckon we're at about 2%.
I don't think, and it doesn't surprise me, I don't think this crowd is representative of the Australian adult population. So one in three Australians play annually, play the pokies. And I'm guessing the reason why this crowd doesn't is it's a pretty numerical crowd, and 92 cents in the dollar return to player probably doesn't seem the most compelling odds in the world. I'm going to ask you another question then, and this one's going to even be more confronting, I think. Who has a little luxury vice? I'll, I'll continue this one. Raise your hands in a sec, but I'm going to ask you, where you've paid double or triple, quadruple, I don't even know what five times is. Quintri- quintriple? I don't even know if that's the word, but the category entry price. Okay?
Something like fine wine, spirits, branded clothing, accessories, jewelry, electronics. Mine's bikes, maybe a car. So put up your hand if you've got some little luxury vice you've paid triple the category price for. I think we've got 80% truth tellers here and 20% liars. But it's significantly more than the 2 or 3%. So if you think it from a pokie player's perspective, from suburban Australia, those purchases might even seem less compelling, 'cause when they play the pokies, they've actually got a shot at making that money back. So it might be worthwhile just spending a little time to understand the player and a rounder view of who they are and why they enjoy gaming. And I think that competitive part, you know, being able to win it back is part of the motivation.
They're often competitive, they're confident, and they enjoy a challenge. They see the pub as their escape from the everyday. They see gaming as recreation and part of the overall pub experience, alongside meals, sports, drinks, and live music. Most players view gaming as an entertaining part of their lives. It also has significant economic benefits, employing nearly 300,000 people across the pubs and clubs industry, and generating about $ 5 billion in state taxes. Of course, while gaming is social entertainment for the vast majority of players, we recognize that it can be harmful for a small minority. So that's why at ALH, we strive to provide responsible gaming in a safe and supportive environment, and at the same time, provide a superior entertainment experience.
It's an important distinction to say that we're not looking to find the right balance between the two goals, but to ensure we do the best to achieve both of them at the same time. I think you'd all understand this one, that the gaming market is large, and across multiple economic cycles and constantly evolving regulation, gaming expenditure growth has been relatively steady and resilient. State treasuries are forecasting continued growth in their budget models, and alongside this growth, they're focused on a range of new policies, trials, regulations to support players and enhance responsibility. This has been the case over the long term. With this background of expenditure, expenditure growth, there are fewer and fewer machines in the market, an outcome of state government policies. There are unlikely to be any net new pokies in the future.
These dynamics have increased the attractiveness of existing entitlements and grown their average value in the biggest states. Now, I think while we're here, it's probably worthwhile indulging a little bit of pokies one-on-one, one-on-one. Turnover, player returns, and how the proceeds of meted revenue are shared. Firstly, turnover is the term used to describe both the total of the original funds bet, so if somebody puts in $ 50, as well as the reinvested winnings. As they win, they may reinvest them. That's turnover. States regulate the minimum return of this turnover to player, which is at 85% or above, and on par or higher than most other forms of gaming.
But this is the minimum, and hotels naturally return to player a significantly higher number of around 90%-92%, and the reason is, is that's arrived at to optimize the player experience. From this meted revenue, 45%-65% is paid to the state in taxes, with the remaining, which is about 3%-5% of turnover, representing the hotel sales revenue. Hopefully, that makes sense. We can speed read this one. There is a lot on here, and no, it's not necessary to read everything, it's just the essence. You remember a few slides back, that we shared the steady expenditure growth over the past 20 years. This has happened in a background of ongoing regulatory change.
Almost every year, there's been a change, with perhaps the most impactful being around 2007 when the smoking bans happened. History's shown that ALH has worked closely with governments and regulators on every change and responded effectively, both in terms of immediate compliance, but also in maintaining the overall player experience. Over this time, ALH has also moved ahead of regulation with a number of initiatives as a commitment to responsible gaming, and also with the confidence that we can manage the commercial implications. I'll share some of these initiatives later. There's been a few recent announcements that I spoke about before and press coverage to propose regulatory changes, and as per the previous slide, this evolution isn't new.
Firstly, there's been some confusion between load limits, which are designed to slow the pace of cash feeding, and loss limits, a defined maximum loss over a period of time. The mainland states are focused on load limits, which are primarily targeted at anti-money laundering. Reduced trading hours, load limits, and loss limits are population-wide measures. These don't account for individual circumstances and are applied in a uniform way, unnecessarily limiting recreational play for some and still exposing others to risk of harm. Identified Play, facial recognition technology, and voluntary pre-commitment are more targeted and each provide the capability for ALH to understand and support individual players. Victoria and New South Wales have both proposed versions of Identified Play, which are being considered through consultation and/or trials.
We are working with both governments and are part of a working group in Victoria on consultation and have two pubs included in the New South Wales trial. We also have a separate digital wallet trial underway in New South Wales, as we do see an eventual consumer preference for digital payments, similar to transport and the Opal card. We're confident that we're well placed to implement any changes and continue to provide a superior playing experience. And following on from the prior slide, we consider and prioritize measures that maintain the player experience and are most effective at reducing either player harm and/or money laundering. Using evidence-based research, we advocate four key principles. First, collaboration with all key stakeholders, so that's governments, regulators, the community, and industry. Second, solutions that consider the experience of the player. This encourages adoption and therefore enhances responsibility.
Third is Identified Play, and this is probably the biggest for us. It allows an understanding of playing patterns and creates the opportunity for intervention and support. This is already available voluntarily through the Monty's card, and will be in the future in the Pub+ app. And then lastly, targeted solutions, which most effectively help those most at need and maintain a sustainable industry. And to maintain this sustainable industry, we've developed Player Protect as our Endeavour business commitment to responsible gaming. I won't go into every component, but I will highlight a few. And the first is that the ownership and accountability comes from the executive team down, and is a key pillar of both our group and our business strategies. We also focus on additional responsibility training for the team.
So we've had over 3,500 people completing responsible gaming training, which is over and above what's required, and 550+ completing advanced responsible gaming training as well. And we also have a strong compliance and assurance program, having built a sizable team with three lines of defense. And we have biannual audits from the Responsible Gambling Council of Canada, a world leader in responsibility. Importantly, Player Protect is not a static framework, and we'll evolve it as we learn. And finally, we have a number of initiatives underway, guided by Player Protect, that we believe will be good for our guests and help shape responsible gaming. The first is the Focal Alert Better system. We're the first Australian company to use this global leading capability that analyzes player patterns and allows our teams to check in and support players.
We've trained over 2,000 members, team members, in the use of this system. Next is voluntary pre-commitment, which allows players to set limits on how much time and/or money they spend on machines. We are the only operator to offer this on all of our mainland machines. Finally, self-exclusion is one of the most powerful tools available to players who are at risk of harm. Facial recognition technology supports self-exclusion by improving the ability to identify patrons on the excluded list. It's mandatory in South Australia, and based on the success that we've seen here, we're taking it further by advocating to governments and trialing it in both Queensland and New South Wales. I'm honestly proud to say, I think at ALH, we're making progress on the journey to creating both a superior playing experience and a safe and supportive environment.
I should have used your advice, Jared. I didn't press the green button. That brings us to the end of this section. Hopefully, I've been able to show you, firstly, the role of gaming as recreation and entertainment for a sizable portion of the Australian population. The steady growth of revenue alongside the evolution of regulation. ALH's commitment to responsible gaming, delivered through Player Protect, and our range of initiatives ahead of regulation, aimed at preventing individual harm and how we work with government, the industry, and regulators. Thanks, and, gentlemen, come up, and we'll throw to questions.
All right. All right, everybody, so I would, we've got a question now for the operational gaming and responsibility section we just had. I would encourage anybody who didn't get their question on these areas answered previously to re-ask it, and this is an opportunity to do exactly that. I'll just say, when Paul was in rehearsals and he asked how many people were going to put their hands up to play his pokies, and I said, "Well, put it this way, Paul, 50% of people here have never crossed the Harbour Bridge before, and the other 50% think the western suburbs start at Anzac Parade.
Thanks, Sean. Hi, David Errington. Look, I really enjoyed the presentation, Lukas and Jared, and I think, you know, it gives a bit of idea of as half of that 150. My question is, you look to be moving more to a state-based, more control centralized. That's the way I took away from it. Yes, it's not stating too much outside the spec that you're a. You've brought together, through acquisitions, a lot of different pubs being brought in, probably because of gaming. So there's a lot of, you know, dysfunctional, if you like, between the hotels, so you need to pull it all in together. And I get the advantages of pulling it together, where you get digitalization and you get operating systems. My question, though, is: what's the risk? You've got five segments here.
But you've got 350 pubs that are so different, that how are you going to be able to get those cost efficiencies out? By running a more centralized business model, but then you lose the individuality of the pub, you know, the individual managers of the business. How do you incentivize them to be more flexible, to be more energized? Because a pub is an energy, you know, you go there not to get a stale, corporatized offer. You go there to be excited, to be energized, part of the community. You know, where I live, you know, the Eltham Hotel is a dog, absolute dog, whereas the Warrandyte Hotel, which is privately owned, is pumping because it's privately owned. It's part of the community.
So how can you get the corporatized balance to get your cost efficiencies to drive the 75, but keep that individuality that excites the customers, that get the foot traffic in? I still quite can't get how you can get the best of both worlds.
Yeah. Maybe I can give you the helicopter version, then I'll hand over to Lukas to give you the more informed version. But I think that's the goal of segmentation. And the way that we're rolling out segmentation is gonna be very much venue-led. So the tools and capabilities that we'll be setting up are to support venue plans. So the venues will do. Sorry. The venues will be setting up venue-level business plans, which will be based on segmentation, to provide the insights and the understanding of peer cohorts. The support will come centrally, but those plans will be created and driven at an operational venue level.
Thanks, Paul, and I agree with that. And I'd also think we can't underestimate the value of our,
Yeah.
Sorry. We can't underestimate the value of our venue managers and our venue teams, and how they can individualize each pub to be able to make that community and cultural-centric pub that you, that you're alluding to. I think what we're talking about is the capability of group being able to provide the support and structure to allow our publicans to be individualized and be really specific in the communities.
It's the biggest debate we have, is how to keep that balance right.
How do you do that?
Well, that's what we're describing. The way that we do it is by creating the tools and a segmentation framework, which allows us to have a common set of systems to support their plans.
At the back here. Richard from CLSA. Can we talk about collaboration with government? You talk about that as one of the, your, your principles, and, well, obviously, obviously it seems like, well, it seems like an obvious one. But in the context of the recent Victorian government announcements, it looked like you were blindsided by that. I don't know, so, you know, correct me if you, if you disagree. So when, when you do talk about collaboration, how do you manage that, those sort of risks? How to what extent can you collaborate? It sounds like a nice thing to do, but that, the Victorian situation, it sounded like it didn't work. And then how are you thinking about that in the context of the Queensland election coming up in 2024?
Yeah, I think we absolutely do work really closely with government to understand what's happening. Victoria was a surprise, and I think it was a surprise for everybody. I think that was probably a rarer outcome than the normal outcome. But certainly, you know, over the last period of time, I know that Steve's met recently with the. I'll throw it to Steve in a sec. But with the Victorian government, we've met a number of times recently with the regulator, and we're now part of the working group, both in Victoria, and we're part of the digital working group in Queensland and a number of other forums as well.
And I think, you know, I think we'll continue to work closely, and I think some of the moves we've made by stepping ahead with things like Focal Alert Better system has allowed us to work with the become part of those working groups and demonstrate the trials in New South Wales. Allow us to work with the government as well on what's happening there. And I think the working group in Victoria is another good example of that, but I'll throw over to Steve around some of that.
Mic three. Yeah. Thank you. Just back to the Victorian example. As much as it was true that it was unexpected by us and the industry, what was the biggest surprise was the market's reaction to it, to be blunt. The substance of the announcement itself was in four parts, three of which we relatively immediately responded to by saying, "We either already have those things in place, or we will accelerate them." The fourth was the establishment of a working group to explore the possibility of mandatory pre-commitment, which is something that we're open to. But the market's reaction to that was what took us by the most surprise. So I think there's been some recent notes put out about a potential overreaction that took place.
