Thank you for standing by. Welcome to the SkyCity Entertainment half year 2023 results conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Michael Ahearne, Chief Executive. Please go ahead.
Good morning. Welcome everyone to SkyCity's investor call on the FY 23 interim results. I would firstly like to recognize the traditional custodians of the land upon which all our SkyCity sites sit. Ngāpuhi, Ōrākei in Auckland, Tainui in Hamilton, Ngāi Tahu in Queenstown, and the Kaurna people in Adelaide. With me today in Auckland is Julie Amey, our Chief Financial Officer, and Callum Mallett, our Chief Operating Officer in New Zealand. Our investor presentation on the interim results was released to the stock exchange earlier this morning. We're gonna take that presentation as read and hence focus on the key themes and our observations across the period, leaving time for Q&A at the end. Turning to the key themes for the first half of the financial year.
I want to start by saying that I feel incredibly proud of how our team has dealt with the opportunities and challenges over this period. In particular, our frontline employees, who've been incredibly flexible as we've navigated through a positive recovery in customer visitation in the first half in 3 years where we've had no mandated closures. This has been a period of intense regulatory focus, which has taken considerable effort and diligence from management and both SkyCity Entertainment Group and SkyCity Adelaide boards. I'll address this in more detail later. We had a strong first half financial performance, noting that the prior year period was significantly impacted by COVID-19. Group normalized revenue of NZD 487.4 million was up 87% year-on-year and just 6% below FY19 half one normalized revenue performance.
Normalized EBITDA of NZD 162.4 million was up 348% year-on-year and pleasingly in line with FY2019's normalized EBITDA performance. The group's normalized NPAT of NZD 73.1 million was up well over 400% year-on-year, and we've also declared an interim dividend of NZD 0.06 per share. From these results, it's evident that our businesses have once again recovered quickly from the significant adverse impacts we experienced as a result of the pandemic period across our New Zealand and Australian businesses. I'm thankful for our operational staff and leadership team for their focus on customer experience, operational improvement and cost management, all of which has positioned our business well to deliver the strong recovery in revenue and earnings.
We successfully completed collective wage agreements both in New Zealand and Australia in the period, which was a positive outcome for our employees and the business. Retention and recruitment of our people has been a significant priority for the group. While we have made a lot of progress on recruitment, there are still a large number of vacancies across the group, approximately 450 positions, particularly in Auckland. Positively, we're seeing a material increase in the number of applications for roles. Given resourcing constraints, we continue to prioritize our resources to our highest performing businesses. As an example, our Auckland outlets in the first half 2023 are operating at approximately 55% of the capacity that they operate at pre-COVID.
We are planning to start expanding our operations in the near term through reopening and expanding the hours of outlets that are currently either closed or operating under capacity constraints. In Auckland, we're seeing continued positive momentum in the New Zealand International Convention Centre and Horizon Hotel project. We expect the convention center car parks to be progressively returned to the operation during 2023. Horizon Hotel to be completed in 2024, and the convention center to be completed in 2025. The project remains complex, including the insurance arrangements, but we remain comfortable with our contractual position. The process in relation to the buyback of the Auckland Car Park Concession from Macquarie is underway, and we expect to conclude the process in this financial period. We have in place the appropriate funding through a combination of existing liquidity and additional USPP financing.
As I mentioned earlier, and as you're all aware, regulators across Australasia remain highly focused on the casino industry. The New Zealand regulator, the Department of Internal Affairs, continues to undertake routine reviews of our casino operations, including our compliance with AML and host responsibility obligations. DIA has expanded its resourcing over the past 12 months. We continue to work proactively on enhancements to the SkyCity New Zealand host responsibility and AML capabilities. As you know, AUSTRAC commenced civil penalty proceeding against SkyCity Adelaide in November, in December of 2022. We are currently working with our legal advisors to review and assess AUSTRAC statement of claim and each of the specific allegations that it contains. There is still considerable work required to complete that process. It could take one to two years to resolve these proceedings.
As we've previously disclosed, any associated penalties could have a significant financial and reputational impact on SkyCity. We continue to cooperate with the South Australian regulator, CBS, in relation to the independent review of SkyCity Adelaide. As you will be aware, in July 2022, CBS appointed Brian Martin KC to undertake an independent review of SkyCity Adelaide in light of interstate inquiries into various casino operations in Australia. The independent review was a major focus for the SkyCity Adelaide team in the half, which involves responding to extensive information and document requests, as well as interviews with employees and directors. On the 6th of February 2023, the commissioner advised that Mr. Martin had formed the view that until the resolution of the AUSTRAC proceedings, it was not possible to reliably determine the question of suitability.
