Earnings Call: H1 2019

Feb 25, 2019

Ladies and gentlemen, thank you for standing by and welcome to Experian's FY 'nineteen Half Year Results Conference Call. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session. I must advise you that this conference is being recorded today, Tuesday, February 26, 2019. I would now like to hand the conference over to your speaker today, Mr. Bob East, Chair of the Board. Thank you. Please go ahead. Thank you, and good morning all. Thank you for your time today. I'm here with Owen Kemp, CFO for the business, with Anthony Boco, Managing Director and Founder of ExperienceCo. And we'll share the pack a bit today and obviously share the Q and A. So thank you for your time today. As we go through the pack, we'll probably call out page numbers. And again, thank you for your time today. So from the outset and as the Chairman update, the business is in quite reasonable shape. I think the results are reasonable too. Obviously, there's been some substantive changes in the business over the last period of time since taking on the chair role in October of 2018. We've seen a new CFO in Owen joined the business. We are obviously having advised the market. They were in a new looking for a new CEO of the business and I have stood in as Executive Chair for the last few years few weeks, goodness me, for the last few weeks. Look, as an overall view on the business and the market it's trading in, it is actually reasonably positive. So, the bones of a really great business, are certainly in order and with a new management team and a recruitment process underway, we're actually feeling confident of the growth prospects of the business, both organically and then in time as we look further field for acquisitions. The opportunities in our current trading markets in Australia and New Zealand are very strong. Tourism continues to grow quite significantly in the Australian market with 9,200,000 visitors and growing at about 6% to 7% and projected to stay in that similar trajectory over the next 5 to 10 years. And similarly, New Zealand, particularly, Queenstown and the areas we trade in is performing very strongly. There's a renewed management focus on systems and processes and building up our capabilities in regions to ensure we have good financial literacy, good data to draw from, good KPIs and tracking mechanisms in place so that as we've expanded this business with those controls and those systems are in place so that we can go on and build the business out from there. The team is actually an incredibly positive aspect of this business and we're really delighted with the efforts of all team members with over 1,000 team members in place now, very, very dedicated and very tourism focused and service the service culture and the safety culture in this business is really second to none. So there are outstanding aspects to this business as we go about improving other parts of the business to realize the full potential of the business, the service ethic and the individuals operating in our regions, it really is second to none. So we do think we can add some shareholder value and we are excited about the leadership. And aside from all of that, sitting here with Owen and with Anthony Voco or Bowie, we're genuinely excited about the prospects of the business. We feel like there's been somewhat of a reset and we're seeing a lot of opportunities of how we can do things better and how we can go about growing this business and working towards our vision. If I turn to Page 5, the announcements have already been made. But obviously, we've renewed management, we're in market to look for a CEO. And in fact, that has commenced and interviews have actually commenced. So we are well on track to secure a very suitable CEO for this business. My step in as Executive Chair is obviously a temporary arrangement until such time we secure the right CEO for the business. We're really pleased and it's absolutely vitally integral to this business that Bowie remains in and around this business. So the ASX announcement of a couple of weeks ago detailed Bo's intention to transition to a non executive director role and once a new CEO is underway. And that's a really pleasing and probably the most pleasing aspect for me personally and as a Board as we look at retaining the IP and taking this business to its full potential to have Bowie involved in the business and adding his significant expertise. As current Managing Director and obviously, Founder of the business, that's an invaluable transition for us and one we look forward to. Similarly, on the same vein, we're really happy with Owen Kemp arriving as Chief Financial Officer. That's a very, very good acquisition for this business and has already made remarkable inroads into this business as we go about unlocking the systems and processes and the financial capabilities of this business. Steve O'Malley in North Queensland is doing a very good job up there as is Clarke Scott GM of New Zealand. And we just announced recently that Ian Douglas GM of Corporate Development having joined or is joining us in fact next Monday, which is another important contribution to the executive team. The finance people and system is obviously a focus. It's one which Owen is well quick to handle as he goes about improving the financial functions, increasing disclosure and transparency and improving processes and systems. So as we get more sophisticated and implement new systems, we should be able to unlock the