I think it'd be fair to say that I would be aligned with that perspective. Because the substance of those announcements, while, you know, it was real, and they made announcements that impacted the way we operate our business, I don't think that they were at risk of destroying the sort of value that the market thought they were.
Can I just get one follow-up here as well? To the extent that you have visibility on your players and what they're spending, do you have a view on what percentage of your gaming revenue comes from problem gamblers?
One of the reasons why we advocate for identified players, that will help us do that. And without identified players, it's really difficult to answer that question.
That's something you expect to gain over what timeframe?
. Well, we already have it available on a voluntary basis through Monty's. But it is a voluntary basis, so, you know, that's part of, you know, the Victorian carded play trial would include identified play, and the New South Wales cashless would include identified play as well.
You've got to be conscious of anybody's capacity to define problem gambling in the first instance. So I think that's the first place to start. What I would point you to, though, is, as Paul has talked about, the not immaterial investment we've made in working with a third party that has designed algorithms that can show our team that an individual may be at risk of harmful patterns of play and therefore problem gambling. And we are enabling our team to intervene with those players and talk to them about the options they have to self-exclude and do that in the most effective manner.
You've got that now, Steve?
We do that today. Yeah, that's the Focal Alert Better system that Paul talked about. We're the first in Australia to activate that system. It was a not immaterial expense, but an appropriate one for us to take leadership on the topic of attempting to identify. And it's very difficult, as I say, but you can use patterns of play, or they can use patterns of play to help identify players. And then what takes place thereafter, and Lukas will be better placed to talk to this than me, is a very, I think, thoughtful and careful explanation to the player of their options, and in the event that somebody chooses to self-exclude, we help them to reach that self-exclusion step.
Now, it's one of the reasons why facial recognition technology is important, because we all change our mind about changing our habits from time to time. So I've decided I'm going to do this, and then I change my mind. And at the moment, it's our responsibility to identify you if you have self-excluded. It's very difficult with 12,000 people working in our pubs and different shifts and so on and so forth. So facial recognition technology, we think, is a great solution to enable better player outcomes for people that have excluded. So I don't know, do you want to add anything to that, Lukas? In terms of the experience that somebody has, if they choose to self-exclude.
Yeah, no, I think when you listen to the actual name of the system, Alert, Alert's the real important word. Alert, meaning our teams get notified should a person start showing patterns of play that could indicate to problem gambling. What that does is that our team then are notified. They go to that individual in a very discreet way, have a conversation with that individual to see if him or her are okay. From that conversation, Paul made reference to the over 500 people that have had advanced training in gaming. That's the Alert advanced training. From that conversation, our teams can then direct the individual, should they feel they need to do it, into self-exclusion schemes and stuff like that, that all the states have in various areas. So that's what Alert means, yeah.
Through the Focal system and just visual intervention, we had over 4,000 recorded intervention with guests in the last quarter. We think it's a lot higher than that because not everything was recorded, but a minimum of 4,000 interventions that were alerted either via the system or just visually.
Noted, though, that not all of those resulted in somebody self-excluding. It's all harm is a very individual thing, and we don't means-test our players or understand their personal circumstances other than to offer them the opportunity to step into the self-exclusion space.
So Bryan Raymond, JP Morgan. Just again, coming back to the, to the $ 75 million of operational benefits from an EBIT perspective. I wrote down food and bev was $ 15 million-$ 20 million in there. I just want to confirm that's $ 15 million-$ 20 million off the 75 is an opportunity within food and bev? Sounds like it is great.
Sorry, sorry, just to. That's not $ 15 million-$20 million opportunity in food and bev. That's just in getting it up to the average margin or to the standard margin.
Right.
There's growth opportunities, there's lifting further, there's all sorts of opportunities.
Okay.
Absolutely.
Maybe if I just ask it slightly differently. If of the 75, could you maybe think about where, what is the build up to that across food and bev, gaming, cost out with Endeavour GO? And then just what sort of, have you factored in for gaming regulation? Which is known. Obviously, there's stuff out there which we don't know yet in terms of how that plays out. But just a build up to the 75, at least roughly, if possible.
Look, I won't go into direct specifics. What I will say around the $ 75 million, it's spread fairly evenly across four of the initiatives, taking out the trade plan. And it's not that there's not value in the trade plan, but trade plan is there to help connect and create a better platform for how we deliver the others. So, but it is a fairly even spread across the other four initiatives. I think it's also really important to note that, you know, we've got a little bit more of a bank sitting there as well, but some opportunities will come to light the way we want them to, others won't, right?
Yeah. If I could just follow up quickly.
Yeah.
Just on one of those being the Pub + app.
Yep.
and how that plays with the personalization engine. I thought it was interesting when you said you can sort of prompt people with, when they've already got a booking, to buy a particular beer. And I'd imagine there'd be some supplier funding behind some of that, hopefully. But then, can you prompt, from an ESG perspective, can you prompt people which have not already entered the pub or indicated- Can you send someone a voucher for a beer or for gaming, who haven't already been in, gone to the pub and are already in the venue? Or is that an ESG concern? I'm just thinking about opportunities to drive visitation in a responsible way.
First of all, I could say from a gaming point of view, no, we wouldn't. That would be an absolute no. And then from a food or beverage point of view, you can, as long as it's done in a responsible way. If it's the way you do it, then we do it. And then a physical example is the James Squire example we gave around, you know, the $ 20 to us, you know, suggest somebody to come in. Supply it, fund them, come in, and effectively, you know, have a beer in the pub and use that to try the pub. But gaming would be a no, but I can hand over to you more on the F&B side.
Yeah, and I think that example I gave was very much when we were talking about the future state. You know, the most important thing for us at the moment is to get a hold of guest data to understand them better. I think we talked a little bit about segmentation, and how we're thinking about our pubs, and the architecture of our pubs. This is going to give us another level of our guest data, to be able to understand how we interact with them. I take your point around how do we drive footfall? I think when we talked about that James Squire example and our digital network across our entire ecosystem, that is where we can unlock great opportunity later on. Like, if we thought about what I spoke about, it's essentially driving footfall into pubs.
But if we fast forward two years, and we've got our pub network as well, that's a great asset for one of our guests in our pubs to be able to sit there and go, "You know what? I can go and buy my carton of James Squire at Christmas over in my Dan Murphy's," and we're closing that loop. You know, we're a great ecosystem, right? Everyone comes in, and is coming for a different occasion. A pub has thousands of occasions that people come for, and our retail brands have different occasions even in amongst them. Our job is to try and capture that network, and I think we've got a really great footprint to be able to do that.
G'day, it's Ross Curran from Macquarie. So I'm just trying to understand the gaming fleet, the CapEx requirements, and the opportunity there. So there's a bit of regulation change going on. There'll need to be some investment in those machines to bring them up to standard. You know, if we get a standard across Australia on facial recognition or whatever it is. Can you help us understand how much CapEx is required to bring the fleet up to where you think the regulation's going to? And then once you've put new machines in, can you help us understand the performance of a new machine versus the average machine on the fleet? So are we going to get a better payoff through the machines to help pay for the CapEx?
I can probably start by just. We did a huge amount of work through COVID. That gave us the opportunity from a gaming room perspective to reset our rooms, and we prioritized because of COVID, spacing, et cetera. We invested a chunk of our CapEx over that period of time, resetting rooms. So our gaming rooms from a physical room perspective and CapEx are in actually a pretty good space, and I think you'll see that in Sean's presentation. And we also recently have done an acceleration in life to get it to where we think is about right, which is around that 6.5-7 years, age of machine.
In terms of your question around the specific regulatory changes, we don't know yet, because we don't know what the changes are. We do know that we're probably best placed because of our capability and our supplier relationships, and the scale of the relationships, to be able to do that. But we're not sure, based on timing, whether it will just happen as part of the normal cycle, or whether it will be something we'll have to do, you know, ahead of a cycle. Because if it's done on our normal game replacement or machine replacement cycle, there probably won't be additional CapEx. If it gets accelerated ahead, there might be an element, but we, we're not at the stage where we know how that will be shared with ourselves and the suppliers.
Sorry, just because I'm not a gamer. Like, a 6- or 7-year-old game sounds pretty old. If I gave my kid a 7-year-old Mario Brothers game, he wouldn't be particularly happy. Why is it different for poker machines? Like, why isn't the latest machine drives more traffic than a 7-year-old game?
No, sorry, I'll probably. That was machines I was referring to there, rather than games. And then within the games, it's like a Nintendo. You can change games within it, and roll them over, but,
Can you just restate that point, just to be clear about how it works?
Yeah, so
Try to turn it on.
Yeah. So a machine is obviously the physical machine, right? That obviously needs to be upgraded, so capability can stay up to speed. But for example, the analytics work that I was talking about is how we're optimizing the machine. So think of it as an Xbox, right? Not the greatest analogy, but, you know, you brought up that, and it's the games that we're changing within that Xbox. Every now and again, you've got to get a new Xbox, right? Because it's outdated, graphics, sound, all the experience things that I talked to you about before. But it doesn't mean that you can't get the latest game within that machine with the same capability.
We're continuing, continually looking at and optimizing those games and using, now using advanced analytics. But the CapEx that I referred to was new machines.
G'day, Ben here from Jarden. Just around cashless gaming, what do you expect the impact, based on some of the trials and what you've seen offshore? Because there's massive ranges around what the impact is, and how does that impact your desirability to invest behind the machines? I think you've got the average age down to 6.6 years now. With cashless gaming coming in, obviously, there are trials at the moment, but it looks like it's more than likely. Is it a 10% hit? Do you think it's a 30% hit? How does it impact your decision to invest behind it?
It's again a really difficult question to answer. I think what you can say, if you say, you know, go back to basic principle, you say it's an industry that employs a lot of people, 300,000 people. There's a lot of small businesses involved in it. History demonstrates that governments have found a way to increase regulatory increased responsibility and do it better, but do it in a way that the gaming player experience stays. And I think we'll see this, in my personal opinion, we'll see the same in cashless. So the way cashless is being trialed in New South Wales as being proposed is a hybrid model.
You'll effectively see the Identified Play, which enables a digital and also a cash component to it. It's being called cashless, but it's hybrid between those two things. I think the more that we can be on working groups and we can trial, which both governments are doing and allowing, then the more that player experience will be enhanced, but the harm minimization will also be improved, and we'll see the least impact in that way.
Thanks. I might just ask one more, just following up from another question around data. So Pub+ sounds great, but one, how are you going to get people to sign up to it? And two, with the name, are you thinking too small? Because you're going to have people who might not have an affinity with a pub, might want to go to a bistro or whatever. How could you then tie that and have the umbrella or halo effect with Dan's and BWS? What if you want to partner with a ticketing group to become an entertainment app? It just feels like you're pigeonholing yourself.
I know it's just a name, but you guys have got massive opportunity, in theory, probably the best in the entertainment space in Australia, given your scale, and it feels like you're limiting your market from the get-go with the name.
Yeah. Yeah, thanks. Yeah, yeah, it is Pub +, right? And our entertainment is in our pubs. Yeah, I think I don't. Let me have a think for a second. I don't think we're narrowing our focus on what that app could be. And it is just the app, right? But it is a pub in the palm of your hands, and it can facilitate a lot of different things. So what was the first question, sorry? Sorry.
Sorry.
I just got caught up on the brand. I'm like, "Oh, I never really thought about it like that." So I had to think about it.
It's how b ecause there's so many loyalty programs, right? Like, you look at the-
It's value. Value, sorry.
Yeah, value.
The first question was-
How do you get members on there?
Yeah.
Because you want to have 5-10 million, sort of seems to be the pay to play with a loyalty program in Australia. Obviously, My Dan's is massive.
Yep.
But how are you going to get them on there? And if you get people willing to sign it, you've got me and you and your pubs, all this sort of stuff that people are already using these sorts of applications.