On that basis, the commissioner has determined to put the independent review on hold and has extended time for the provision of a written report of the findings of the independent review until after the conclusion of the AUSTRAC proceedings. The commissioner has also advised that he's considering his options regarding any action he should take whilst the independent review is on hold, including whether he will seek that the company undertake any actions in the interim. SkyCity Entertainment Group and SkyCity Adelaide will continue to cooperate with CBS and any further requests for information and documents. We also continue to progress our AML and host responsibility enhancement programs across the group. This area remains a major focus of both SkyCity management and our boards. We continue to have regular dialogue with AUSTRAC as we progress the AML uplift program in Adelaide.
As part of the uplift activities, we put in place new senior AML resourcing both in New Zealand and Adelaide, improved governance and investment on ICG systems and KYC processes. We have also recently implemented a number of pilot initiatives in SkyCity Adelaide to further enhance our AML CTF processes, including the introduction of a cash limit of 5K, NZD 5,000 per day for a customer, as well as a mandated card of play for all customers in our VIP rooms. Moving now to performance of our properties as outlined on slides 9 through to 14 in the presentation pack. Auckland has performed strongly with normalized EBITDA of NZD 128 million at a very strong margin in excess of 45%.
This has been a record performance for the property in a six-month financial period, largely driven by domestic visitation with a recovery from international tourism in Q2 and a focus on operational execution. The gaming machine business has been a highlight with strong revenues driven by growth in all segments, in particular the main gaming floor. Continued investment in product and the recovery of domestic visitation have been the key drivers. Table games continues to recover, albeit at a slower pace than electronic game machines. The non-gaming operations, hotels, food and beverage, and attractions have recovered quicker than anticipated and have benefited from the recovery of international tourism, which we anticipate will continue. This performance has been achieved even though the majority of our open outlets have operated at reduced capacity and some are yet to reopen.
Auckland margins were exceptionally strong, driven by the work done by the management team on operating model refinement and cost discipline, but were potentially slightly inflated due to labor shortages. While Auckland has had a very strong half, revenue, with the exception of electronic game machines, is still well short of pre-COVID levels, highlighting the continued growth opportunity in this business. The SkyCity Hamilton and SkyCity Queenstown businesses have performed very well in the period, driven by strong local visitation and activity. In particular, SkyCity Hamilton business generated in excess of NZD 19 million normalized EBITDA in the half, which is a record for the business. We've continued to invest in new gaming product, and the changes that have been made in the operating model are proving beneficial. We've also planned to open a new restaurant at SkyCity Hamilton in April this year.
Operational momentum continues at SkyCity Adelaide, with a very strong performance in electronic game machines offsetting a slower recovery in table games. The non-gaming operations continue to gain momentum with our award-winning hotel, EOS by SkyCity. They're delivering strong rates and occupancy. Adelaide has seen significant growth in costs, which has impacted margin, such as increased utility costs, increased compliance resourcing costs, and additional legal costs. The international business, which was largely focused on domestic Australian activity, has had relatively low levels of activity as anticipated. The SkyCity online casino performed well in the half, but slightly down in the prior year, which was assisted by COVID-19 lockdowns. A strong brand and product continued to deliver high customer retention rates. The increasing competition in the New Zealand online gaming market reinforces the need for regulation and a level playing field.
We continue to actively advocate for the regulation of online gaming in New Zealand. However, it is unlikely we'll see significant progress in 2023, given the general election in New Zealand later this year. We are currently exploring whether we could enter the Ontario market as a regulated operator. SkyCity's investment in Gaming Innovation Group is proving beneficial from both a strategic and financial perspective, with that company advancing its growth objectives over the period. I will now hand over to Julie to make some comments on our financial and capital management before closing. Julie.
Michael, and to everyone listening in. It's great to be able to share such strong financial performance from across our group for the first half of the period, particularly after a couple of very challenging years. The group's reported EBITDA of NZD 106 million and reported NPAT of NZD 23 million for the period demonstrates the capability of our businesses to recover quickly from adverse events. This is even more evident from the normalized earnings performance, which removes the largely technical accounting adjustments to enable a better understanding of the underlying operational performance of the group. I refer you to slide 8 in our investor presentation, which summarizes the financial performance and highlights the recovery in the group's normalized EBITDA to deliver NZD 162 million, with a margin of over 33% for the period.
