Earnings Call: H1 2021

Feb 17, 2021

Thank you for standing by, and welcome to the Experience Co. Limited First Half Fiscal Year 'twenty one Results Conference Call. All participants are in a listen only mode. There will be a presentation followed by a question and answer session. I would now like to hand the conference over to Mr. John O'Sullivan, the CEO. Please go ahead. Thank you, Anastasia. Good morning, ladies and gentlemen, and thank you for your time this morning. With me is Owen Kemp, ExperienceCo's Chief Financial Officer. And today, we'd like to walk you through our half year results for the financial year 2021. As per previous calls and updates. Our presentation this morning is 3 parts. I'll provide a business update I'll then hand over to Owen to run through the financial results. And then to finalize things, we'll give a brief trading update and outlook on the business. And from there, we're happy to take your questions and answers. Turning to Slide 4 and the highlights of the first half of FY 'twenty one. As the business continues to try its way through our COVID impacted sector, sitting here this morning, we are I'm extremely pleased with the management team with our overall progress through financial year 2021. As we progress through the half, Despite some interruptions caused by interstate lockdowns and border restrictions, our business performance Has continued to improve, particularly during that peak trading month of December. I'm also pleased that our business Divestment and Simplification Program that we announced to the market late in 2019 is now completed, and this has allowed us To reduce our net debt level to the lowest point it's been for some time at $2,600,000 And finally, with the combination of our working With the Queensland government, a stronger balance sheet and our desire for growth in our North Queensland business, we've been able to allocate capital to some value accretive projects, in particular, our REIT pontoon, which Alan will give you an update on briefly during his financial update. Turning to Slide 5. The semantics I'd like to pull out for the first half financial snapshot of the business really revolve around proved trading during the financial year to date and also our balance sheet health. Our underlying EBITDA It was $4,400,000 Our continuing operations were just below breakeven. And very importantly, with our balance sheet, We have cash and cash equivalents of $15,700,000 And as I said before, our net debt levels are at $2,600,000 Going over to Slide 6 and going through an update on our COVID-nineteen recovery before I hand over to Owen to take you through our financials. As we outlined to you during 2020, the mindset of our business as we've approached this financial year was really to break it down into Four distinct quarters and approach each quarter in the thematics that we've outlined there on the slide in front of you. As we stand here today, as we go through quarter 3, there's no doubt there has been some disruptive events Caused by some further interstate lockdowns, which has led to some consumer uncertainty. But also, we're now experiencing The domestic shoulder season in February March, which will see some quieter trading, particularly in North Queensland And over in New Zealand. But pleasingly, we're seeing in our Skydive Australia business some strong trading, in particular, on weekends. That said, as we look forward through to the Q4 of FY 'twenty one, we remain confident in the sector and our business, in particular, will benefit From the vaccine rollout in Australia and New Zealand, which we believe in Australia particularly will lead to better stability for interstate travel and also increase We also know that from talking to our partners in regional tourism organizations that the holiday periods ahead for the financial year and Easter And also June July looking particularly strong. And we also expect that during the quarter, we will get better visibility on international market opportunities as the year progresses. So that's a bit of an update on the business. I'll now hand over to Owen to walk you through our financial results for the first half. Thanks, John, and good morning, everyone. So So we're now on Slide 8 for those of you with the presentation before you, where we're just looking at some highlights on the financial performance, which I think the key takeout that we want to share with you today is that we're trading in line with expectations. You may recall the group started the half cautiously looking forward, Having only recently recommenced operations following suspension of activities in March 2020. Today, I present to you, as John shared, A result that we as a team are extremely pleased with, perhaps not in normal times, but certainly within the context of a pandemic and more so a tourism business during a global pandemic. Domestic uncertainty with pandemic clusters, interstate border restrictions and metropolitan lockdown added to the challenges and uncertainty faced during the half and will continue to feature in our near term. But overall, revenue of $20,100,000 was a solid result And underlying EBITDA of $4,400,000 a stark improvement on the $1,000,000 loss for the second half of twenty twenty. Now I would note, there's a bit of accounting housekeeping. The results now include the impact of AAASB 16 leases And for each of the current and comparative period, the underlying EBITDA is $900,000 higher than would otherwise be the case. We are extremely pleased with the reduction in the statutory net loss of after tax to $200,000 