Yeah, yeah. So, well, starting with me&u, I think one of the things I spoke about was the fact that we want to make it a more seamless digital experience for our guests. So if we think about me&you, if we think about our fork, we think about the way that we do order a table or book a table, there's multiple different touch points for a guest. So this helps facilitate that over time, over time. But most importantly, this is going to be the place that our guests get the best value. I spoke about the member-only offers. Currently, with our beverages promotional program, it's one to all. This will allow us initially to go to one to a member, then one to a segment, and then over time, one to one.
So there's the value there, just straight up from the members' offers. But equally, there's rewards for spend, right? So we have a points-based program fit within it. And then we have an engagement model that once they download the app, we feel that they'll have a lot of other great benefits, why they want to keep engaging with the app.
I think just on Pub+ , too, on the name, and why did we center it around a pub? It's because that's our core proposition and our differentiator. That's what we can really offer and compete against. Offer, you know, quite purely the pub offer and the range of offers, whether it be accommodation, food, beverage, gaming, entertainment that's within a pub, and we think there's a real opportunity to do that. You know, versus competing against Ticketek or someone directly as the immediate opportunity.
Yeah, I think our GM of marketing is really-
Sorry.
Our GM of marketing is really happy that I'm never going to take his job with my answer with Pub+ .
Hi, it's Lisa from Goldman. So we talked a little bit about segmentation, and there was a slide on 60, page 62, that we were, you know, largely square in the middle with that big, the big ball, the big cluster. If we fast-forward 3-5 years, how do we see it, in terms of the spread or the segmentation in the quadrants? And then the follow-up on that is a little bit to Ben's question. Personalization becomes increasingly important, so what is the synergy or data sharing that we're able to leverage with the Dans, and the Everyday Rewards on BWS, as analytics? And then on the front end, how can we cross-sell on those two apps, potentially?
Okay. Maybe I answer the first half, and you answer the second half. You happy to do that?
Uh, sure.
So in terms of how do we perceive the bulk of the. Or how the segmentation and where we'll be in 3-5 years' time versus where we are now? I think, and you would have seen through the presentation, we have an enormous opportunity in the space that we're at, first of all, for the next 3-5 years, to extract value by all the initiatives that were spoken about. So I'd say for that period of time, in doing that, we. I think, have the opportunity to build out capabilities, especially when we move to inner city, for example. We've created a destination. We've created what we call a precinct role, leadership role, which looks after our top 20 hotels.
That will start to build us a capability of really building and focusing a transferable toolkit for those premium venues. Our head of beverages has come from one of the leading premium hotel groups in Sydney. You can guess where. And our executive chef has come from the leading premium group in Queensland in terms of restaurants. And so we're building out that capability so that as we go after opportunities in the existing portfolio, we see that within 3-4 years, we'll have capabilities are much more transferable to other parts, which allow us to really build out those parts of the segmentation as well.
Just so to clarify Does that mean the segmentation, whether on 32 or that, you know, in the middle or the 63 segmentation on inner city destination, none of the segmentation changes, it just lifts.
Correct.
Oh, okay. So none of the segmentation changes?
The segmentation is based on the venues themselves and the way that guests, I suppose, experience the venues. Does that make sense?
Yeah, so it's optimization within the segment itself.
That's, that's exactly right.
Got it.
So, so we've got a larger chunk, as you would've said, seen the numbers. We've got a larger chunk in the middle segment.
Yeah.
We see over time, as we build our capabilities, improve our capabilities, that we'll be able to step into other segments as well.
Okay, so we're not trying to move more hotels into the F&B-led premium quadrant?
We, we, we,
Not really.
We see opportunities, as per Kate's slide, to get a good return across all of those segments.
Okay.
As we build out our capabilities.
Okay. Got it.
Did you want to take the digital one?
Well, on the question on the apps and the interconnection between programs. Yeah. Yeah, sorry, I don't know whether this is okay? Thanks. It's very early days, so we're just building Pub +, and, you know, Jared gave you an example of a bounce back offer that happens between retail and hotels at the moment. The first one we've done with James Squire. So I suppose you could see a world where there are more connections between customer experiences, but it's important to recognize that it is a different customer experience, whether you're in BWS or Dans or a pub. And the Pub+ customer experience needs to be the Forest Hotel. So, and most patrons of hotels have their local, have their regular.
So, it wouldn't be normal for many people to even understand a connection between this pub and our next pub down the road. So there's even those opportunities when you're traveling, for us to, you know, let you know that you can get your Pub+ benefit in the pub that you're in here. So one particular point I want to make is that Everyday Rewards is not our program. We're the beneficiaries of Everyday Rewards inside BWS. It's the Woolworths program, so that's the limit of that one. And it wouldn't be appropriate for Everyday Rewards necessarily to be associated with Pub+ , because we don't speak for them. So maybe one day there's a food offer or something like that, but that would be a conversation for down the track.
Great. Shaun Cousins, UBS. Just curious around how you're thinking about Tasmania, in that while there's a bunch of trials going on on the mainland, there's actually change that's mandated to occur at back end of next year. Are you forecasting your gaming, conscious you only have a few pubs there, but are you forecasting your gaming revenue to fall, rise, or be in line? And noting that the state government seems to have gaming revenue forecast to grow between now and 2027. So I'm just curious around where we've got real, live regulatory change, what are you thinking is going to happen to your gaming?
So with Tasmania, there has been another recent change in Tasmania, which is probably somewhere some of the forecasts have changed, in that they've changed the structure, in that they had a middle party, which was part of the gaming landscape there. And that has recently changed, which is actually for both the government and operators, you know, meant a different sharing of the gaming revenue in Tasmania. I think moving forward, you know, I don't think because there hasn't been, you know, the confirmed system or the confirmed date. So I haven't seen the forecast for Tasmania change at this stage.
Okay. And then just curious around Pub+ , what did you get right, and maybe what could you have done better with Monty's? 'Cause that seems to possibly not have done all the things you could do to sort of be an engagement point. Or have you been happy, totally happy with Monty's? And then moreover, how do we then get confidence that Pub+ will execute well?
I'll have a crack at answering this, but I'm gonna answer it by actually saying, I've been in the role 12 months, right? And we've been working on Pub + for a little over 12 months. So our focus is very much on getting that app right. And so Monty's, it's not that we've stepped away from it for our guests, but it hasn't been a core focus. So what I can talk to you about is the team that's gotten behind Pub + to make it an interactive environment that covers all of our drivers, and with a future state to really help us with our Nightcap business and several other opportunities across the business. I'm not sure of the approach that was taken back then, but this is very much a holistic pub-type program that we're trying to deliver and drive.
Yeah. So the simplest way to describe it is that, you know, Monty's was largely a points-based reward system. Whereas I think Pub+ has been designed as an experience enabler across all the different drivers.
James, voluntary group.
Oh, did give us a number of gaming responsibility tools that will also be in Pub + as it rolls out as well. Which, you know, if you refer to the question before around the cost of future compliance as well, a lot of that is done within the app as it stands.
Hi, Paul. It's Johannes here from Morningstar. I was trying to connect the two CAGR, the growth rates on that slide 87, where we look at the gaming market. And the forecast that's implied by the budgets is the CAGR is greater than what it has been in the past. So firstly, like, has that outlook, that future CAGR changed since the proposed regulatory changes in Victoria? And secondly, is that higher growth rate perhaps connected to any tax increases, or is that just driven by underlying EGM spend? Is there just high inflation there?
Yeah, I can only give you a simple answer and just say that we've just taken what's in the government treasury forecasts and reflected it with, you know, we haven't tried to understand why or how, but as I understand it, it's, you know, it's in line with the trajectory that they previously had as well.
Yeah. Okay, that's interesting because, yeah, I'm just surprised by the fact that they're implementing regulatory changes but don't expect their tax revenue to decline, rather accelerate.
Yeah.
Do you have any explanation for that?
Well, I think if you look at history, that's what they've been able to achieve in the past. They've been able to, you know, change the regulatory environment, improve, you know, the effectiveness of harm minimization and been able to achieve a low, steady level of growth continually. Yep.
Thanks.
Hi, Craig from MST. Just, maybe a pretty simple question, but $ 428 million of EBIT for hotels in FY 2023, $ 75 million of cost savings. Am I just adding the $ 75 million to EBIT over the next five years? I can ask the same question in the renewal section, but the other 75, but is that how we should look at it?
Yes. In, in effect, we see at the moment, you'd normally expect to see a level of, let's say, market-driven growth to EBIT over the next five years. But with the balance of the way it's standing in terms of cost inflation, we're in a high cost inflation. And obviously, right at the moment, we've got disposable income being squeezed. What we see is a flatter normal trajectory in terms of base EBIT. So, these opportunities are largely effectively above that 430, because between, you know, the revenue of market growth, cost inflation, and natural fleet decay, all being equal, we'd see, you know, a reasonably flat EBIT outcome over the next period of time, is our forecast.
Maybe it's for Steve and Kate, but so will this. How will this be disclosed in terms of progress? How will we understand where the growth has come from in terms of earnings and these initiatives?
Well, I think you should Sorry. Sorry. Expect us to continue to update the market through the basis of the scorecard. So we'll, now we've put this out there, we'll continually talk to our progress against it. It is elements of the scorecard reflect exactly the aspiration that the teams talk to, so that's how we'll, we'll report on. Won't necessarily be a straight line, but we'll keep everybody up to date.
Sorry, can I just take one more and follow on Craig's question? I think, Steve, particularly in your supermarket days, you never want to bank everything you take out. You want to put some back to the customer. How are you thinking about that dynamic in terms of still trying to drive value and not just bank all your savings and pump your margin up?
Yeah, well, I think Jared, Jared's best placed to answer that, and he, he did touch on it before when he talked about the initiative that he has instituted to gather data on competitive pricing in hotels, in, in each of the catchments around our hotels, so as to maintain the gap that we have today. But there are opportunities to expand it. There's also opportunities to be more focused in the investments you make at a one-to-one level through your Pub + platform, which will drive efficiency. But how much cheaper than everyone else do you plan to be, Jared?
About the same as where we are now. No. Look, it's a good question, and I did touch it on, on it earlier on, because, you know, we spoke a little bit around value and the way that we're measuring value. And about 12 months ago, we started a program of work around how we pressure test against every pub's local competitor and make sure that we're pressure testing everything that we're doing and keeping that value going. A lot of what we talked about is about how we get better for our guests, right? How we get offers more to a segmented level and a more targeted level for what that guest is looking for, and that unlocks the value by just not having a dump out of promotions across the market.
But also, when we think about our range, value is many different things to many different people. We don't have a program of work here, where we're just looking to put prices up across all of our pubs and go, "Happy days, away we go." What we're trying to show is that we've actually got a really smart way to start to handle our back end, and it probably goes a little bit to what David was asking. I think David was asking earlier on. We're not looking to take away what our venue managers have done well for many, many, many years. What we're saying is, we used to do it in a way that kind of was a little bit from everywhere, and we're trying to get alignment through our business. You only have to think about our tap bank.
If you look at our tap bank, you know, we're not. Our venue managers don't necessarily choose our core range and haven't done for a number of years. But by being smarter in the back end, we don't have to have a whole bunch of mainstream beers on our tap bank. We're able to work with our suppliers and say, "Actually, if we use analytics, if we get smarter range, we can actually have the right mix of products for our guests at that time." And then when a guest is coming in, and they've got their happy hour, they know the product is there for them, that they need. So it's about how we're getting smarter in the background, not taking away from our venues. And it's not just about jacking up prices, it's about increasing our quality.
I think it's worthwhile to reflect on what Jared spoke through about around menus as an example, where 50% of our sales are in key value items. And the opportunity there is to increase the quality, but by standardizing, decrease the cost and make a huge cost saving. But the rest of the menu becomes local opportunities for the chef, and that premiumizes, and you make a higher margin on that. So you get this combination of great transferable value or visible value, but premium opportunity because it's localized, which is value from a, I suppose, a premiumization perspective as well.