potential, particularly that we are multiunit or multifunctional business operating across different jurisdictions and regions. It's imperative that we get these hygiene factors in place. And a lot of them are well underway, but with that one on board, we feel very comfortable that, that will progress with some pace. Over to Slide 6. In terms of the vision and strategy, the core of this business and its intent remains intact. We are dedicated to the task of becoming the largest and most respected venture tourism company globally. We fundamentally believe that this is a niche that we can explore and prosper in. It is the highest growth engine of tourism and the visit economy across the globe. Those seeking experiences or hard and soft adventure, the bragability, the shareability of those experiences And it isn't it's not easily achieved. It does require very core capabilities in service, understanding the travel and distribution market, understanding the service culture and the safety procedures that go along with operating good, efficient, safe and well respected adventure companies. And we believe we've got the DNA or the core ingredients to capitalize on the opportunity. So we are really well positioned. We do have fantastic customer focus and as our systems and processes catch up to our capabilities, we should be able to ride what is effectively a bit of a tailwind in this sector. Placed. Over on Slide 7, just some financial highlights. The revenue is $84,000,000 driving an underlying EBITDA of $17,300,000 obviously up significantly on a like for like basis. However, sorry, on a period on period basis, obviously, with some acquisitions laid in the first half of FY twenty eighteen, We'll go into more detail of how these businesses are operating. But there's been over 92,000 jumps and in fact we've had 221,105 customers. So we are making some significant penetration into the tourism markets in which we operate. Cash is really pleasing story out of this. I want to go into more detail, but we believe we're getting a very good handle of the cash potential of this business and we've got good flow through on that front. I'll now hand over sorry, I'll go to Slide 8. And just to highlight and show on a full year run rate, calendar year of FY 2018, the split between Australia skydiving, New Zealand skydiving and the venture experiences, Again, you can see we've got a bit of a portfolio effect here as we're not overly reliant on one particular sector or geographic region. And we are getting good dispersal. As well as we are in places like Cairns where we have a multitude of front. That gives you a high level snapshot. I'll hand over to Owen now to take you through from Slide 9 on financial performance. Thanks, Bob, and good morning all. I guess, as Bob opened, the core business is in good shape, and this is reflected in the numbers for the first half of twenty nineteen where you see improvement across all the key metrics in the business. Revenue, EBITDA and net profit after tax were all up, and I'll discuss the drivers in more detail in the coming minutes. However, the main message I want to leave you with here on Slide 9 is the increase in earnings per share, which is calculated on the volume weighted. So we've taken into account the acquisitions and capital raising in FY 2018. And that's now $0.0103 per share on both the statutory and underlying earnings basis. Also down the bottom of Slide 9, you'll see there net assets per security. And now we're looking at about $0.33 per share, which is a slight growth up on June 30. Now moving into Slide 10. This is where we get into the trading. So the trading there, we see an increase in underlying EBITDA from 13 point $2,000,000 in the first half of twenty eighteen to $17,300,000 in first half twenty nineteen. Now this is driven, as Bob alluded to, by 2 factors. Firstly, we see some growth in the skydiving segment across Australia and New Zealand. And for the adventure experiences segment, we see the full year contribution of the first half twenty eighteen acquisitions, principally being Big Cat, Tropical Journeys and Great Barrier Reef Helicopters. The growth in adventure experiences was somewhat held back by extreme weather in late first half and softer trading conditions in the Cairns tourism market more generally. When we look at corporate costs, they were largely driven by the 30 June 2018 exit run rate, along with changes in headcount and some cost increases in things like insurance. Moving into the skydiving business on Page 11, we see skydiving underlying EBITDA increased by $200,000 So this was largely revenue led growth through jump volume with Australia up 1.4% on first half twenty eighteen and New Zealand 2.5%. The average price per jump increased largely on the back of healthy volumes at Wollongong and Queenstown, which are 2 of our high yielding price point drop zones. EBITDA margin was down in the period, which was a combination of operating cost leverage in our Far North Queensland business, which has been impacted by similar dynamics to what we see in the adventure tourism and increased costs across the sale cycle. And then more generally, I should say, there's probably been some changes across corporate and skydiving allocation as the business has matured. For those that have a thirst for more detail on the KPIs and I know there's a number of you, we've included summary information at Appendix 2 for both Australia and New Zealand. Moving into Slide 12. The story here