down from $7,100,000 in the comparative period, which follows the timely implementation of the business simplification strategy and has positioned the business well to navigate the pandemic. As John alluded to, month to month trading continued to improve through the half with solid volumes and profitability in the key months of December, which most will recall saw the emergence of the Athollong cluster in New South Wales from mid December, which once again was another short term blip on the horizon. Looking at the results and the near term prospects, it's a simple story. International travel has and will not feature in the near term, as John alluded to, and the domestic story is one of continued metropolitan self Drive markets trading well, but destination markets that require aviation access, such as Cairns and Queenstown, relevant to our business, Continue to be highly impacted. Overlying that, we've got the vaccine developments, which are positive overall to our outlook, And we are cautiously looking forward with optimism in this regard. Now, I promise not to dwell on net debt as I usually do it too much today, but we are delighted to where we are at the end of the period, that $2,600,000 net debt, which included a $1,000,000 contribution in net terms to the pontoon project. And lastly, we continue to be grateful for the government support we see today, enabling us to continue to prudently navigate the pandemic with our workforce. Turning to Slide 9. In the skydiving business, we saw a strong finish to the half with our Victorian drop zones coming online in late November. Skydive continued to build over the half even with the emergence of the Avalon cost up and the peak season bookings and jump volumes, particularly in Australia and the metropolitan markets were quite strong. In Australia, we had 8 DDs operating for the half for the full period with the 3 Victorian drop zones coming online in late November. Approximately 42% of Volume was achieved for the half compared to the prior period. And if we look back to FY 'eighteen, FY 'nineteen volumes For the key months of November December, we're starting to see prior comps coming in around the 50% mark. Metropolitan self drive markets within 2 hours of major cities have performed beyond our expectations heading into the period, But more sobering has been the performance of the destination markets in tropical North Queensland and Queenstown. And with the absence of international, we expect this to continue through the calendar year. That all said, we are extremely pleased with our market position in each key market and our pricing and cost structure across the SkyDive business. The second half will be a story of continuing to stay on top of the emerging pandemic factors and managing profitability heading into the low season, which is typically from the May to August period. Moving on to GBR experiences on Slide 10. The trading was once again improving through the half, but Queensland border uncertainty is impacting interstate demand. So it simply is a Queensland domestic border story in the near term. Our business was highly impacted by the border closures. And in simple terms, we just only have to remember that Greater Sydney And Victoria were open for approximately 2 months and 1 month, respectively, during the half. Interestingly, as at the end of January, we had seen over 21 border variations to Queensland since the pandemic commenced. There is no judgment cast from the management team here today, but it is clear that this uncertainty will continue to be a perception challenge to consumer sentiment. At a trading level, December and January volumes were pleasing. However, the continued lockdowns, we have seen a slow off that John has mentioned with the Metro Snap lockdowns in Victoria, Perth and Brisbane. In particular, the GVR Experience Business, we have welcomed strong support from the Queensland Government through the growing through the Tourism ICONS program and the growing tourism infrastructure along with some rental Relief from the Port's North statutory authority. But for this segment, uncertainty will continue to be a factor in the near term, given Queensland Government's demonstrated approach to state borders and emerging COVID hotspots. Moving on to the balance sheet on Slide 11. Net debt is once again down. And importantly, we remind everyone that no capital raise has been required to navigate the pandemic to date, something we're extremely proud of in the tourism industry. Capital discipline has been a key part of the business strategy, We continue to live within our means. With net debt down to $2,600,000 at 31 December and including A $1,000,000 net investment in the pontoon project, we are quite pleased with where this has all landed. We still have approximately $3,000,000 in net surplus assets, which management will continue to sell down in a orderly manner. There is no need for a fire sale, so we are prepared to wait for value. On the debt facility, we've extended the corporate debt facility maturity out to February 2022 and the multi option Facility has been reset to $20,000,000 down from $40,000,000 in light of the pandemic. We've exchanged fixed leverage and senior leverage covenants with a minimum cash requirement at any one time, something that's more suitable for our business as we go through the pandemic. Importantly, where we deploy capital in the near term will all be about this continued disciplined capital allocation in what is the new normal with the pandemic, Certainly for the next 1 to 2 years. So we're certainly encouraged