Part of sorry, last thing I'll say. Part of our segmentation is to get our pubs all aligned and me thinking about them in their segment. But part of getting them all aligned is then being able to separate them. So if we've got a bunch of pubs all in a similar area, it doesn't really make a lot of sense to have the same offer in every single pub, because we're not giving a different occasion for our guests to come to different pubs. So they might sit in the same segment, but we actually want to use a toolkit that Paul mentioned earlier in the background to actually make sure we've got varying offers to give our guests different occasions and different offers that they're looking for.
All right. So no more questions in the room? No. All right. So we're going to go straight into the next presentation, which is network opportunities. Kate, Sean, and Matt will be on stage, and then we'll have one more Q&A with everybody on who's presented today on stage after that. Okay.
All right, am I on? Yes. Oh, forgetting afternoon tea. Bad luck. All right, so I'm going to introduce this section, and then I'm going to hand to Sean and Matt, who have the far richer and deeper experience on the topics we're going to cover. But as we've referenced throughout the day, in addition to operational optimization, we have multiple property levers to drive portfolio performance. These include acquisitions and divestments, brownfield renewals, and redevelopments. Through this section, we'll cover acquisition and renewal opportunities and returns, and we'll share where we're up to with larger scale redevelopments, particularly of our freehold portfolio. And as I said earlier, we have a long runway of attractive property capital deployment opportunities across the hotels portfolio. And we'll start with the topic of overall portfolio optimization. So just to repeat a few key things about the hotels market.
The market in Australia is large, and it is very highly fragmented, with the top five group holdings representing less than 20% of the market. As I referenced earlier, hotels are very readily tradable businesses, either in combination with the associated freehold property or on a leasehold basis. For both landlords and operators, hotels provide attractive, stable returns over long lease lives, and hotels are relatively resilient to economic cycles, sitting as they do at the heart of Australia's cultural and social occasions. We will continue to buy hotels that have the opportunity to drive superior returns, leveraging our group assets and capabilities, and equally, we will seek to divest those that don't. Our preference will continue to be to acquire long lease terms that provide stability and a long timeframe over which to generate returns from capital investments.
However, on occasion, we may make freehold purchases, too, where there is development upside or other strategic reason to do so. Here we outline our set of criteria for determining if a hotel is a good fit for our portfolio. As you'd expect, this is aligned to the ways in which we believe we can add value to the business, including via multiple revenue drivers, such as extending into retail and accommodation and through operational optimization to deliver target returns. Acquisitions typically take up to 24 months from purchase to deliver the full return capacity. This is due to the time required to execute any post-acquisition investment, such as conversion of the attached retail into a BWS or a refresh of the gaming fleet, and to embed technology and operational changes, including bar and food menu changes, implementation of our operational safety and compliance standards, and so on.
It takes time to understand the guest profile and trading dynamics of a venue and decide what changes should be made that minimize disruption while maximizing guest experience and trading performance. Acquisitions often have further upside from investments such as refurbishing accommodation rooms and converting to our Nightcap brand. This is considered as part of the acquisition case and is typically upside to the initial 15% ROE hurdle, as these can take longer to execute. You can see on this slide, this example outlined for the Rainbow Beach Hotel. We acquired this hotel in February 2023. Since then, we've converted the associated retail liquor stores and improved hotel trading margins, which will deliver the target return. We have further upside to grow the returns by investing in refurbishment of spare space to turn it into accommodation rooms and by expanding the gaming fleet.
The returns on capital or investment in this hotel are supported by what is effectively a lifetime lease, with an initial term of 15 years, plus 5, 10-year options that are exercisable at our discretion. Here we share the trajectory of returns from 11 leasehold venues and associated retail that we've acquired since we demerged from Woolworths. As you can see, all but one of these is on track to deliver the 15% target return on investment based on year 2 EBIT, noting that 6 of the 11 have traded for less than 12 months under Endeavour ownership, and so have not yet had time to demonstrate a full annualized run rate of return following the actions we've taken to uplift performance post-acquisition.
You'll see we regard one venue as underperforming, which in this case is actually due to circumstances impacting the economy of the location in which it sits, which we are actively monitoring. Across the sum of these investments, we are delivering 14% ROE currently, remembering, as I said earlier, that this is an EBIT return measure, and on a cash EBITDA basis, the returns are approximately 2% higher. I'm now going to welcome Sean up to cover renewals.
Okay. Can everyone hear me okay? All right. Thanks, Kate, and good afternoon, everybody. I'm Sean Dunleavy, and I'm the head of format operations. I joined the company just over a year ago, and I lead the renewals program for ALH. Impression of the company, it's my first time presenting to this group, so I apologize if I refer to my notes, but our CEO is sat in the front row, so I need to make sure I cover everything. Being English, it'll be no surprise to hear I grew up in and around pubs. One thing that those of you who've been to England will know, us English, we love nothing more than a good pub experience. In fact, my grandfather had me working in the family pub from a young age.
Luckily for him, back then, he didn't have to worry about things like responsible service of alcohol training, award rates, any of the stuff, actually, that Lukas has to worry about. Paying us GBP 2 an hour would no doubt have helped him with. Well, he didn't, he didn't use the word EBIT, but needless to say, he must have done well because at this time of year, Christmas, the Christmas tree was always fully stocked. As many do, I went on then to work in pubs during my university days before moving to Australia in 2004. First stop upon arrival in Australia? Yep, a mate's pub for some casual work whilst looking for my next career role.
Tasked back then with everything from changing kegs to running food, working behind the bar and collecting glasses. For the last 20 years in Australia, I've been completing corporate rollouts for a number of large organizations, including delivering the renewals program for Spirit Hotels, now known as AVC. For the last 14 years, I've been combining work with my passion for pubs, completing hundreds of hospitality projects. It's been a long day. It sounds as though afternoon tea might have been canceled. I'm aware that it's now just Matt and myself that stand between you guys and a nice glass of Pinnacle's. I think we've got Riddoch's Cab Sav, the award-winning Riddoch's Cab Sav today. So with that in mind, I'll keep my presentation to the point, and you'll, of course, get the opportunity to ask questions at the end.
Walking through The Forest at lunchtime, it reminded me the importance, the important part renewals play in improving guest experience. The Forest is a multifaceted pub, has all the key elements we look for in a licensed venue. Its renewal was successful in creating distinct zones for different occasions. We have the sports bar, where Lukas, Jared, and myself will be having a beer after work. We have the bistro, perfect for the midweek date night, and the beer garden, where I'm meeting friends and family at the weekend for a Sunday afternoon grazing session whilst the kids are having fun in the play area. It also has the function center, where we're sat here today, ideal for business events as well as milestone occasions. To round things off, Dan Murphy's, just next door to stock up on drink for at home.
Just like, Paul, the green button failed me, so, there's a little flash up, and I think everyone's been through The Forest today at some point, but a couple of shots there from the, before the renewal. Okay, so if improving guest experience is one reason we complete renewals, let's talk through a few more. We have pubs that were designed decades ago, built decades ago, in a different time, for a different style of operation. Pubs designed for the six o'clock swill that could handle six deep at the bar. Whereas in today's world, our guests are behaving differently. Their expectations of what they want from their pub experience have definitely changed. We also complete projects addressing changes in local demographics and competitive set. And of course, we complete projects that deliver strong capital returns and growth.
You saw the before photos of The Forest prior to its renewal, and the pub clearly hadn't been touched in a long time. When we look at the age of our portfolio, we don't only take a whole of venue view, but we also drill into the numbers of years since last touch by driver, be that food, bars, accommodation, gaming. We roll out projects strategically at the right level to rightsize the investment in our hotels. Age of fleet is one of the key data points we use in reviewing the renewals program at portfolio level. What's clear from the data is that we have a large pipeline of projects to select from for the next five years, and with that comes clear opportunity for growth. As you'd expect, we'll continue to assess the program as we progress. We have a mixture of small, medium, and large pubs.
Some are simple operations, one or two drivers, whereas others are larger, multifaceted, multi-driver venues. Our projects have a mix of complexity and size, and we split them into three categories. We have smaller refurbs, where we touch one or two of the pub's drivers, spending lower amounts of capital and quicker speed to market. These projects are less complex, quicker to scope, document, build, and launch. Repositioning projects are exactly that. We invest at a higher level to truly reposition the pub within the market it sits, targeting new and a wider group of customers. These projects take longer, often triggering development and liquor licensing approvals. They come with a higher level of investment, bringing to life the asset's potential for the next stage of its life cycle. Accommodation projects really are a great opportunity for us.
They're easier to roll out, given we have a clear brand standard. They are lower cost and quick to execute. Learning from the past, previous projects demonstrate that taking unbranded rooms, upgrading them while applying the nightcap brand, results in both increased occupancy and room rate. We also have the benefit of being able to reopen previously unused rooms to further increase returns. A little bit more on that later, though. We'll deliver a balanced program that consists of a mixture of all three of these types of projects. Now, I'll take you through a snapshot of a few recent examples for each of those categories, the investment and the returns. I'm going to stick to the numbers. We'll show you more of the end results of these projects later. Redbank Plains is an example of a refurb project addressing two drivers of the hotel.
This is a suburban pub in Brisbane's west, and the project unlocks spatial planning opportunities by relocating the sports bar and the gaming room. We invested $ 1.6 million, launching the project in May 2023. The project is performing above hurdle rate and showing 19.5% return on investment. Sunnybank Hotel is a recent example of a repositioning project. We invested $ 3.1 million, which included all drivers of the pub. The project was launched in July 2021. It's trading well, delivering a return on investment of 33.2% and receiving positive feedback from our guests. Hotel Victor in South Australia had its renewal completed in November 2022. We took the opportunity to bring the rooms up to the Nightcap standards, investing $ 900,000 across 32 rooms.
The project's resulted in improved guest reviews, higher occupancy and room rates, and is delivering a return on investment of 26.9%. Now, a little bit more detail on that broader accommodation opportunity. Kate touched on Nightcap, and we operate 1,700+ Nightcap-branded rooms. We're the fifth largest accommodation operator in the country. We also operate 873 currently unbranded rooms, which are yet to benefit from all the advantages of the Nightcap brand. We have more than 350 rooms that are currently not trading, and in addition to this, we have a pipeline of greenfield sites identified with demand for new accommodation. Okay, a few minutes break from hearing my voice. Well, about 3.5 minutes to be exact, while we share with you a short video highlighting some of our past, and better still, future projects.
A little more detail around how we approach and bring these projects to life. Okay. Looking at some of the future projects in the video, you can see our recipe for renewals is starting to take shape. Recipe for renewals, not my tagline, but pretty easy to spot marketing's fingerprints showing up in the renewals program. We start by understanding where our pub sits within its local market, their competitive set, as well as who our current and potential guests are. With a guest-focused approach, we tap into data to understand our pub's local demographic, what it looks like in terms of age, affluence, ethnicity, people's life stage, be that couples, singles, without kids, empty nesters, young families. We review our pub's individual brands, what they represent, and how they are marketed. We understand our competitive set.
We look at the format of the hotel, the spatial planning, the look and feel, the service models. We seek operational efficiencies in bar, kitchen, back-of-house design. We put a plan in place around our food offer, wine list, beer tap, product mix, cocktails range, point-of-sale messaging, and the service levels we deliver, all with the aim of providing a clear and targeted offer for our guests. To call out a couple of examples, at the Elsternwick Hote l, we thought about spatial planning and operational efficiencies. By moving the sports bar, we unlocked the opportunity to reduce the distance our team have to travel to deliver meals, as well as being able to create a central service core of bars, reducing the number of labor points around the hotel. Our team can now.
Well, our team will be able to spend less time counting steps and more time with guests. Another example is how we're repurposing an oversized loading dock to make way for a new outdoor beer garden, creating a new sales driver for the pub and dialing up the appeal of the Wick. At the Manly Hotel, we've worked with marketing from the project inception. Now, I'm not going to take you through the whole strategy, but having considered the local competitive set of bars and restaurants, the brand voice is steered towards positioning us as being the local pub, anchoring the project around being humble, comfortable, a second home for locals. So we're ramping up, but we're going to take a disciplined approach. We've selected a team that forms part of Group capability.