Of our normalized group revenue delivery of NZD 487 million, 50% was from local EGMs. This performance is 30% higher than EGM revenue for the same period in the 2019 financial year. While table games remains our second-largest revenue contributor in the period at NZD 118 million, this was 13% softer than the first half of 2019 and a clear indication of a slower recovery for tables post COVID-19. Hospitality was a meaningful contributor in the first half, delivering 13% of the group's normalized revenue, and this is around 20% higher than the same period in the 2019 financial year. With a significant upside from Adelaide post the expansion, offset by the operating constraints in Auckland that Michael referred to earlier.
With 11 of our 12 Auckland food and beverage outlets operating at availability well below their pre-COVID-19 levels. As an example, during the first half period, our most popular and profitable restaurant, Orbit, which happens to feature on the cover of our investor presentation, only operated at around 57% of its capacity compared to pre-COVID-19 operating levels. It was great to welcome 1,200 new employees to our SkyCity whānau during the first half of the financial year, there still remains a significant number of vacancies that need to be filled in order for our businesses to operate without resourcing constraints. The ramp up in staff also brings a ramp up in our manpower cost, with manpower continuing to be the single biggest expense of the group at around 50% of our cost base.
An increase in the cost of our compliance activity was also a feature in the first half, with NZD 9 million spent during the period on both the one-off regulatory responses and enhancement activities, and also on the ongoing baseline activity, Host Responsibility and Financial Crime departments. On that ongoing baseline compliance activity, we expect the cost of our Financial Crime and Host Responsibility departments to be around NZD 10 million annually, which is about three times higher than in the 2020 financial year. As I mentioned earlier, our reported and normalized results differ considerably in some areas. A detailed explanation of these differences is included in the appendices of the presentation. These differences include adjustments for our Auckland investment property valuations that are independently assessed every reporting period against the fair market value of the Auckland commercial real estate market.
Fair accounting for the New Zealand International Convention Center project remains complex, but this will simplify as the project moves out of the reinstatement phase and back into the construction phase. I will also call out that there has been an adjustment to this fair accounting that was triggered by Macquarie exercising its termination option under the Auckland Car Park Concession agreement. All other accounting adjustments that will be required in relation to unwinding the concession agreement will be made when the buyback of the concession is complete. Moving on to our balance sheet. Our capital spend during the period was relatively low at NZD 23 million, compared to the run rate of BAU CapEx in a normal year.
Our focus has remained on affordability during the period and directing our capital spend largely to core maintenance and upgrades to ensure we retain our health and safety standards and on gaming product replacements to grow our customer value proposition. The group also remains financially resilient, with borrowings of NZD 391 million at 31st of December 2022 and a healthy level of liquidity headroom of NZD 475 million, which includes NZD 390 million of syndicated debt that remains undrawn to date. We are also no longer reliant on debt covenant relief from our banking syndicate and USPP partners, having met our standard covenant tests at 31st of December 2022 with a gearing of 1.6 times.
The lifting of these restrictions, coupled with our strong normalized NPAT performance and free cash flow delivery, have enabled us to declare an interim dividend of NZD 0.06 per share. This dividend is in line with SkyCity's existing dividend policy. As Michael mentioned earlier, we have also successfully secured new structured funding of $75 million from our USPP partners, which will help to finance the buyback of the Auckland Car Park Concession. We are very mindful of the uncertainties in our operating environment and will continue to retain an appropriate level of liquidity headroom to ensure the business remains sustained as we navigate these uncertainties. However, we do expect this headroom to reduce over time and back to the liquidity thresholds as determined by our treasury policy.
Regarding these uncertainties, as Michael mentioned earlier, any associated penalties related to the AUSTRAC proceedings could have a significant financial and reputational impact on SkyCity. We have included a very comprehensive note in our interim financial statements on the proceedings, and I want to call out in particular that it is not yet possible to reliably estimate a provision for any potential financial penalty that may arise. Before I hand back to Michael for a trading update, I want to thank our financiers and our investors for the great support we have received as we navigate our regulatory matters and our post-COVID-19 recovery. The group is entering the second half of the financial year in a very strong position, and we look forward to closing out the financial year in the same way. Now over to you, Michael, for the trading update.
Thanks, Julie. A few comments around recent trading and our focus for the remainder of the year. I'm pleased to say that the revenue trends observed in the first half of the financial year have largely carried over into January, with no indications yet of a recessionary environment, although the group remains cautious. International tourism recovery is anticipated to continue, which assists the Auckland precinct in particular. We continue to see significant cost pressures across the group, including operational costs such as salaries, wages, and utilities and legal costs associated with the AUSTRAC enforcement investigation and proceedings and the CBS independent review. We have also established a chief risk officer position that we're currently undertaking a search for. We do not anticipate any material activity in the international business in the second half.