with the opportunities that it is emerging and that we're working on. On Slide 12, I've given a short update on the pontoon project and importantly, it's on schedule and secondly, on budget. John and I both had the opportunity to be hosted by English Engineering, our building contractor last week in Cairns, and we were pleased with how this 170 tonne floating The probe it will be the 1st pontoon on the Northern Great Barrier Reef in over a decade and it is great to see how proud and passionate our staff, Our contract partners, government and local stakeholder groups are towards the project in what is very difficult times in the region. Located on the presentation on the right, we can see the project coming together with tubes that are 35 meters long and 1.9 meters in diameter, which will weigh in each of 25 tonnes and will be the supporting structure that enables the platform to flow. As we've indicated previously, we're on track to have this open early in calendar year 2022, which we hope to be a well timed new product launch as markets return. And while we're on the calendar year and recent trading, I'll now hand back to John to take us through the trading update and outlook. Thanks, Owen. Turning now to Slide 14 in the presentation and just to conclude today's presentation before we open The floor up to question and answers. Our January performance was, by and large, as Owen said, in line with our expectations and also previous trends across all three business units. Pleasingly, even though we saw a decrease in the financial Impact of support from the JobKeeper program within Australia, the business continued to be profitable in the January month, and net debt remained Low at $2,400,000 as at 16 February 2021. As we've referenced before, we've now seen the onset of the traditional shoulder season within the domestic Australian and New Zealand tourism markets. And as a result of that, We are seeing quite a trading, particularly on our Great Barrier Reef experiences business and also our SkyDive operations in New Zealand. But pleasingly, demand Our Skydive Australia product remains consistent and, in particular, strong over the weekend. We do remain confident about the outlook for Australia and New Zealand, as I said before, based on the vaccine rollout, which we do rollout, which we do believe will continue to improve consumer confidence and we also believe will also ensure that border certainty within Australia And potentially trans Tasman travel will start to emerge as real possibilities as the year progresses. That said, due to the continuing uncertainty over FY 'twenty one, we don't intend to provide an earnings guidance for this financial year. So in closing this morning and before we hand it over to question and answers, again, I'd like to thank you for your time this morning. In particular, Owen and I would also like to thank The team members at ExperienceCo across our business in both Australia and New Zealand who have just been outstanding in responding To the many challenges thrown at them during this first half of the financial year and months before that and also to you as investors for your continued support of our business. Thank you. That concludes our presentation for this morning, and we're happy to take questions. Thank The first question comes from John O'Shea with Ordinance. Please go ahead. Good morning, guys. Can you hear me? Yes, I can, John. Yes. Good morning, John. Good morning, Alan. Thank you guys for the presentation. I guess a couple of questions from me. Firstly, just on the JobKeeper During the half, what was the amount that you guys received? And secondly, if you can give us a bit of a sense of, Obviously, with the borders opening and closing, John, and not that uncertainty, can you give us some sort of sense of the leverage in the business? In other words, When you spoke about in the presentation that when things were opened up, things were you saw some good growth in the business. Sort of Can you give us some sort of extent of the scale of the leverage yield? And let's say, for example, the borders do open up domestically. Obviously, the international travel part Perhaps after that, obviously. But what can you give us some sort of feel on the leverage inherent in the business with domestic borders opening Fully, if you like. Yes, sure. And it's Alan here, John. So I'll try and answer that question, and I'm sure John will chime in along the way. So if I start With the facts that are hard facts here. In terms of JobKeeper, we also we'll throw in the Wage Subsidy over in New Zealand in our business. Sure. Sure. That contribution was $5,400,000 in gross terms, which we estimate that gives us a net benefit to underlying EBITDA of 3,500,000 The reason for that, we're a bit unique in a way that we have a lot of people still on stand down. So as you can imagine, there'd actually be no work at the moment, unfortunately. So A different impact to some industries. Now how that plays out? I guess the best way of answering it is, look, the other fact is the results are driven by Who is non Jocchi and who is it month to month at the moment? That's the first point. But secondly, maybe the other factual point that we've got is looking at the December January months and When we see the volume come back, which in those periods, yes, they are seasonal highs, but they're profitable on their own back those months. And we probably expect to see the volumes that we've now experienced in December, January that usually, yes, that would be It's season high, but we're hoping if the domestic stability