It includes myself as head of format and a team of experienced client-side hospitality project managers. We'll be working in ways that are both collaborative and repeatable. We'll continue our process of post-implementation review, ensuring that we continue to monitor and learn from previous projects once they go live. Simplified, it's about joining our renewals program up with operations, food, commercial, our marketing teams, with the intent of creating timeless appeal and a welcoming atmosphere. We've talked today about a few topics: why we do projects, the opportunities we have, the types of projects we complete, our past track record of returns, our strategy moving forward, and how we plan to execute it. Ask anyone in our business, no two pubs are the same.
Literally, literally hundreds of pubs around the country, each with their own unique history, identity, brand, design, look and feel, demographics, financials, competitors, and guests. Each pub has its own story. But what is the same? What is the same is the way we read and understand each one of those stories, how we apply our business strategy and structured formula to fully understand the opportunity and what it is for the pub to be part of the fabric of its community, writing the next chapter of each pub's story and creating pub experiences locals love. Now, finally, I'm going to hand you over to Matt. I'll be here for the Q&A, and I'll be more than happy to answer any other questions you might have over that glass of Riddoch Cab Sav we mentioned earlier, and that we're now one step closer to. Thank you.
Good afternoon, everyone. Can you hear me all right? Yes, I am the last thing standing between you and that cab save, so we'll get straight into it. Thanks, Sean. Good afternoon, everyone. My name's Matt Toohey. I'm the Director of Property at Endeavour. My team is responsible for the rollout of new stores, property management, facilities management, property development across all the business units, including retail, hotels, and Pinnacle. I started at Endeavour in July this year. I've been in commercial property in the industry now for 30 years, and prior to Endeavour, I was the Director of Property at Coca-Cola Europacific Partners for 6 years and was responsible for property development and management across 6 countries. Prior to Coca-Cola, I was at Wesfarmers for 13 years and was General Manager of Property at Bunnings for over a decade.
I also have had M&A responsibilities in previous roles. Our hotel portfolio is made up of both owned and leased sites. We have 54 owned sites and 300 leased sites across Australia, and as you can see from the numbers on the screen, we have a strong presence on the East Coast, and in particular, Queensland, where we have 137 operating hotels. As Kate mentioned, these hotels are of high value and very tradable. The net book value of our hotel freehold portfolio is $ 535 million. Of those 54 sites, we've identified 10 that we believe are underutilized and have high development potential.
In addition to the review we've undertaken on our own sites, we've also undertaken a similar review on our leased sites, and to that end, we've engaged with the senior leadership team at both Charter Hall and the Laundy family, who are our two largest landlords, and we believe there are many more development opportunities we can explore together as landlord and tenant. As part of our review to identify those high-potential sites, we've had regards to a number of factors. Firstly, we've considered the town planning controls, the underlying land zoning, floor space ratios, height controls, setbacks, et cetera. We've also had regard to the existing improvements of the site, their age, condition, written-down value, and any operational impact the development may have. We will consider CapEx required in each case, and this can be done by engaging early with quantity surveyors and/or contract builders.
We will test the development feasibilities by engaging with external valuers where needed. As part of the review of the development opportunities, we've obtained detailed town planning advice from external planners to help us understand what the planning laws allow for on each site. The list on your screen highlights the 10 sites we've identified as high potentials, and we believe there are many more to come in the medium category range as well, which we're going to review next year. The last column you can see on the screen provides commentary around the potential in each case. I won't go through all 10 today, but we believe the development of these sites will take place over a five- to 10-year horizon. Some are major and complex in nature, and others are more straightforward, and I'm going to highlight a few for you now.
This is our Chelsea Heights site in Melbourne, which we own. We currently have a trading hotel and a Dan Murphy's and a vacant ex-hardware store on the site. When we looked at what other uses we could co-locate with, we conducted some research into the planning controls and determined that a supermarket would be a good complementary use. Following that review, we lodged an application with the local council, and we now have development approval for a full-line supermarket with seven specialty stores. We've also now received an offer to acquire that parcel of land from a national supermarket chain and are in the process of subdividing that part of the site and intend to sell that land and realize a significant development profit.
By pursuing the development approval for the supermarket, we've not only increased the land value, but we've also, we'll also get the benefit from the additional foot traffic and the cross-shopping that the supermarket will produce for both our hotel and our Dan Murphy's. This is our Camberwell site, located in the affluent area of Melbourne's eastern suburbs. The site is 5,200 square meters and is in the heart of the main retail precinct of Camberwell and directly adjacent to the Camberwell Plaza Shopping Center. The site is zoned activity center and allows mixed use, retail, office, and residential. Any redevelopment of the site can take advantage of a 12-story height control. We currently occupy the site with a single-level Dan Murphy store, underutilized, and the store has been open for 20 years and is in need of refurbishment.
While this site is not an operating hotel site, we believe there may be potential for us to have a new Dan Murphy's and a new pub in any redevelopment. We've received town planning advice and also had a pre-VA meeting with the local council, who were very supportive of our concept in principle, which you're about to see. The designs you're about to see are not approved by any authority and are conceptual only, but are an indication of what the planning laws allow for.
As you can see by the massing diagrams in this slide, the site has potential for a large mixed-use development, taking advantage of the height controls and may allow up to 200 apartments to be built on the site, with ground floor and podium-level retail, which will accommodate a Dan Murphy's and potentially a new pub. This is the Morrison Hotel, which we also own, located at Woolloongabba in Brisbane. It is 3 kilometers south of the Brisbane CBD and 600 meters from the Gabba Stadium, which will be knocked down and rebuilt on the same site for the 2032 Brisbane Olympics at a cost of $ 2.7 billion, according to the state government's website. The rebuild of the Gabba will start in 2025 and is expected to take up to four years to complete.
Now, we've completed a demand study, which shows there is a lack of short-term accommodation in this area. So we think this is a great opportunity for us to develop an accommodation offer for our Nightcap business, as we will be one of the closest accommodation offers to the new stadium. Now, why is this exciting? Well, if we can move quickly on this development and have this approved and built within the next few years, we'll be able to provide accommodation to the thousands and thousands of construction workers who'll be working on the new stadium. We'll also be well placed to service patrons attending concerts, sporting events, et cetera. The Mater Hospital and Queensland Children's Hospital are both within 500 meters of this site, and there's three universities within 2 kilometers of this site. Finally, this is our Doncaster site in Melbourne, which we also own.
For those of you who know Doncaster, this site is on Williamson Road, directly opposite Westfield's Shopping Center. It's 2.3 hectares of land. For those of you who don't understand that scale, that's about the size of an average Bunnings warehouse site area. It's massive. We have a 40-year-old pub on this site and a BWS at the front. This site is prime for redevelopment. We think this is a large-scale development opportunity. I'm going to play you a video in a minute that showcases what this site's potential is. I want to caveat the video by saying what you're about to see does not yet have planning approval from the relevant authorities, but again, is based on expert town planning and legal advice as to what is allowable under the current planning laws.
We have met with the local council and had a pre-DA meeting, which was very positive. I also want to point out that it is not our intention to become a residential developer. We are in the liquor and hotel industry. Having said that, we believe we own some fantastic real estate that is currently being underutilized and where there is an opportunity to add, pursue adding value to a site, we intend to do so. Generally speaking, the value of land increases when the planning approval risk is removed. We are very excited about these projects and the opportunities they provide to allow our brands to go back into any redevelopment, but to also add value on the way through. We've only just started on this journey, so there'll be more to come as we move through the next stage. I'll now play the video. Thank you, and I think we'll go to Q&A now.
We're going to ask everybody to. All the speakers that have presented today to get back on stage. Oh, right. Yep, yep. Okay. Okay, so we'll go through just the network opportunities first with Kate, Sean, and Matt on stage. Okay, first question.
G'day, guys.
Thanks.
Phil, it's Phil Kimber here. Just wanted to ask a question. In the, the target, by FY 2028 of earnings, are there any, is there any contribution from the, the major refurbishments that you just showed us then expected in that number? So, are we getting some of the benefit of those major refurbishments in your target?
Yeah, absolutely. I mean, it was called out in the slides previously, that the time to value for some of the larger projects can be between 12-36 months. However, not only we have some of the projects that we're just starting now mature within that time period, we'll also have projects that are in construction now or launching now, come through that period as well. So, yes.
So, so even including some of these potential residential developments, I guess-
Oh, sorry, just
More focused on them than necessarily just the pub.
Sorry, just to, just to be clear, I'm talking about the renewals part, so refurbs and repositionings. Redevelopments is Matt's wheelhouse, as it, as it were.
Yeah, and the answer is no. We're not counting on the returns from the large-scale redevelopments as part of that target.
Just conceptually, how would you benefit from that? Is it a case of getting the DA approval and then selling the land, or is it joint venturing with a developer and sharing any part of the profits, just as a rough guide?
Yeah, look, I think we haven't yet worked out exactly how we're gonna go about it yet. I'd say, yes, at minimum, the benefit will be from the increased value of the land that we then on sell to a developer. But we, we're exploring at the moment what kind of structural options, and including potential pooling options. So do we put more than one asset with, with a single developer and have some kind of, you know, joint venture or other arrangements? The sort of thing we're looking into actively but haven't yet made any decision on yet.
Ben here from Jarden. So a question for Sean. You sort of come from the other team or the big competitor a year ago, and you must have been looking in at Endeavour's portfolio, and in real terms, it's been going backwards for hotels over the last sort of five, six, seven years on a CAGR basis, sort of probably growing 1%-1.5%. When you looked in as a competitor, what was the biggest impediment? Do you think it was capital and not spending enough on refurbs? And what are you doing differently now you're coming in to get more out of the refurbs than might have been got out of it in the past?
Sorry, can we get that projector to change the slide? It's right in my eye line there. Sorry. Thanks for the question. Just to clear up my CV a little, I was with Spirit Hotels between 2010 and 2016, so part of the business turnaround there before it was sold to AVC.
Okay.
I was there with Mario Volpe and a few others. Now, we obviously, as back then, the second biggest operator of pubs in the country, kept a keen eye on ALH. And it was absolutely our observation back then that we were of the view that they were underinvesting, or certainly they were investing at a lower rate than what we were at Spirit Hotels. And the renewals program at Spirit Hotels was one of the growth engines around that business turnaround prior to its sale. Sorry, the last part of your question?
I suppose just in terms of what you brought in to do differently in terms of the approach to refurbs, is there a more disciplined ri- approach around the capital? Are you putting it into different areas? Are you spending less? What are you doing differently to actually drive some better returns and uplifts that give you confidence in the $ 75 million over the next few years?
Yeah, good question. I can't really talk about the approach to renewals previously. Obviously, I wasn't in the room. But certainly how we're gonna approach it moving forward, there is that disciplined, structured approach. That it is data-led, and it's formulaic in its nature. But really, it's that cross-divisional piece. It's not just building it and opening the doors. It's really understanding our customer, really understanding our competitive set and where the unlock comes out of that. And, then it's about linking in with the operations team, the commercial team, the marketing team, food teams, and really, it's pulling all those levers at the same time. That's, that's how, that's how you're able to really turn up that return on investment. And if you go back in the history books and look at Spirit Hotels' results in their renewals during that period, that's how you turn it up and unlock it.
Thanks.
Hi, it's Lisa from Goldman. Just two questions, one for Sean. On the renewal target ROI of, I think it was 17% on a combined basis, the key competitor is, has pretty uniformly delivered around 30% that they talked to. Is there any reason why we can't aim higher, like a structural difference? And I've got a follow-up for Matt, but we'll, let's talk that one.