is one of an impact of the Far North Queensland weather. Adventure experiences well up on the prior period has had its trading challenges principally from the previously mentioned weather and tourism trends more generally. That all said, the segment still produced $9,300,000 underlying EBITDA in the first half and remains a core business with the business being impacted by short term conditions rather than any fundamental issues. Bob will pick up on this further in the coming minutes. Moving into cash flow on Page 13. This is a great story as an incoming CFO. So we're pleased to report that cash flow for the period reflects an operating cash conversion of circa 100%. I would love to close the 103% and claim to have a magical business that generates more cash than earnings, but I'll settle with 100. This simply reflects the seasonal pattern of higher cash deposits in advance as at 31 December as a result of the Christmas and holiday peak period compared to the 30 June balance. Nonetheless, a strong testament to the operating cash flow conversion cycle of the business. CapEx of $5,300,000 for the half has the business well placed. We've included at this time some additional information on the maintenance CapEx cycle. Now naturally, this will vary from period to period. However, we've included these proxies for what you may see in coming years, but we'll look to guide you through each period. And for the FY 2019 period, we're looking at up to $15,000,000 CapEx. Moving into Slide 14 and into capital management. As Bob alluded to, gearing is low at 15% and the net debt to EBITDA at 0.7x leave us feeling quite comfortable. The short term outlook sees a more disciplined approach to capital management and no immediate need for equity. With that, I'll turn back to Bob and Bowie for the remainder of the presentation and look forward to meeting you over the coming days. Thank you, Arnold. Slide 15, it's the skydiving snapshot. Obviously, a core to our business. Obviously, this is a core competency of ExperienceCo. I think it's safe to say and I've been in and around this business for about 8 or 9 months now. This business is the market leader in skydiving generally, but more particularly the systems, the processes, the safety culture, the protocols, the equipment we use, the customer engagement, the logistics of transport, the activation of video and social, There's undoubtedly, we are significant market participants, but more importantly, market leaders in this space. The market this sector has stabilized following the unfortunate fatalities of FY 2018. We are seeing the resilience of this business and the return to normal market numbers and behavior. The weather events that look at have been outlined and they have impacted numbers to a point. However, with the portfolio effect and different regions operating, we are seeing a good stabilization in this sector. And we're seeing that continue through to the current month. And it gives us a sense that the business is trading nicely, marginally ahead of expectations and looking that it will go onto greater heights in FY 2020. Over to Slide 16, in Far North Queensland, We have included weather charts here and whilst it should be assumed that there are significant weather events on occasion in tropical North Queensland, particularly through the wet season. You can see this has been a particular outlier set of numbers with significantly high rainfalls and a lot of non operating days, which has obviously impacted the business and overlay that with the fact that these weather events occurred during peak trading period, it certainly did have an impact on our ability to transact with our customers. Having said that, Kansas is performing reasonably well on the positive side. We had some new hotels opening with the Crystal Brook Collection having opened the Riley and 2 more hotel openings imminent. The airport is has great capacity, particularly in the international front. But on current trading conditions, it's trading soft to marginally down with a constraint on domestic flights, running very high load factors of over 90%. But obviously, pricing and yield is a concern for discretionary spenders in the leisure domestic market and that is having a marginal softening effect on the Cairns region. We do remain committed to Cairns and we do believe that as internationals continue to grow that we are well positioned to capitalize on the market movements. However, our expectations are that a lot of our growth in the medium term will become will come through better organic systems and processes and unlocking the potential of very good products in that market. Over to Slide 17, I won't dwell on these, but obviously these acquisitions that came in and we just want to reset expectations, big cat and tropical journeys with shown a very simple graph there of expectations moving forward, not dismissing the capability of these businesses to outperform in our views, but setting an expectation around what a season may look like with good or bad weather associated with that. So looking at FNQ FY2019, rebasing expectations to somewhere into $7,000,000 to $8,000,000 EBITDA line. Over to Slide 18 and the Great Barrier Reef Helicopters. Again, important we share some information around this asset. The contract with Quicksilver does expire on 31 March 2019. This had not been budgeted to proceed beyond that point on the current earnings and of course, in the earnings guidance. The great sorry, the Quicksilver contract