comes in, the vaccine plays out. Question of timing, of course, John. But we are profitable without that support, if that makes sense. And we so I think that's certainly the way we look at it. That's I'm trying to give you the high level read through on that. So and maybe the other way of just finishing off that point, something John and I took out is, Look, if say we go to the ultimate scenario that JobKeeper ends and there's no replacement, obviously, we would be A little discouraged on that. However, we would be we have contingency plans in place to navigate that through and ensure It's not a catastrophic event for our business. And I guess where I'm getting with that, with that leverage question is, In an ideal world of domestic border openings, the sort of upside and the sensitivity in the numbers is quite significant here? Absolutely, absolutely. Once we push through, it's about onethree, I guess, and this is Very colloquial terms, John. But once we push through to onethree of the volumes of prior comps, that's where we start to see it being very accretive to profitability. Okay. The next question comes from James Tracy with Vireta Securities. Please go ahead. Yes. Good morning, John and Owen. Good morning, John. Hi, John. How are you going? Good. Thanks. Just a follow-up to John's question really. Would you be able to give us an indication of what sort of revenues and margins you'd be looking at With all of the Australian borders open, but the international borders closed. Because I think looking forward for the next 6 months of the year, that looks like The sort of the most likely scenario. So yes, would you be running sort of a 50% of prior year On the revenues and what sort of percentage EBITDA margin would you be looking at on that basis? I'll go back to numbers, man. I'm probably naturally conservative on giving too much guidance there, James. And the reason why we haven't given A lot in this regard. The uncertainty attached to each of those is I get where you're going, but I think from where we stand today, we probably expect it not To be as fluid and stable as whether you keep on hitting 50% each month, just given we're seeing with the patchy closures. We are starting to cycle through the prior comps. We're naturally a bit higher as we go through given we're impacted by bushfires Last year. But I think at a high level, I guess, John, chime in as well. But around if we started looking at We went back to averages of FY 'eighteen and FY 'nineteen, James, which is probably our biggest reference. I think if I sort of look around the markets, I'd Probably say it would be in that range of 50% of volume for the Australia SkyDive business, probably something more in the order of 20% in New Zealand. And then on the REIT, that's probably the variable. We haven't got a great read through yet with the uncertainty around Queensland borders. But If we have a look at December and January, it's conceivable we might be able to get up into that high 40%, 50%. And that's not assuming any kick up, if you will, of people suddenly having pent up demand for travel. That's us sort of reading the tea leaves on the numbers we've Same when borders have been open. But I would express like they're very directional estimates that the sort of trend lines are starting to emerge. Yes. So I suppose you haven't really seen any period of properly open borders. So you don't really have any experience What that would imply? No, we don't. We haven't because if you think about the geographic footprint of our business and then The states that have been impacted as well as the countries in New Zealand's case, but we've seen during that first half, we've Western Australia virtually closed off to the rest of the country. We've seen clean plans open one day, close the next. The state that's been the standout from our opinion is being New South Wales and the way that Premier Berejiklian has Manage this as well. And then obviously, Victoria is being open and shut. And then obviously, New Zealand, I remembering they've had a number of lockdowns. So we haven't actually seen that. But as Owen said, we're pretty confident in those types And remembering as well, we've done a lot of work during the First half of this financial year, renegotiating a lot of our distribution agreements, bringing back commission rates by an average between 5% 10% And spending a lot of time building up that direct business. And I think as we go Longitudias, I think what we're starting to see emerge in the travel sector is the parts of the travel sector that are being impacted the most By COVID, I mean, we're all being impacted, but a lot of the pain point seems to be in that distribution side of It will be interesting to see how that sort of what that landscape looks like in a post COVID world compared to what it was pre COVID, Which will ultimately also get back to what sort of margins businesses like ours can generate. Yes. So it sounds like when there is a recovery, you guys will be potentially a higher margin business than what you were just because of the work you've done around Costs and efficiency? Yes. And I think we've already started to see that in these sets of numbers, right? If you look at some of the results, particularly in North Queensland, where we Spent a lot of time, as you know, cutting a lot of cost out of that business. And certainly, our business is really well positioned when we start to see when we start to get Further out of this and the vaccines get rolled out, to really take advantage of those international markets opening up. Because I