So, just to clarify, I think the 17% you're referring to was our historic run rate. And is there any reason why we can't target more than 15? Well, we are targeting more than 15. 15 is the, the hurdle rate. And I think I know the competitor you're talking about, and I, I think I know the number. The main reason behind that is a different calculation, and, Kate, you might wanna maybe build on the differences between those calculations.
Yeah, I think it's pretty important to understand again, that ours is an EBIT hurdle rate and an EBIT, and we measure the returns on an EBIT rate, which is not normal, actually. Most others would look at it on an EBITDA basis. We have cash return versus PNL return, and so our numbers will always look anything from 2%-4% lower on that basis than the cash return that we're delivering. But Sean's point on the, I think it was the 17% number, is right. I think that was referenced in the slide as the return delivered on renewals done since FY 2019 to date.
Recognizing that's been relatively hard for us to measure because of the disruption that the hotels business underwent through that period, but we've done a pretty rigorous process of comparing like-for-like hotels that have experienced the same level of disruption and looked at the uplift we've got from the renewal program through that time.
While we're on the definition, that EBIT number, is that pre-double AASB ?
It is, yep.
Okay, so that's post all the leases and stuff.
So we don't take the lease asset into the calculation. So, you know, it's pre-AASB 16.
Yeah.
So it's EBIT cash, EBIT pre-AASB 16.
Yeah. Got it. And then one follow-up from Matt is, for the 10 that we outlined, how much of that is on the books? Like, what's the book value, right now? But then also, more qualitatively around resourcing. You've come in in July 2023, apart from yourself, have and just, you know, outside of CapEx alone, what about your team? You know, have there been processes changed so you have better, you know, access to decision makers? Is it faster? Have they built a team around you? Can you talk us through that?
Sure.
to get it done? Thanks.
Yeah. The net book value was $ 535 million. That's just for the hotel portfolio.
No, the 10. What about the 10?
Oh, we haven't done those numbers yet, but we can certainly come back to you on that.
Okay.
But to answer your second part of the question, yes, on resourcing for the team at the moment, so we've employed a few more property managers in the team recently, but we're also going to be employing some senior development managers to assist with the work that's ahead of us in the years to come.
So you've already got that all approved, you're just in the market right now?
Yeah, absolutely. Yeah, I'm in the market right now. Yeah.
Okay, thank you.
You got Kate, you got Richard from CLSA. I really like that slide 55, where you broke down, you got the WA returns and, you know, the rest of Australia than the total. Based on that, the returns out of WA are superior, 20, was it 27%? So, yeah, I guess my question is, when was the last time you bought a pub in WA? What are the plans for acquisitions going forward? Because if they are the return metrics, shouldn't you be focusing your investments in that market?
I think we haven't bought a pub in WA.
Two years ago.
I was going to say, in the recent 18 months. We bought one 2 years ago. Steve will remind me which one it was.
Two Rocks.
Two Rocks. I think maybe the bigger picture way of answering the question is, as I said before, we do see a path to acquiring good, diverse mix of driver hotels, and we will continue to opportunistically do so when we can get the right type of portfolio at the right type of price. In some states, clearly prices have been too elevated to make that viable, so we will simply continue to look and watch. We're not prioritizing that over unlocking the rich pipeline of renewal opportunity that we have as brownfield investment that Sean spoken about. And Sean shared some good numbers about how much returns we can deliver on. Actually, what are, in relative terms, really small licks of capital, but almost deliver immediately.
You've kind of got a 2-3-year horizon, you've literally got your cash back. So we will be prioritizing supporting Sean to activate that pipeline as fast as we can go, while also continuing to keep an eye on how would we add to the portfolio.
Just a really quick clarification, the, the extra, the 150 target over the next five years, so there's no redevelopment profits in there, so that 150 is what you'd see as a new, sustainable base of earnings going forward?
That's right. And I guess we would be very cautious about the redevelopment profits, because clearly they're one-off sugar hits. So we wouldn't try and bake them into any go-forward earnings forecast. We'll enjoy them when we get them, but they'll be one-off. What we should get out of the redevelopments, though, is, you know, our goal as per the plans that Matt showed, is to put back into the site a better asset than we had as we exited it. So we should get a better performing site at the back end, following what will inevitably be a fairly long period of disruption. So we're not baking in to the five-year projection, either the return on the, you know, sale of the freehold, for example, or the uplift in performance we'll get out the back of the redevelopment.
Hi, Kate, Sean, and Matt. I'm David from Bank of America. I'm trying to get the conceptual. The question I'm trying to get to is the latent value that's within the hotels business. I think that's the whole, probably the purpose for today, is how valuable is your hotels business? And obviously, we've heard the first part with earnings, with the $ 150, and then the first part of that's the $ 75, and this part's the actual development of the fleet, if you like. Can you give us a bit of a rundown? It's a bit of a multifaceted question, but you've said, "We've highlighted 10," well, you guys have highlighted 10 stores out of 54, which look pretty exciting in terms of opportunities. Can you give us a bit of an understanding, though, what about the other 44?
What sort of plans have you got for those? And then of the 300, the question I'm really interested in is, you've highlighted refurbs, repositioning, and accommodation. What sort of opportunities are there within that 300 in terms of, you know, how many are there that you could actually really get your teeth into? And, I suppose, what sort of discussions are you having with your landlords? Are they as excited as what you might be? Because the 5, the 10 that Matt put up there looks pretty exciting, and what Sean says is pretty exciting. I mean, I'm trying to now to conceptualize what's the actual value here that could be within this business outside of the 150. It's, you know, what is this business really worth? I didn't ask that very well, but I'm hopeful that you know where I'm going with that.
Certainly understand where you're going, and it's, you know, a complex question to answer, of course, because you're talking about return hurdles and time frames. I think, I mean, I hope that what I'm hearing in the question is that you've appreciated the level of opportunity we the latent opportunity we see in the portfolio, you know?
I am, and that's what I'm trying to materialize. I'm trying to actually, well, quantify it, if you like, what that opportunity is.
Yeah.
We've got the 75, but I'm trying to quantify what is the real prize of your hotel asset?
Yes, understand. I think I can't answer that in a simple statement. I think, you know, we've put the 150 out there because clearly-
Well, let's break it down. You've got 10 of 54. What's the other 44? And in the 300, how much is in the refurb bucket? How much is in the repositioning bucket? How much is in the accommodation bucket? And how much is in the bin bucket that you just throw out?
So maybe I'll take the first part of that question out of the 150 equation, because as we said, the opportunities Matt spoke to aren't included in the 150 uplift by 2025. I'll take, at a summary level, the question, and I'll ask Sean to comment further. But I think the summary statement on our pathway for the next five years is that we are still reviewing all of the opportunities in the renewal pipeline, and therefore, we can't in a position now to say, "Here's how we break it all down, and here's how it all adds up." We're still doing all the feasibility work. We still have DAs to get. We still have to do value engineering of designs.
You know, we've got, we've got a lot of work to do, but the more we look at it, and the more we size the work, the more we get returns from the work that we have done, the more confidence we have in the value of that pipeline. Hence, why we're standing in front of you saying we're really confident there's some real value unlocking here. But, Sean, do you want to comment on that further?
No, I think you've covered it well, Kate, other than to say, the exact number of repositionings versus refurbishments versus accommodation projects, we don't have that exact number right now. But I can point you to the data around age of fleet to give you a sense of the size of the prize. I think you said your local was the, what?
The Eltham. It's an absolute dog.
Okay, so you'll be able to see where, you'll be able to guess the last time that was invested in, and you'll be able to see where the Eltham sits within that. And that will give you a sense of the broader, broader portfolio and the size of the prize that sits beyond it.
And the landlords?
I can take that one.
Yeah.
Yeah, David, as I mentioned, we've we're having regular monthly meetings with both Charter Hall and the Laundy family. In fact, Sean and I had met with Arthur and the whole family last week for our regular portfolio review. So we are going through literally every property in the portfolio and looking at how we can both benefit together by either going back in with a new pub, a new Dan Murphy's, whatever. And we're basically going through the same exercise that I've just gone through with those top ten. So I'll have more to say on that shortly as we work through that portfolio. But it's very active.
Yes.
Maybe just to add to Matt's, Matt's statement, I guess, you know, Matt's given you a flavor for what we believe we can do with the redevelopment of our freehold properties. It's safe to say there are properties within our leasehold portfolio that have similar sorts of opportunity. It's certainly not all of them, but there are some there, and they are jewels that, of course, the landlord is as interested in unlocking as we are. And so we're seeking to, you know, engage with our landlords on that basis to say, "If it's just in our hands on a triple net lease, we may not have the ambition around the level of capital that might be required to get the highest and best use of the site. So let's work together on what might that look like to get a better return for both of us.
Hi, Kate, it's Shaun Cousins from UBS. Just a question on divestments. I'm just sort of curious, and we touched on this a little bit before, but I'm just. What attributes do you need to see out of a pub or a hotel to sell it? Why did you exit the Victory? Maybe as an example, would you sell EGMs? And I guess we're really keen to see all the exciting things around investment, but I think the investor feedback that we've been getting is there's also a desire to see action on actually exiting some and recycling the capital that you have, rather than just talking about adding to it, but actually starting to recycle it, please. Thanks.
Yeah, absolutely, and thanks for the question, Sean. I know I have spoken about the topic of divestments a number of times today. There will definitely be hotels in our portfolio for which we are no longer best placed to realize the value, or it's not positioned well within our ambitions for our portfolio, and that will be for any number of reasons. It may be that the return on capital isn't adequate. It may be that we can't grow it any further than its current earnings profile, and we have better ways to grow earnings for our shareholders through other uses of that cash. And that could be a well-performing pub, but one where we've kind of maxed out on where it goes to from here. And that's the way we're looking at it.
We sort of don't have a one-size-fits-all. We're looking at every pub and saying: Are we going to be able to grow the earnings base of this pub in a reasonable way with a diligent application of capital and operational improvement or not? And if not, then what? We obviously look at every pub as it reaches the end of its, you know, lease renewal life and decide what to do. We have exited, I think, now, 2 pubs in the last, I'm going to say 12 months, approximately 12 months, both with no, you know, both without having to pay any kind of lease exit price because they are not performing well enough for us to continue to be the right holder.
EGMs.
EGMs, we don't have a specific goal around the divestment or otherwise of EGMs. I think we've said that gaming is an important part of the pub experience for a lot of our guests, so we will deploy EGMs to enhance guest experience where relevant. And I, I presume if there ever was a case where it wasn't, then we would think about what we do with them, but they're, they're just part of the overall equation.
Um-
Bryan Raymond, JP Morgan. Just on the acquisition, gross margin uplift, you called out, I think it was the Rainbow Beach Hotel with a 1,000 basis point uplift in food and bev gross margin. I'd imagine tap beer is a big part of that, or it has to be part of that. First of all, is that a typical uplift? I know it would vary. I'm sure you'll say it'll vary, and it's all pub by pub. But over the 14, for example, that you've done, what is the average uplift? Is it sort of in that vicinity? And if it is, like, how are you only getting 14% ROI? I would have thought the gross margin uplift by itself, the synergies essentially, would be day one, cost-free, making two phone calls, to the pub groups. Like, what's the opportunity from particularly on buying on these acquisitions?
Let me pass that one back to Jared, if that's okay, to talk about, I guess it comes back to the question of what's our, what are our buying advantages relative to our typical pub owner? Which I think is very hard to say, because it always depends on who owned the pub previously and what their buying terms were.
It does go to Lisa's question earlier, and it's probably the best answer, a better answer in places, which is, we don't know, because there's one example of something of that scale. So I think the question answers itself.
Well, not quite, because there's 14 pubs you've acquired over the last couple of years. Across the 14, is that 1,000 are broadly similar?
In that vicinity.
In that vicinity. Yeah, okay.
You were right when you referenced the trading terms up.
Mm-hmm. Which would be the majority of that.
The public advice or guidance that we speak.