was a significant portion circa 40% of revenue and earnings. Having stated this, management has been working very hard on repositioning the asset to obviously reduce any impact of any short term earnings impact. There has been a restructuring of the cost base. We are targeting more commercial work, we've got some projects underway to unlock potential in that sector. And then obviously looking at more tourism products And we've also well progressed on some projects on that front. We are considering an investment or additional fleet investment there to better position our fleet with the potential in the marketplace. We operate up further north of Cairns, and we've identified areas that we think we can better utilize our fleet moving forward. The EBITDA expected to be impacted by circa $500,000 in the Q4 of trading. And then obviously, we'll be coming out with more information on this asset as we look to FY 'nineteen FY 'twenty guidance later in the year. It does remain core to our venture experiences. It does still have growth potential and we remain committed to the Great Barrier Reef Helicopter Business. I'll hand over now to Owen just on outlook. Yes. So the outlook is quite a simple one. You probably heard us say throughout the call. So no surprise there. The strategy is focused and remains as it always had on growing experiences and experienced growth. The key takeouts for us as we look forward to the core business remains solid and we're reaffirming the FY 2019 underlying EBITDA guidance issued on the February 13 of 30,000,000 to 33,000,000 for the FY 2019 period. Over the remainder of the year, you'll see continued improvement in processes and systems and then the management team working together as Bob alluded to earlier in the presentation. So that completes the deck. As a conclusion, the business is in a good sector. The business has component parts that are operating either best in class or developing to be best in class. The skydiving business is very resilient, has stabilized and we expect to see growth in that sector moving forward. And the other adventure activities we have under our banners, we will continue to extract both revenue synergies and cost synergies in those business. We intend to develop systems and processes that make it easier for us to conduct our activities across different jurisdictions and regions. And finally, we are genuinely excited about the leadership and the management team and the potential of this business moving forward. It's well positioned and with strong leadership, it can really carve out a really interesting niche in the broader tourism market. The operators that we have on the ground and those that are dealing with customers on a daily basis truly incredible and they really the secret sauce to us delivering great experiences to people in the ground. And that shouldn't be lost as we go about transitioning this business at a corporate level, which is where our focus has been certainly over the last few months and particularly since I've come on as Chair since October. So we're excited about the business and we look forward to meeting with you and discussing it further. On that note, we'll hand over to any questions. Thank you. Ladies and gentlemen, we will now begin the question and answer session. Your first question comes from the line of James Tracy from Veritas. Your line is open. Good morning, James. Yes, good morning, Bob and Owen. Thanks for taking my questions. The first question is on GVR Helicopters. You've outlined that you plan to potentially increase investment there. Why are you planning to put more capital into this business given that capacity utilization seems to have dropped on leaving the Quick Civil contract? That's the first question. Second question is on free cash flow. On my calculation, you delivered €8,700,000 of free cash flow in the half, excluding the proceeds of the asset disposal. That's sort of more than double what I was expecting. Can you outline what the working capital cash inflow in the period was? And what you expect on a sort of full year basis to what extent it would unwind? And then finally, could you just comment on aspirations for free cash flow going forward? Thank you. Just on the first one, Bowie will give the detail, but there has been a thorough analysis of the potential in the market. And then overlaying that with this is in relation to Great Prairie Reef Helicopters, overlaying that with the assets we have in market. Quite simply, we believe we're not in a position or a need for asset disposals. We obviously have activities and plans underway to sub plant any lost revenue. And we obviously have a number of levers to pull in terms of our own product and our distribution network up in North Queensland. 