Financial year 2023 normalized EBITDA is expected to track ahead of FY 2019 levels on a like-for-like basis, with estimates ranging from NZD 305 million-NZD 320 million, excluding any upside from the integration of the Auckland Car Park post completion of the buyback of the Car Park Concession from Macquarie. This assumes no significant changes to the group's operating environment and settings. It will come as no surprise to you that a significant amount of my time, my management team's time, and the Board's time will continue to be prioritized on our regulatory matters and ensuring that our enhancement programs put in place meet the expectations of our regulators and are sustainably embedded deep into the organization. As mentioned at our annual meeting last year, progress continues to be made from a governance perspective.
We have established a separate Audit Committee chaired by Chad Barton and Risk and Compliance Committee chaired by Kate Hughes. The SkyCity Adelaide board is chaired by Glenn Davis, who is also a SkyCity Entertainment Group director and is based in Adelaide. Subject to regulatory approvals being obtained, David Attenborough will become a director of the SkyCity Entertainment Group board from the first of March 2023. David has extensive experience in the gaming industry in Australia and globally and is well known to most of you on this call. In summary, the first half was pleasing from an operational performance perspective and again highlights the potential within our business. There continues to be significant regulatory scrutiny and focus on our business, and we continue to focus on enhancing our AML and host responsibility practices.
I want to personally thank all of our investors and shareholders and financiers, both on this call and more broadly for your ongoing support. With that, I will hand back to the operator for Q&A.
Thank you. At this time, we'll conduct the question and session. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A start. Our first question comes from the line of Justin Barratt of CLSA. Please proceed with your question. It seems we've had a disconnect from Justin Barratt. One moment for our next question. Our next question comes from the line of Matt Ryan of Barrenjoey. Please proceed with your question.
Thank you. Michael, just got a question on the enhancement programs in Adelaide and whether you can clarify where the use of carded play is gonna be required. I think you sort of mentioned that carded play is now required in VIP rooms. If you could just clarify whether that includes all private rooms or just the rebate business. Just on the program, I know it's really early days. You obviously rolled out a lot of the stuff just in January, but just curious as to what your thoughts are around the initiatives and what sort of impact you're expecting to play moving forward.
Morning Matt. Thanks for the question. Well, firstly, these initiatives, both the carded play and the limit on cash, these are initiatives initiated by SkyCity. They're not initiatives that have been forced upon us. So the carded play in VIP rooms is going quite well. VIP rooms, a lot of the play was carded anyway. You know, we're very high percentage of card. I think it's in excess of 99% actually, that we're achieving there. In time, we don't have technology in place to enforce that right now, so it's being done sort of manually. In time we would see that we'll put the technology in place to enforce that.
It's early days in relation to those changes that we've made in relation to cash limits. We will be analyzing those over the next number of months to understand, you know, what they mean and so on. And just in relation to the carded plays, it's all VIP, not just IV. It's all VIP rooms in Adelaide that we've made that change as part of a pilot.
Thank you. Just a second question, just on the guidance for the second half. Obviously you've had some more subdued table games growth compared to machines. What's your assumption baked into the guidance around table games into the second half?
Look, I think that table games being slower than AGMs has been a trend over two years now, to be honest. We assume that that continues. We haven't assumed any major recovery in table games. We are seeing in Auckland in particular, we're seeing the benefit of additional open hours. As we bring more staff and we get more employees into our table games area, we're getting more open hours. You know, we're, you know, I would say realistic in our expectations from table games.
Okay, thank you.
One moment for our next question. Our next question comes from the line of Larry Gandler of Credit Suisse. Please proceed with your question.
Hi, Michael. Hi, Julie. Thanks for taking the question. With regards to Auckland's hospitality business, you're obviously indicating and showing that revenue's been impacted by, I guess, scheduling. I'm just wondering about profitability, 'cause, you have been able to manage through that, those scheduling issues in some cases may be voluntary. Can you talk to profitability of hospitality in the half, and how do you see it rolling out over the next six to 12 months?
Thanks, Larry. Look, I'll make a few comments, and I might get Calum to give you a little bit more color on that. I think seasonally we're seeing a recovery coming through in some revenues, still quite a gap to what we were seeing before. The work the team are doing generally on enhancing margin through a number of different measures is helping us to run the business, all business in particular, at healthy margins. Maybe Calum, you want to talk about some of the detail about what you're doing.