think the important thing to remember as well is that The 2 markets that will come back first from a customer point of view will be the youth market. They are bulletproof. They will travel no matter what. They I don't really care about COVID, and they are our core market, particularly for the skyliving business and that FIT end of the market, Which has also been a big part of our Skydive business, particularly in both Australia and New Zealand historically. And just as a follow-up question, what's the market like for acquisitions? Have you seen any Interesting companies come out of the woodwork because of COVID. Look, it is interesting. We're still as we've said previously, We're still very active in monitoring what's out there. There's been some opportunities that have presented themselves that we've assessed And decided to not necessarily pursue, and there are some opportunities out there that we're looking at. But we haven't seen any 5 sales emerged as of yet. And look, I don't really think we'll see that until really when there's Clearer view on things like JobKeeper or ongoing support for the sector. I think there's a lot of operators out there that are probably Existing on that welfare that may have a different view once we come out of that, and We'll just wait and see and look at the right opportunity. As we've said before in numerous presentations, Ultimately, we will be guided by what any investment, what the return on invested capital is, does it strategically fit within the business and can we integrate it correctly Once we acquire it, then does it generate value. And do you have any guidance on that Job, keep a pace. You said that the gross contribution was, I think, 5.4% in the first half. Did you have any expectation for the second half and Beyond? Yes. So I think maybe breaking up in So we know what it will be for the Q1 after March. I think we can safely sort of get the numbers. It will be about Half the monthly run rate, James, of what it was the first half in gross terms. And then beyond that, I guess, we're in the hands of government policy And we read the same news that many of you on the call today would read. And Yes, I think that's probably the thing. Hopefully, we find out that in the next few weeks, give us a bit of certainty. But we're planning for both cases, To be frank, and I think that's just prudent for us to be doing at the moment. Okay. But regardless of That if you've got state borders opening, you're comfortable with being profitable even without JobKeeper? Yes. With state borders open, that's the result we'd much rather take. Agnostically sitting here today, we'd rather borders be open enough earning Yes, keep in demonstrating that the strategy has worked rather than a continuation of JobKeeper. So that's not meant to be any value judgment on whether JobKeeper should continue or not, James. All right. Policy can move on to people, but great objectives Thanks John. Thanks John. Thanks John. The next question comes from John Heinz with Please go ahead. Hi, good morning, John and Owen. Thanks for taking my questions. Could you give us an indication of the split of the 30 odd 1,000 or 31 odd 1,000 jumps From New Zealand to Australia, this period, please? Yes. So in In terms of that, John, you're looking at about 5,000 if I just took some round terms in New Zealand and the balance being in Australia. Right. And perhaps more, I guess, looking forward a little bit more, the pontoon It's a great addition and operational in early 'twenty two. What how does that change your business up in Far North Queensland? And what sort of revenue opportunities should we be Thinking about is this incremental to what you're doing at the moment? So Joel, I think in terms of the project, I think if I understand where you're going, is it incremental or not, it certainly will be a better product in terms of that. But The Q1 call is that we were looking to refresh our product or we're at the end of it, economic loss in many respects of the existing Pontoon out on the reef. So this enables us to really just lock in that economic life of 15 plus years. But in doing so, we have looked To obviously have a product there, but we haven't banked in that upside. But certainly, the first quarter call is That we want to extend the economic life and make that capital work longer for us to protect that business. But in doing so, with the design of the There's scope for increased revenue streams either through additional activities, which We'll have the capability to do and also in terms of things like scientific research and having the facilities on board the pontoon to offer those. Okay. Maybe another way to ask that question is From what sort of revenue contribution would you expect to make on a percentage basis to the overall operations up there? And then, I guess, on a through cycle or a mid cycle basis, keeping in mind, Just helping us, mate, understand it. I think the total cost was at $7,000,000 What sort of return on capital would Do you aim for what's the internal what are the internal targets for projects like this? Yes. Okay. That's probably a simple one to answer. A project like this, John, we're talking sort of in the double digits in North. Now I would say with a project like this, as you'd well know, when you try and work out what's incremental, etcetera, it's quite a challenging one. The return on this project is certainly something we're quite satisfied and exceeds the threshold of 10%. Okay. Thanks very much. The next question comes from Alan Franklin with Canaccord Genuity. Please go ahead. Good