Yeah. Before we seek to, you know, operationally improve a pub or find other ways to drive uplift, there are two most easy levers for us to return average performance relative to the average operator: tap beer buying and conversion of the retail to a BWS store, where we, you know, just self-evidently from our retail trading margins, get a better return. Generally, we would get both of the sales uplift and a better EBIT margin from the conversion of the BWS.
Yeah. If I could just sneak one more in. So I really like slide 105, where you put a breakdown of the acquisitions, which ones are outperforming, on track, and underperforming. You haven't done that for the refurbs, and I know it's been a crazy couple of years. So I'm not suggesting it's a clean picture, but just trying to get a feel for how that 17% ROI would be distributed across, because I'm sure there's a lot more refurbs than there has been acquisitions. Would you say that, you know, on, there's a lot that are sort of outperforming or underperforming? Is it more volatile, or is it less? Like, I'm just trying to get a feel for the distribution, because, yeah, I would have thought you'd know your own assets better than you'd know an acquired asset.
Yeah, I mean, I think I'll start where you started, which is to say it's really hard to measure that in a precise way through a COVID-disrupted period. So that will get much easier for us from here, as we can literally compare pre-renewal trading to post-renewal trading at the site level. Having said that, you know, I think I'd refer you back to the point Sean made about the age of the fleet. You know, and to the earlier slide I spoke to about how we think about returns on capital deployed into hotels as opposed to retail. Where in hotels, we would regard renewal capital on average as being an uplifting capital investment, and therefore proportionately growth capital as opposed to sustaining capital. Whereas in retail, it basically just keeps cycling the fleet.
So, you know, on average, when we deploy renewal capital, it will be returning above our return hurdles. And I know, I mean, Sean can talk to it, but that's the way Sean thinks about it. So, you know, when he's mapping out what we're going to do, he doesn't distinguish there's gonna be this much spend on sustaining, and therefore I'm kind of excluding that, because that's just maintenance capital. And this bit over here, I'm gonna call growth capital. It's just one big renewal capital bucket from which he seeks to get the above hurdle returns, but I'll let you comment on that more.
No, I think you're right there, and simplistically, drilled into me for a number of years, capital is capital, so it needs to return. To your point around our recent returns post-COVID, the reason we didn't drill into it today is because the dataset is a bit messy because of the disruption. But what I can say with confidence is the returns we're seeing in our post-COVID projects are in line with what we represented. So.
Just for clarification, the renewals that are in that 17%, is that whole of pub renewals, or if you're just renewing the gaming room? Because I know you've done a lot of that. Is that in that 17? Because I imagine that number is a lot higher than 17.
So, yeah, just to clarify, what we're referring to is the renewals program, and within that sits refurbs, repositionings, accommodations. The group of gaming projects that happened during COVID that you're referring to are all bundled with it, within that number, yeah.
Good day. It's Ross Curran from Macquarie. Sean, I'd like to get your thoughts, coming out of the UK, that there's a lot of pub chains over in the UK. You've talked about 300 different pubs, and they're all individual businesses. What's your thought. Why does it need to be 300 different brands? You guys are some of the best brand custodians in Australia, Dan Murphy's and BWS are amazing brands. Why not homogenize the offer? You know, not every McDonald's has a drive-through or a kids' play area, but you kind of know what you're gonna get when you go into one. If you're standardizing the menu, why not standardize the pub offer and roll it out faster?
Yeah, you've really hit on a contentious subject there. One that's. There's been lots of discussion over that for a period of years. Start with your comments around the U.K. Lots of pub chains, yes, single brand pub chains that have been successful enduring. I'd probably challenge that a little bit. And the more broader comment around that is the U.K. versus Australia. The industries do the same in a lot of ways, but also the customer. Very, very different. I think for us, the ability to have those individual brands that are localized and talk directly to what our customer wants, there is great value in that, while having the large machine that sits behind it and all the efficiencies that come with that. We could talk about this one for hours, and I'm more than happy to do so over a beer later, but it's something that we talk about a lot, but nothing that's in our immediate plans.
Sure. And,
Sorry about that. Yes, so one way that you could talk about it or think about it maybe is not so much in as a single-branded outcome for the pubs, but what we do think about is sub-brands. So, I think the Totty's name came up earlier, and while we're not looking to do what Totty's do, and Merivale do what they do very, very well. There is a place for sub-brands within pubs, be it in that instance, an Italian branded concept that can sit under the brand architecture of the pub. And then once you've built that trust, credibility, and service level, you can then replicate that through your portfolio for the segments of the market and for the demographics that are right for it.
And then, this might be for Steve or Kate, but in the IPO documents, Bruce Mathieson at the time was expressing his frustration with Woolworths of not acquiring more pubs more quickly. And so the shift in strategy away from, you know, being acquisition-led towards reinvesting in their own network, can you talk us through how the board, as a group. What they're thinking about this sort of changed approach? Do you have universal board buy-in to this sort of shift?
I think we probably can just summarize the response to that by saying the board, like management, is focused on getting the best return for shareholders for every dollar spent, whether that be through revenue expansion, operational optimization, or capital expenditure. I think our interests are very well aligned, and we have continuing active discussions with the boards about how we achieve that.
Craig from MST. Just a question on the refurb specifically. It looks like there's roughly 200 where food and beverage can be upgraded or updated. How fast can you go on that? Is it a question of capital or just bandwidth and human resource?
Yeah, good question. The question on capital, I'll pass over to Kate. The short and simple answer is there's more projects than we can deliver in a short amount of time. The size of the prize and the opportunity, it tells a story itself. History's taught me in terms of capital rollouts and ramp-ups, you do need to take that capability and how do we deliver it at the right speed and ramp up at the right rate? Because as you guys would know, if you ramp up too fast, you shock the system, and your return on investment drops back down.
That being said, we have stood up the resource, we have stood up the team as part of group capability, so we are ready to increase the number of projects we've been doing, but we'll do it in a measured way.
Is seven years the right age for a, you know, refurb cycle?
It's another contentious question, not as contentious as the last one. But if we think about what the industry does, there are a number of large players in the industry whose refresh rates or renewal rate on their hotels typically sit between 5 and 7 years. We know that ours is substantially behind that at the moment, and there's some catch-up capital required should we try and bring our levels to the same as those.
Thanks.
Okay, if there's no more questions on network opportunities, I'm gonna ask all the presenters that presented today to get up on stage. And just. This is really just a last opportunity. We don't want anybody to go home, having not had a question answered. So if you do have any last questions, please, put up your hand, and we have everybody up there with an answer.
Hi, it's Lisa from Goldman. I just have a follow-up on the, I guess, incremental, CapEx preference or, you know, spend preference between, retail and hotels for growth CapEx, right? Because we're looking at FY 2023 ROFE for hotels at 15.9, and the target ROFE for hotels will be above at least 15%. SIB aside, the growth, CapEx, where would we be spending if, for incremental growth CapEx?
Sorry, I might need to correct you on those numbers there. The hotel's ROFE is not at 15.9.
Oh, sorry, not hotels, retail. Sorry, I might have said the wrong thing. Sorry, retail ROFE is 15.9. Current, FY 2023 hotels ROFE is at 10.2, but the incremental is targeted at at least 15+. So if we've got incremental growth CapEx, where would we be preferring to spend?
So I think I said, I said earlier, the retail capital expenditure for this year, we're expecting to be broadly in line with last year, and in hotels, we're slightly below, but that's because we're not acquiring as much hotels while we ramp up the pipeline of renewals that Sean spoken to. So it's not, it's not, we're, we're sort of not. How do I say this? So, so we actually have, if you like, less growth capital being spent in the year, but being directed towards what's arguably a higher returning, earnings pool, which is renewal, which we're ramping up in, in hotels. But, but thinking about directionally from here, as Sean said, we're building a pipeline. He's got some work in progress, but we're building out capability and also building out the pipeline of renewal.
So directionally, I would expect growth capital, capital to be increasingly directed towards the hotel renewal pipeline because that's where we see a good return opportunity. But that's not to say we'll sacrifice other things in the process. So we have-
Increase in growth direction.
That's right. But as I said at the outset, while not growing borrowings to fund capital expenditures, the capital envelope will remain within what we can fund within free cash flow generated in year, after paying dividends in our target 70%-75% payout ratio.
Sorry. I'm sorry. I got Ben from Jarden. Sorry, Steve, I think you got through the whole day without anyone asking about trading or the consumer. So I thought I might chuck one in for you. How do you feel the pubs business is positioned in that context? You obviously saw the press overnight talking good cyber for Dan's and performs well in this environment. How do you see your pubs positioned, consumers trading down, all these sorts of things that give you any concerns? Or do you think you naturally benefit if people shift from pubs back into retail?
Yeah, thanks for the question, Ben. Net, we feel pretty positive, actually. I think the published data on gaming is demonstrating relative resilience in that market. I'll have to get the latest on what our forward bookings are for Christmas lunch, but we're almost sold out. And sorry if I can the desk tell me if I need to move, if I'm creating a problem with this mic? Don't hesitate. Put it closer to your mouth. Oh, there you go. Sorry. 87%, So we're 87% forward bookings for Christmas lunch in the hotels network, which is well ahead of where you were at the same time last year. Looking very positive.
Looking very positive. So I think, you know, our oft made point about the comfort, the familiarity, the value, the positive service experience that you get from a hotel is really playing through this year. And it is analogous with the points I made yesterday in relation to the customer experience of cyber week, and in particular, Dan Murphy's. You know, customers are hunting value, they're hunting familiarity, they are looking for great experiences that don't cost the earth. So I think both our retail and hotels businesses are well placed to capitalize on that.
Bryan Raymond, JP Morgan. So I'll ask my first question again around the regulatory impact being built into your assumptions longer term. We've obviously got some things that you've implemented already, some that are pretty clear, and some that are uncertain as to how they play out. In your 150 number, in terms of uplift, does that take account of any of the regulatory changes in the landscape from FY 2023 through to 2028, as you see it? Or is that still something we need to consider over and above your target?
Bryan, we've tried to give you an understanding of the history of the gaming category in context of very material and high frequency of changes imposed by state governments, to give you a sense of history informing the future. We've also given you insight into what state government forward projections look like from their treasuries on what gaming revenue taxation will look like. I can't give you a better answer than that. I mean, that, that is informing our decision making around the support that we put behind our hotels business, and the support that we put behind players, and the support we put behind our responsibility initiatives. So I'll have to let you make your own-
On that front.
Cool. Yeah.
Yeah. Okay, and then just, maybe just the 150, if you could just maybe give us a few guidelines around how we should be thinking about, say, that long term, after the five-year period, with the 150 in the base, if you achieve what you had planned to, what your sort of EBIT margin and ROFE will look like at that point, if all goes well? Is this gonna be an EBIT margin driven uplift from your 21%-22% level at the moment? Does that overall ROFE get close to 15? I know incremental is gonna be, but there's obviously a big base there. Is there some sort of a further detail you can give us around the shape of the PNL, should all go well?
I think it will be a watch and see. You'll do your own calculations. I think you would actually take out the award for Best in the Room at doing the back solves, so I'll probably ask you. But we are putting out there our long-term plans to create shareholder value, and that is a component part of that. I don't know, Kate, do you want to give any more specificity around where you think the ROFE is going to end up or anything like that?
No. Other than to say, as we stated in the scorecard at the start of the day, our goal is to continue to expand ROFE, to improve ROFE, while continuing to optimize returns for shareholders and grow the business at a, you know, through the cycle, 10%+ return to shareholder.
Thanks.
Steve, over here. Kate, again, I'm trying to get down to working out the intrinsic value of the hotels business. When you look at buying, I know, Kate, you said that you look at when you buy a hotel, you look at maximizing the value of the license. But can you give us a bit of an idea? I mean, you guys have been in the industry a long time. What's the sort of multiples that you look at, earnings multiples, cash flow multiples, that you would look at that would be value, you know, that you'd look at to buy a hotel?
Just so that we can get a bit of an understanding as to how to value a hotel, because it's, they're so difficult to value, and I think we, I'll put my hand up, I certainly struggle to know how to value your business. So maybe if you can give us a bit of an idea and a bit of help as to we can, might be able to value your business.