Thanks, Michael. Good morning, Larry, and everybody. Look, you know, as you've seen, significant restrictions for us in the F&B space across New Zealand, to be honest, but, you know, most obviously in Auckland. As Julie pointed out, you know, we've really focused and prioritized on our highest margin businesses and highest margin meal periods. As we discussed at full year results, you know, a big focus on margins for F&B, and a number of you will remember what we talked about re automation and productivity initiatives. It's pleasing to see that they're having an impact. As you can see, F&B margins at around 20% now versus pre-COVID at around 16%.
We think we can keep it around that mark, albeit, as we open more outlets, you know, obviously, we will have to watch that. Demand is there. Right at the moment, on any given day, we have greater demand than we do supply. We're working hard, both as a business, but also with associations and government entities to help with the staffing in this space. We see, you know, good growth still in our hospitality business, as we move into this full year, and particularly as we move towards the FIFA tournament, in July and August and spring and summer as hopefully airline capacity grows as well.
Thanks, Calum.
Thanks. Can I just ask, just with regards... Give me a sort of a guide for, I guess, overall demand. Sky Tower, I know, it's a, you know, an important tourist attraction there. Can you give us a feel for whether that's now operating at above pre-COVID levels?
It's getting back towards pre-COVID levels on certain weeks and certain months, Larry. You know, we've seen a really strong January in the tower despite extremely inclement weather. It's building back to what we would hope, but certainly on a half year basis significantly down from pre-COVID.
Yeah.
Some good trends.
Larry, I think what we're seeing from a trend point of view, we're definitely going to get back to pre-COVID levels of visitation and activity, but we're not there yet. We're on a pathway there. With that extra revenue and visitation and the new measures that we've put in place, that will help, you know, drive further growth in our earnings in the Auckland property.
Fantastic. Thank you.
One moment for our next question. Our next question comes from the line of Adrian Allbon of Jarden. Please proceed with your question.
Good morning, team. Just a couple of questions. The first one, like, are you able to sort of... Like, I know you sort of commented, like, on the earnings front, sort of tracking back towards pre-COVID, which this result has demonstrated nicely. Obviously there's a lot going on in the growth in the next couple of years, like both in terms of finishing capital projects and sorting out some of the regulatory stuff in the Car Park Concession. How should we think about, like, returns tracking back to pre-COVID levels? Like, is, with all of that stuff in the mix, is tracking back to pre-COVID levels, like, optimistic or do you think achievable?
Look, as you say, there's a lot changed in our business pre-COVID. You know, we have businesses now that we didn't have online, we didn't have actually pre-COVID. That's, you know, a business in an annualized basis that makes, you know, in excess of NZD 10 million EBITDA. That's a business that, you know, has exponential returns. We'll have the new hotel convention center coming on, you know. We're really positive about those, you know, coming back based on, you know, the demand we're seeing in right now from tourism perspective, and how they'll fit into the portfolio both directly, but also the indirect benefits that they will drive to the Auckland business.
We also have extra costs in our business, you know, and you can see we've handled those costs quite well, I think. You know, we have very significant extra compliance costs that are a feature of our business as we look forward. You know, I don't wanna get into specific guidance about the long term of the business. We see, you know, we've got back to pre-COVID levels of earnings actually a bit quicker than we thought we would, which is really good. We see this as a base now that which we grow from in all our businesses, to be honest.
Okay. Some positive mix stuff, equally a lot of OpEx pressures and responses and I guess twisting the business towards more cashless still to come on that front?
Yeah. Yeah.
Just 2nd question. Around the casino duty stuff, obviously been a major issue with some of the peers. Just, can you just sort of give a little bit more detail, firstly on, like, what sits behind the outstanding bit in Adelaide? I think it's note 14. Like, what would be the sort of magnitude of that kind of investigation?
Look, what I would say firstly from a casino duty point of view, we're in a stable environment in New Zealand and Australia for that matter. That casino duty matter is something that's been ongoing for many years, that was just stepping through in the process. I don't think we've actually disclosed the actual amount on that. You know, I think we've made a... Whatever is in the note covers it.
Okay. Just like... I mean, you sort of started by sort of mentioning like New Zealand being stable. If my understanding is correct, like the certainty that was sort of signed when you did the building contract for ICC was seven years, which has sort of just expired. What's the sort of process that you're sort of undertaking to sort of manage any sort of change on that front?