morning, guys. Thanks as always for your time. I appreciate it. 3 from me, if I may. 1 financial, Two more operational. Just hoping for a bit of detail on the COGS line, just looking sequentially relative to the second half, COGS was Quite materially lower and gross margin high. I just want to understand what aided that, if I may. And then 2 operational ones, Just on pricing, are you how are you sort of seeing the propensity to spend in each of the different markets? Do the markets have different pricing sort of weekend versus Weekday or is there a way for you to sort of drive volumes through that way? And then just the last one, just on PeopleManagement. I know a lot of these sort of experienced jumpers Come in and out of your business sort of anyway, but just interested in how you're keeping a lot of those experienced jumpers busy and or on your books? Thank you. I'll pick up the next amendment with the financial numbers and then you can comment on that with the operational. So on the margin, Alan, there's a few things happening in that. Obviously, this is where we see the JobKeeper contribution coming in. So you'll have a workforce mix issue Playing out that overall net terms, it will be benefited in the period in the margin sense in that We're obviously operational. When we're operational, the cost that come through from JobKeeper, we'll put it through, and it helped us improve the margin through that. The second bit of that is we have been doing a lot of work around, as you know, the cost structure and that can be the commissions through all forms of distribution In terms of that and variable charges we've been working on. But there's no simple read through, I guess, in terms of that. There's a lot of moving parts In that, but certainly an area we've been focusing just to maximize it in the short term. And then in terms of pricing and demand, Certainly, as most of you are aware, we took quite an aggressive stance on pricing for Skydive Australia As we came out of COVID-nineteen, we felt as a management team, and this was agreed with the Board that In history, in some years, our product in Australia, considering the quality of the product, the quality of the drop zones, Quality of the aircraft and the instructors was that it was relatively underpriced. To give you an example, we had run-in some years upwards of 20 odd different sales during the course of the financial during the course of the year, which is we're now forced down to 8. For skydiving, we have basically gone for a consistent pricing model in peak season across The drop zones in that there's no differentiation between midweek and weekend. As we're going into the shoulder season, however, we have just introduced a midweek offer, and That's in response to, as I said before, this, I guess, this quiet period, which will keep going until April. Up on the reef, again, we've either maintained or increased our pricing. As being the tradition on the reef, there's There's been a lot of local discounts that have been provided by the operators, generally in the vicinity About 50%. But again, we've bought back our discounts on that round to the 30% market. And Unlike some of our competitors out there who have acquired locals rights to all of Queensland, we've maintained that to being in the local catchment area. And with respect of the question around the Tandem Masters, It's important to remember our TandemMaster workforce is a contractor workforce. So like any contractor, they can provide their services To other businesses, other operators, just like an electrician can fix my house and come fix your house, Alan. So they're able they've got a much more flexible work arrangement in and around that. A lot of them have been able to qualify for the JobKeeper program directly. But I guess for us, what we're able to provide is higher volumes of higher volumes of work than Our competitors do. And again, importantly, the equipment that we have, the aircraft and the drop zones that we provide For them, plus a lot of these contractors have contracted to us for a very long time. So there's a history in Connected with you with the company. Yes, sure. Thank you. And sorry, just one other quick one. So I think you alluded to November December being sort of circa 50% Normal volumes, just to clarify, so that's normal volumes including international, but relative to normal domestic that would be At or even higher than normal sort of domestic volumes pushing through those months? Yes, yes, yes. And I think that's one of the things that has been we have benefited from. If you think about on a normal basis for Skydive Australia, it's generally around 35% of our Customers are from Australia, and we're now seeing through some of the numbers. I think in December, it was around about 54%. So we're seeing a higher number relatively to what we do in normal trading. Now obviously, there's an impact COVID, Australians being as you were in Victoria and locked in your house for an extended period of time, you want to get out and jump out of Aircraft, so that's good. We realize that, that will happen, but we're also doing a lot of work at the moment on CRM and Direct sales so that we can continue that post pandemic. Perfect. Thank you. Much appreciated. Thanks, Alan. Thanks, Alan. There are no further questions at this time. I'll now hand back to Mr. O'Sullivan for closing remarks. Thank you, Anastasia. And once again, thank you, ladies and gentlemen, for your time this morning And before listening in any questions from the floor, I hope you all have a good day. Thank you very much.