2nd to that, we've also identified greater potential for commercial work with the helicopters. We don't want to go into detail. Some of this is market sensitive. Some of the actions are market sensitive. But needless to say, there's been very thorough process underway, and we've known this event was coming for quite a few months or potentially coming for quite a few months. And therefore, our contingency planning has been in place for 5 to 6 months. Okay. So if I'm to paraphrase sort of that, sort of see quite big opportunities in that helicopter area, despite the fact that you've lost one contract. And so you're planning to sort of invest ahead of that. Is that correct? Good morning. It's Bowie. That is correct. We have had a look at the commercial opportunities up on the tape and also around the Greater Cairns region. And there is a lot of commercial opportunities within that region that previously we haven't really targeted. The business traditionally was mainly a tourism business with an offshoot of commercial capacity. And now the focus will be definitely in the commercial. And there are also a number of tourism activities that we are targeting that previously we didn't put as much energy into, and we will focus heavily into those. As well as we're adding some machinery, we will be removing some machinery as well. We will cease with the flying school, which hasn't made profit prior to our ownership or currently. There'll be 3 machines we will dispose of, and they will offset the costs of a number of the newer machines. I hope that gives you a bit more clarity. No, that's perfect. Thank you, Barry. And maybe, James, if it's Owen here, I'll pick up Tier 2 of the question, which I think was around the cash flow, and I'll try and paraphrase the story here. So I think, yes, free cash flow is probably ahead of expectations there, but that's probably more of a capital story than a working capital, albeit there is a bit of working capital in there. So maybe if I just talk to the working capital that you alluded to and speaking of that in terms of the operating cash conversion, so the EBITDA to operating cash flow. Look, I wouldn't expect it to be 100% in all periods, but it is the sort of business when you go to it effectively, I described it being similar to a cash book that as we head into the second half, even accounting for seasonality, it would be something I would expect to be at least the 80% but probably around the 90% mark for the second half. And you might ask what the key driver is of that. It's going to be around the deferred revenue. So taking a step back from our numbers, we get a lot of our cash before we actually perform the service. So you do have a bit of a timing gap. Naturally, there's a lot more of that at 31 December than at 30 June just due to seasonal factors in both markets of skydiving and adventure experiences. So that's on the operating and working capital side. Moving on to the free cash flow side as we go down, probably looking more at the CapEx there and what we have in maintenance CapEx. So we are tracking sort of lower than what we did in the prior year in that regard. And look, we're going to have that capital discipline heading into the second half. And that doesn't mean we'll miss opportunities for growth capital as well, but you'll probably hear us talking about those if we're doing them. So I guess things like GBRH where we're looking to deploy capital, we can get into semantics of whether that's growth or reinvestment. But ultimately, we'll look to call out those chunky spikes that we might have, but we'll live within our means of $15,000,000 for the whole year of total CapEx. Okay, that's very clear. Thank you very much, Alan. No worries. Your next question comes from the line of Mark Chiari from Wilson. Your line is open. Hi, guys. I'm just interested in the Cairns airport numbers. Most airports are growing around the country and just wondering what the major airlines have done to sort of halt the growth of the Cannes airport? Is there any specific pricing or capacity things that they've done in the last year or 2 that you guys can detail? Yes. So they have had growth. It's plateaued now. The biggest consideration with Camden Airport at the moment is domestic arrivals or domestic capacity. Quite simply, Qantas and Virgin are running with very high load factors and neither parties has been willing to increase capacity over the last period of time. Pricing, this is reflected in pricing. If you have a look at any of the portals, Webjet or any of your favorite aggregated portal, you'll see that pricing is reasonably high into cans at the moment. So whilst a lot of the focus is on the international sector, about 70% of the arrivals coming in on domestic flights are reportedly international. So you're seeing a constraint on domestic leisure travel and price competitiveness in the leisure market. This has been playing out for some time. It's not a new event, but it is it's having a bit of a softening effect. I think there's a double whammy there with some really poor weather and a lot of that last minute discretionary spend would have gone to other locations given their wet season was particularly bad. On the international front, they have had some wins, but you'll see that they've also had some losses. China Southern will pull out of that market, and that will obviously give some unwind to the inbound direct out of China. So it's not all positive, it's not all negative, but we have a cautious outlook on cans and tool. But obviously, the next iteration of this may well be increased capacity and therefore these things do tend to be cyclical, pricing is getting to a point where you would think it would be tempting to put on additional capacity. But that's up to the airlines and the airport to negotiate those arrangements. Thank you. There are no questions at this time. Presenters, you may continue. Okay. So there being no further questions, we will we look forward to seeing as many people as we can over the roadshow. And we thank you for your time today. Thank you very much. We'll end the call. Ladies and gentlemen, this does conclude your conference for today. Thank you for participating. You may all disconnect.