There's not a, there's not a process. You know, that was an agreement that was put in place. You know, the casino arrangements in relation to GST and the duties have been in place before that. I go back to when the licenses were established. There's not a, there's not a process we need to go through to renew anything. It's just, it applies. This regime applies to all casinos. That exclusivity or change was just in relation to the Auckland property.
Okay. It's just, it's BAU on that front for Auckland. All you lose is kind of like the certainty that was signed against the contract if someone did wanna make a change.
Yeah. Any change. There's no, you know, movement or any rumblings of any change.
Just on Adelaide, is effectively any change like, enshrined in the sort of exclusivity deal around the license as well? Is that the right way to think about that?
Sorry, I'm not following that. Oh, in relation to tax, is it?
Yes. Well, in terms of the casino duty tax. Like, is that sort of set with the license extension and exclusivity on that front?
Yes, it was.
Okay. Cool. Thank you.
Thank you.
One moment for our next question. Our next question comes from the line of Mark Robertson of Forsyth Barr. Please proceed with your question.
Morning, all. Congratulations on a very strong first half. I might just follow on from Adrian's last question there and ask it in a little bit different way. Obviously, you've got tax certainty in South Australia until 2035. Are there any scenarios where this could be superseded, similar to what we have seen with Star in New South Wales?
Mark, look, it's not something that, you know, we're working on or considering, to be honest.
Oh, okay. Thank you. I guess one other question, just how you're finding the labor markets in the markets you operate. Obviously, it's still a pretty tight labor market, are you getting easing in that, and how close are you, do you think, to nearing stable employment?
It's probably In Australia, it has improved quicker in South Australia, Adelaide has improved quicker than it has here in New Zealand. Look, in fairness, we have made progress over this period. I think Julie mentioned it. We've employed about 1,200 people over the course of the past 12 months. Now we've obviously had attrition in that period as well. And you know, our vacancy number remains at four, over 400, but that's because, you know, we've more demand, so we're creating more roles. Potentially we're seeing more applicants for open positions than we did, say, 3 months ago. Potentially it's easing slightly. However, I do think it's gonna take, you know, at least probably 6-12 months.
I think in 12 months time, you know, you would be hoping to have all those positions filled, you know, getting us back to, you know, close to 5,000 employees.
Awesome. Thank you. Then, just one more. Just given the recent increase in the minimum wage in New Zealand, can you just remind us how much of your labor force is on that minimum wage?
Well, we've already put an agreement in place, and we'll have an increase that flows through in April, I think. It actually doesn't really apply. That's, you know, we in our agreement with the union, which we came during the year, we already had agreed to element that, and it was above the minimum wage, so it doesn't have any direct impact.
Awesome. Thank you.
One moment for our next question. Our next question comes from the line of Wade Gardiner of Craigs Investment Partners. Please proceed with your question.
Hi there. I've got a couple of questions. Hey, how are you going? First of all, on the tables, can we just explore that again, particularly in relation to, say, Auckland, where, you know, they are weak versus the pre-COVID levels. What do you think has actually changed there other than the scheduling and open hours? You know, has anything you think changed within the market that means we won't get back to those levels?
I'm gonna ask Calum in relation to Auckland, which is obviously the largest table games business. Calum, did you wanna comment to Wade on this?
Yeah. Thanks, Wade. Look, I would start, I know you said not in relation to scheduling, but I would start with that because that has been the fundamental challenge for us. When we started the half, we were at about 5,000 open table hours per week, and we're now at around 6,000 open table hours a week as we've been able to ramp up staff. We believe demand still exists beyond that. We are still actively hiring into that space and training. There's a number of challenges there.
One, as Michael's already alluded to, the ability to find staff, then getting those staff licensed because as you would know, you know, staffing shortages are a challenge, you know, pan-industry in New Zealand, and so a lot of the departments we have to deal with on those licenses are also understaffed, and so that slows down all those processes. That, that has been the number one issue to date. Secondly, flowing on from that has obviously been just the return of the tables customer. We have seen after every lockdown that tables customers, both from a VIP perspective but also from a premium mass and main floor perspective, are slower to return than EGM customers. We are seeing momentum in that space.
Certainly things such as the opening up of China and just that tourist market coming back, will inevitably help support tables moving forward. The second part of your question was around do we see it getting back to pre-COVID numbers? Yes, we do. It will take longer than we would obviously like, and we would think it's, you know, in the term of, you know, one to two years to get back to pre-COVID numbers rather than something that will return in a half year.
Just to follow up on that, just to clarify, I mean, 5,000 table hours at the beginning, rising to 6 now. What, you know, how does that compare to pre-COVID? What sort of, you know, what's the comparison there?