Yeah, maybe Kate can give you a more technical answer, but there is a going concern consideration as to how the hotel's performing, and then we'll overlay what performance we think we can generate from it, in terms of the better trading terms or purchase prices that we have for the stuff that we sell inside the hotel, as well as the systems we bring. I wouldn't underestimate the materiality of the change to retail that we bring to the hotel side. That, I think, to this whole question and point about an interconnected operating model, is a big part of what distinguishes us from any other operator of hotels or retail in the market. But do you want to talk to any of the multiple side of things?
I think Steve's covered it well. I mean, we do look for that initial year two ROE of 15%+, as I've said. So we will largely, I mean, irrespective of what multiple a hotel may be trading at as a going concern, we will take the price that's being asked and work out whether we have enough value levers that we're confident in, that we will get that 15%+ return. And that how that equation works on a hotel by hotel basis can be very different because, as I said, you know, it, if you go back to the Western Australian hotel versus with no gaming versus Eastern states with gaming, the multiples that they trade on as a starting point are very different.
The asset base you're acquiring is very different from the start, and therefore, the return that you have to get looks very different. So, apologies, it's not. I'm sure I'm not helping you with your valuation portfolio, but it is.
So I'll say it a different way. So a 15% return is about a 6x multiple, roughly, and you'd probably be paying 8-9x multiples, I would imagine. Can you get that to 15% largely because of what you're saying, the synergy? Because this is my first question to you, Steve, about this being part of the integrated group. Is this the value that it brings, that by bringing the retail offer in, by bringing it, the hotel, under your network, you can get that 50% upside, I suppose, in, in earnings from an acquisition pretty quickly because of that. Is that what you're saying?
Absolutely. I would point you to the pubs that we don't buy, that get transacted, if you want to consider what other, you know, acquirers might pay in terms of a multiple and what they think they can generate out of it. That's why we've always said we'll be very disciplined in terms of the deployment of capital more broadly, and we accept the point about focusing more on what we've got rather than expanding it. But the potential that we get from the site is what distinguishes us from anybody else. But yeah, there are certainly pubs that we should not be buying, and consequently, we don't.
Can you share some of them, what the multiples that go in, ones that you've looked at?
The beach bar, and we don't need to pay $ 100 million for a pub that's a, that's a bar with a bistro, with no gaming and no retail opportunity, because that would be probably one that was being bought for the aerial space redevelopment above it. But that's not the primary driver for us. That's a secondary, tertiary outcome, which is a positive value accretive one. But our primary purpose is we're a good publican, and we're a great retailer, a great publican, great retailer, and, and that's what we focus on first. So that's where we, we hunt for the value in, in sites that are going to meet our model.
Apart from those anomalies, like a beachfront, $ 100 million bucks, like a normal pub, you know, what would a going rate.
Well, we tapped out on the Great Northern around the corner. It went for $ 70, and that was about accommodation and some other stuff. So it just sometimes they just get too hot, and that's fine. We wish the acquirers the best of luck, and we'll stand by and see what happens with those or any other pubs in the country, for that matter. In the event that there is a pub opportunity that comes along that's going to deliver the right returns and is something that we can maximize the value of relative to any other operator.
Noting, of course, the information we've shared today about our accommodation brand as the fifth largest accommodation provider in the country, there's a number of things that we can bring to these sites that we consider in the mix, you know, that determine whether or not we're interested as the acquirer.
So just to finish, that's the sort of leverage that you get when you acquire it. You bring it into your business, you get that uplift. You're probably talking a 40% or 50% uplift in earnings from that, from the, from those synergies that you're bringing in by being part of your business. Is that, that's - is that a fair call?
Well, I think we showed the tape talk to the example of the 11 that we've brought in the last, you know, year or thereabouts, and they've got varying degrees of performance. So you don't take everyone to the bank. You don't get everyone right. We haven't got everyone right. On average, we do, and some of them perform exceptionally well. There's the occasional one that is an outlier, and we focus on that. And then there's the point about divesting those that we know are not going to be fit for purpose in terms of our operating model in the medium to long term.
But the outlier is just timing. It's economic conditions.
Absolutely.
Okay, thanks.
Thank you.
Thanks, Steve.
Shaun, UBS. Just curious, in that it's been uncommon over the last sort of four months, where you've had your major shareholder and a would-be director, sort of, you know, make some criticisms of the company. I haven't seen that in a lot of companies that we've looked at. Are there any instances where you've reflected and suggest, "Hey, they've made a good point there?" And then moreover, and probably a question for you and the chair, how do you ensure that there's sufficient sort of board harmony and that, and everything sort of functioning well, just in that, yeah, obviously, you've, you've ultimately got a business to run to generate returns to shareholders. Board disharmony is probably unhelpful for that.
Yeah, I, I feel as though, that question was relatively well dealt with in the moment when you had materials being put out there by activists that we responded to with, quite a detailed paper, that I thought outlined how we reflected on performance, particularly the pre/post-COVID performance and some of those types of questions. So I wouldn't rake through all of that again, but I would say that, those challenges, and challenges from a number of, investors we have in the room, and many more that we don't, are often cause for us to reflect on our performance and consider how we can improve, and that's part of the reason why we've done this session today. It's part of the reason why we've made commitments around our working capital.
It's part of the reason why we established the whole idea of a scorecard, something we stole from other successful businesses and leaders throughout recent history in corporate Australia, because we think there's opportunities for us to help everybody better understand how we're holding ourselves to account on delivering shareholder value. So, we by no means consider ourselves perfect, but we do intend to continue to be transparent and take investors and potential investors on the journey that we're on in improving this business and its shareholder returns therein. And your question in relation to the board, yes, it is one for the board, but our board is functioning and does, you know, that is their job.
I think as a board member, we're all very conscious that we are part of a board that is here to progress the best interests of the company, and I think all of our directors do that. So it's positive.
Okay, no more questions? No, no, no more questions for Lukas. Actually asked if anybody had a keen accounting question. He was really keen to so on, but all right.
Well, thank you, Sean. If I, if I may, there were a couple of questions that I, but I wanted to make sure that we'd answered them. So-
Yeah.
One of them was around distribution points for Pinnacle. I think, Lisa, that might have been from you. So I did, I did promise to come back, and I won't use Kate's glasses because they're hers. Pinnacle Distribution Points, as a matter of fact, are 518,000 across the group, and of those, Paragon accounts for 73,000, and that 518,000 accounts for 12.3% of our wine business. So someone did the back style, probably Bryan, before, about what percentage of your Pinnacle mix is wine? This goes to this point about the velocity or the quality of the sales that we get out of our Pinnacle portfolio.
So it's a much higher percentage of our sales than it is a percentage of our space. I can't remember where that question was coming from. 518,000 points of purchase for Pinnacle products, and Paragon is 73,000. So it's a smaller amount of the t hat's SKUs in spots. SKUs in spots. Yeah, so it's dots on a Yeah. Yeah, I wouldn't get too caught up in the minutiae of the numbers other.
Other than to say that, they are a smaller proportion of our total SKU count than they are of our total sales. Then we had the question I don't think that I gave you a good enough answer to on the question of the flow-through of Pinnacle into the PNL. And that was one we were talking about, too, before. So just to be clear, all of the costs associated with Pinnacle products sit in the goods themselves. So the Pinnacle EBIT is effectively positioned in the retail gross margin. There is no cost that position themselves throughout the rest of the PNL, and that's how we account for all the costs associated with Pinnacle products. So they are up in the COGS, everything, every cost associated with running a winery and so on, sits inside the cost of the product.
The impact on inventory of Pinnacle is diminished, and effectively, we're just making choices about which products customers want in our store network. So there's no material impact on our working capital as a result of Pinnacle products. So I just wanted to make sure we were clear on that one. And Ross, I think you asked how many hotels were perfect. Not very many. This one is not even perfect. So we've, as the team talked about before, we've got an opportunity to build accommodation next to it, so we're still not finished. And the reality is, it's the Harbour Bridge. You are never done. You, by the time you're done, you're starting again.
I think the small exception is probably the Brook that the team's talked to today, where, you know, for a little while now, I think we'll be pens down on the Brook. It's the best example up there in Mitchelton of a pub that's pretty well perfect as far as they go for us. So I just wanted to make sure I'd answered those few points.
Great. Okay, our formal presentations are complete. We'll have some final words from Steve, so everybody else can leave the podium. Then, we've been moving to the fun part of the day, so some informal drinks and an opportunity to taste some of our award-winning Pinnacle wines. The drink session will happen back at the Stag Bar, which is where your lunch was served. For those who are interested, a lot of people mentioned. Sorry? A lot of people mentioned that they never played the pokies before. Lukas has volunteered to give a quick one-on-one to anybody who wants to know how to play the pokies with your own money.
No, no, that's not true. That's not true. I've given Lukas $ 500 worth of TITO tickets, and it's my own money, by the way, not the company's. Mary Andrew already has one of those.
All right.
because I know she likes a flutter, only when she's at an Investor Day. So those of you who have never played before, you can come and see us up the front here. We've got $ 50 vouchers for you.
Okay, I'm at the front of the queue. So if you come up to the front, and if there's more than sort of 10 people, then we'll give you like some time to come back in so we can not disrupt the normal activities. As a token of our appreciation for your attendance today, as you exit at the rear, please pick up the bottle of our newly released Ovata Australian sparkling wine. And please grab that as you leave. And now, and also a final reminder that the bus is leaving at 4:30 P.M. and another at 6:30 P.M. The buses will leave on time, so please ensure you're on time.
And finally, before Steve says his final words, a thanks from all the presenters, everyone at Endeavour and the Investor Relations team, for your attendance and participation today. Thank you.
Thanks, Sean. Just a round of applause for Sean, of course. Just, just for the record, Ovata is Australia's hottest new sparkling wine from the Yarra Valley, produced by our expert winemaking team at Oakridge, who have created a very, very beautiful new wine. So please do enjoy it with our, with our best wishes for the season. I just wanted to touch very quickly on the wrap of what our key messages for the day were, and thank you all for being part of it. We hope you've come away with clarity, much more clarity on the group strategy, and I will reiterate that it is a group strategy.
The whole is greater than the sum of parts in the case of Endeavour Group is our firm view, and we've outlined how we intend to leverage the unique portfolio of assets and brands that we've got to deliver earnings growth. Which is going to be done through a balance of driving sales and managing margin and managing costs on the way through. We've been deliberate in sharing what we consider to be very clear and measurable targets through our scorecard. We've tried to reiterate the importance that we have on the focus in the business on a disciplined approach to capital management. And at the end of the day, we're a business that is all about being sustainable, and it's run by a large team of people, 30,000 of us in Endeavour Group. So hopefully, you've come away with that impression as well.
But a lot of the focus today was obviously on unlocking the opportunity in hotels, and we think we remain very uniquely positioned to the last part of today's conversation to do that and deliver superior returns from the right hotel licenses, the ones that we have. We know that we can grow our capital returns through our portfolio optimization and our renewal and redevelopments that the team's just talked on. We've talked about the $ 150 million plus EBIT growth opportunity over five years, with 50% from operational optimization, and again, our commitment to responsibility. All of that rolls up to that shareholder value creation of 10%+ from FY 2026, which is driven by high single-digit EPS growth and that dividend payout ratio of 70%-75%.
I won't go through the rest of the financials, but they're obviously all laid out in the scorecard. At the beginning of the day, I said that we're a very purpose-driven organization, and that purpose of creating a more sociable future means that we've got to be pioneering, entrepreneurial, and always improving. What we've tried to outline for you here today is the approach that we're taking to that, particularly with reference to hotels, and the fact that we'll unlock that value by connect, by being connected to one another. But there's no better place to be connected to one another than a pub, which is where we are here now.
So I'd love to think that you'd all take some time before you chuff off, to join us for a drink and maybe a punt with Lukas, and enjoy what is a great pub and part of a great business and network in Endeavour Group. Thanks all, very much.