Sure. Pre-COVID, we would've been around the 7,000 mark.
Okay. Just on slide 16 on your capital projects. Can you just clarify a couple of things here? In other words, that's to get you up to the NZD 750, but the gross number will be somewhat higher subject to what insurance proceeds are still pending. Is that correct? Also on your balance sheet, you've got a receivable of NZD 91 million. How does that relate to, I guess that gross CapEx number? How should we re-review that gross CapEx?
Julie might be able to.
I'll share some color on that. The NZD 750 million is the total SkyCity obligation around the project, the NZICC and Horizon Hotel project. The NZD 138 million is what we believe is, you know, it's our obligation to finance. Of course, the way that the reinstatement's working with insurance is that we're in the middle of that. As insurance proceeds come through, we pay them on. Once we clear that, we pay them on through to Fletchers. In terms of, in terms of that's we still believe that that is our obligation. That's predominantly CapEx, but not all CapEx because that's project costs as well.
In relation to the receivables, that is just the subject of timing between the insurance proceeds and Fletchers coming through and the payments on the back of it.
There's no material mismatch in terms of receiving the proceeds from the insurance versus the spend to Fletcher Building. In other words, NZD 138 is what we should assume is the net cost.
Yes, definitely. We always receive the insurance proceeds first and then pay them on.
Okay. Just in terms of that NZD 23.4 million CapEx, that is all just BAU. There's nothing in the CapEx for, you know, for the NZICC and the hotel in terms of your share.
No.
In other words, it's not covered by insurance.
Yeah, this is for our property, for our operations.
Yeah. Like, you can see we've won back that BAU capital quite a bit. We prioritize things like our gaming products. We've prioritized in the half, you know, we're being quite prudent in terms of our BAU capital spend.
Okay. One final question from me, just in terms of the IB turnover. Was it? I can't remember the number there. NZD 1.2 billion. What's the split there between, say, Auckland and Adelaide?
1.2.
What should we assume in terms of margins going forward? 'Cause it looked to me like the margins were reasonable there, you know, relative, you know, given the, a relatively low turnover.
Look, I don't have that to hand exactly. You know, there was activity in both. Most of our activity, however, is Australian VIP play. In Adelaide, the vast majority was actually, you know, domestic Australian VIP play being played.
I think on the, on the slide, if you look at Auckland and Adelaide, you'll see, the performance, including and excluding the IB play. I just don't have the turnover of that equivalent to hand.
Yeah. Look, I think it would be... You know, we're not expecting much activity in the third half. You know, we'll see in the future what that looks like. Certainly from an international point of view. Domestic Australia we'd expect to recover before any, you know, true international play.
Okay, thank you.
One moment for our next question. Our next question comes from the line of Rohan Sundram of MST Financial. Please proceed with your question.
Thanks. Hi, team. Just a couple from me. Firstly, on the increased investment into compliance, I appreciate you're talking mainly headcount. What kind of headcount are you running in terms of relevant staff, and where do you see that going in the near term?
Julie, do you want to take that question?
You see in our investor pack, we talked around 80 dedicated positions that we have across the group there. Around 60 of those are sort of sitting in host responsibility, which is very sort of people intense frontline, and the balance is financial crime, which is very much in this people plus system and in interrogation of systems. In terms of that, we have pretty much as at today, we are largely resourced based on the programs and the enhancement programs we have. There are a few sort of vacancies, a few handful of vacancies which we're looking at. Largely, you know, our target operating model is in play there. That is based on the programs enhancements that we're putting in place at the moment. I guess the...
The cost breakdown is really between, probably three classifications of compliance costs. One is that response to regulatory matters and enhancements to our program in Australia. And that's, you know, for this year, we're forecasting that to be around AUD 12 million. The second area is really on BAU activities. That is what the financial crime teams and host responsibility teams are doing on a day-to-day basis. That's a cost that we. A new baseline for a cost estimate for that is about AUD 10 million annually, and that's about three times, as I mentioned, higher than what we've had in the past. I guess the third category, which we haven't got a cost for, it's a future, potential future cost, is if there is anything changing in regulation that requires us to make procedural changes.
you know, there is clearly gonna be a cost associated with that, which we are using the pilots in Adelaide to help us understand what that might look like.
Thanks, Julie. Last one from me, just to gain confirmation, you provided some line item guidance and also CapEx guidance in the previous results, and I've take on board your comments around BAU CapEx. Does that guidance still stand, or do you think you might run a little below on the CapEx side? Also-
Um-
The line item guidance on the corporate and net interest.
For this, for this financial year, we've certainly been cautious on CapEx. CapEx will come in slightly lower than what a normal year would be. We would expect that we would get back to, you know, the normal CapEx of about, I think we've quoted about NZD 75 million-NZD 80 million in a, in a normal year. For this year, you know, we are taking a cautious approach to spend. Corporate costs very similar. I mean, you'll see that for the first half, our corporate costs come in, pretty much aligned with full year 2019 levels. It is predominantly manpower costs sitting in there as well. We don't expect anything significantly to change through that.
Being mindful that corporate costs now includes, I think, software as a service classification, which is an accounting change, so that used to be a CapEx number. I think in this year, we have about NZD 1.5 million of costs associated with that. That's just a change in classification that wouldn't have been there in 2019.
Great. Thanks, Shirley. Thank you.
One moment for our next question. Our next question comes through the line of Marcus Curley of UBS. Please proceed with your question.
Good morning. Just 2 from me. I just wondered, Michael, if you could talk a little bit to, you know, the run rate on Adelaide. Obviously it's, you know, probably a business which has opened or reestablishing itself a little later than what we've seen in Auckland. Yeah, how would you sort of talk to, you know, the performance in the 1st half? Would you say that's a new base or, you know, is that sort of business continuing to improve as sort of the COVID issues die away in Adelaide?
Morning, Marcus. Look, I think from a revenue point of view, it had a pretty pleasing performance. What you can see is, the margin is impacted by, you know, significant costs. You know, the gaming machine business is doing really well. The hotel there doing really well. Table games, you know, we think there's hopefully in the long term, more upside in table games. With a lot of costs there, some of them are one-off in nature and will disappear, but some will continue. I think it's gonna take some time. You know, it's probably gonna take longer than we'd anticipate to see.
You know, we need to get through our focus there is obviously to get through the deal with the regulatory matters that we have, making sure we've got the right enhancements in place, and they're embedded in the organization. Then from there, you know, get the business operating really well. You know, I think in the medium term, you know, we still, you know, I think this is the first half that we've actually had a normal period. You know, the market share performance in EGMs is probably a real highlight. You know, we're seeing, you know, just under 10% market share in a market that has grown very considerably. You know, that's been a real positive.
By the sounds of things, Michael, you're sort of, suggesting that it was a relatively stable and clean half from a revenue perspective. It's, you know, like you would, you know, I don't wanna put words in your mouth, but it's sort of incremental from here as opposed to, you know, the exit run rate out of Adelaide would suggest, you know, a much more, you know, substantive revenue step-up as, you know, over the next 12 months.
I think the way to think of Adelaide is we started again, you know? That's really the way, 'cause it's had, you know, an opening then closing and so on. This is the first sort of standard half from a revenue point of view. You know, we think of all of those businesses, they're still just establishing themselves and we've, you know, new things that we're adding in there, including, you know, more compliance elements and so on that, you know, that will work through the system. You know, I think that's how I, my commentary on how I characterize it.
Okay. Then just on international VIP, can you talk a little bit about, you know, what your approach will be? Obviously, you mentioned, you know, limited play in, you know, in the second half. Let's say as you step into FY 2024, you know, China borders reopened. You know, are you going to step back into that direct VIP market, you know, in FY 2024 or do the regulatory overhang issues mean that, you know, you need to get all that squared away first?
Look, I think it's too early to say really what that international component of VIP looks like in the future. You know, our focus in that business is really the Australian VIP play, and in particular, bringing that play to Adelaide. You know, that's where our focus right now is. There's a lot of uncertainty and knowns in the international component over the medium term.
You know, just in terms of the backdrop there, are you effectively saying, you know, even if you had reverse inquiry, you know, from some of your known customers, that you wouldn't be accepting their business in the current circumstances or, you, or you're just not outwardly promoting, you know, attracting players in?
Well, it's just, you know, it's just that we don't know. Like, the reality is Macau is only kicking off right now. You know, we've processes that are being embedded. Like we have had international customers in this period. You know, the China borders haven't really opened yet. I think there's just a lot of uncertainty here. It's very hard to therefore make predictions about the future.
Okay. Just to be clear, you're not closed, you know, for direct VIP business.
No.
It's just.
No.
Okay. Thank you.
Thank you. At this time, I would like to turn back to management for closing remarks.
Yeah. Look, thank you everyone, for your time on the call this morning. Look forward to engaging with many of you over the next week or so. Really looking forward to that. Thank you.
Thank you.
This concludes today's conference call. Thank you for participating. You may now disconnect.