Coast Entertainment Holdings Limited (CEH) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Financial Results of Ardent Leisure Group for the First Half of FY '20. [Operator Instructions] I would now like to hand the conference over to Dr. Gary Weiss, Chairman of Ardent. Please go ahead.

Thank you, and thank you, everybody, for joining us on this call today. In the course of 2017, shareholders supported my campaign to fix Ardent, the group which, on any measure, was dysfunctional and had lost its way. Towards the end of 2017, I was appointed to the Board and then appointed as Chairman. While it has taken longer and cost more than anticipated, we have made significant progress. A time line of what has been achieved is set out on Slide 1. In April 2018, we completed the sale of the Bowling & Entertainment division, had an EBIT multiple of 32x with the proceeds used to reduce debt. We appointed first-class leaders at both Main Event and at Theme Parks. Recognizing that safety is a critical element for Ardent and that we strive to achieve the highest level of safety standards for all our operations, we appointed as Safety Adviser to the Board of Ardent, Geoff Sartori, the former General Manager of Group Safety for Qantas. We have cleaned up financial reporting to provide shareholders with greater clarity and transparency. We've cleaned up the corporate structure. We've significantly reduced head office costs. In April last year, we completed refinancing of the group with a new USD 225 million facility. At Dreamworld, we've invested in new rides, with the opening of Sky Voyager and the Fully 6 water slide in 2019. And at Main Event, we continue to focus on improving performance and executing at our growth strategy. Turning to Slide 2. In terms of Main Event, you will see from the results that good momentum has been established and is building in our business. With Main Event, Chris Morris is supported by an exceptional and highly experienced management team. 3 centers have already opened in FY '20 and are performing well, and a solid development pipeline has been established. It's worth noting at this stage that when I assumed the Chair of Ardent, the development pipeline for Main Event growth had essentially stalled. We believe that Main Event has strong prospects and would like to put the business in the best position possible to maximize the growth opportunities available in its core market. The Board has therefore appointed Goldman Sachs to explore potential partnership arrangements with parties that could support and accelerate Main Event's growth trajectory. There is, of course, no certainty that any discussions in relation to Main Event will result in any transaction. In terms of Theme Parks, John Osborne, has appointed, similarly, a highly experienced management team who are committed to the recovery of the business and have well placed them to implement the Coroner's recommendations. Our investment in rides, attractions and entertainment continues with a pipeline of new and exciting rides to come in the future, including a new world-class roller coaster rated in the top 10 roller coasters in the world, which will be coming to the park in the medium future. Finally, the master plan for the excess land surrounding Dreamworld is progressing well with the aim of maximizing the substantial value of the land. Our head office operations have also seen the benefits of restructuring with significant corporate cost reduction year-on-year. In addition to a potential partnership transaction in relation to Main Event, Ardent continues to monitor its capital requirements, taking into account existing balance sheet capacity, growth objectives and new opportunities as they arise. I'd now ask Darin Harper to take us through the financial aspects of the group results.

Thank you, Gary, and good morning, everyone. Before we get into our performance, there is 1 housekeeping item to discuss regarding our first half results. First, our statutory results for the first half of FY '20 include 1 extra operating week versus the prior corresponding period due to FY '20 being a 53-week year. Second, the first half of FY '20 also included the adoption of the new lease accounting standard, AASB 16. The new accounting standard affects comparability of results due to a significant part of the associated expenses now being reported below EBITDA as well as higher lease-related cost overall being recognized under the new standard. Please note, however, there is no impact on the group cash flow associated with this new standard. As a result of the extra week and the adoption of the new lease accounting standard, we've provided pro forma results alongside our reported results to enable like-for-like comparison with the prior year. For the balance of this call, when discussing year-over-year variances, I will focus on our pro forma results, unless otherwise noted. Lastly, I refer you to the appendix of our posted results presentation for a listing of defined terms used during the call. Now I'll quickly focus on the key highlights from Slide 4. First, consolidated pro forma EBITDA, excluding specific items, which represent significant non-trading income or expense items, which are noncash or nonrecurring in nature, was $19 million, up $5.3 million or 39% over the prior year. Main Event pro forma revenue was up 4% or USD 5.5 million versus prior period led by a 1% growth in constant center revenue as well as the contribution from 2 new centers opened during FY '19 and the first half of FY '20. For the Theme Park division, pro forma revenue increased $1.7 million, which is up almost 5% versus the prior period, representing the continuing impacts of the turnaround plan. While pro forma EBITDA, excluding specific items, was a loss of $2.9 million, this has improved approximately $2.2 million versus the prior period loss of $5.1 million. Corporate costs have decreased approximately $5.3 million, reflecting the anticipated benefits from the previous restructuring initiatives undertaken by the group as well as a reduction overall in restructuring and nonrecurring items. Please refer to Slide 23 for a historical trend of our corporate costs showing the significant reduction in the overall cost structure. Turning to Slide 5. We've set forth a graphical presentation of our consolidated group results, providing both the reported results alongside the pro forma results as well as the prior period results for the first half of the year. Excluding the impact of the extra week, revenue for the group grew $20.5 million, up 9% versus the prior period due to growth in both the Theme Park and Main Event businesses. Further, as presented in the reported versus pro forma EBITDA chart on the upper right-hand side of the slide, we're calling out the significant impact of the new lease accounting standard had during the first half of FY '20 and moving forward as EBITDA benefited $23.5 million due to the inclusion of associated lease expenses below EBITDA in the form of amortization and interest expense. Additionally, the extra week of trading benefited current year EBITDA another $5.8 million. Excluding these impacts, EBITDA improved $14.7 million versus the prior year. However, further excluding the impact of specific items, EBITDA improved $5.3 million, as previously mentioned. Lastly, the net loss after tax reported during the first half of FY '20 was impacted by higher costs of approximately $6 million under the new lease accounting standard as well as higher profits due to the extra operating week. Moving to Slide 6. Here, we are presenting our reported results as well as reconciling columns showing the impact of the new lease accounting standard as well as the extra operating week in order to arrive at the pro forma results for the first half of FY '20. The key item that I'll draw your attention to is the fact that while the new lease accounting standard benefited reported EBITDA due to the required classification of lease costs below EBITDA, it has an unfavorable impact on reported net loss due to the acceleration of costs to the lease liability interest expense. Again, note that this had no impact on our cash flows. And I refer you to Appendix 1 in the posted results presentation for a breakdown of the impact of the new lease accounting standard on EBITDA profit as well as our balance sheet. Turning to Slide 7. Here, we have our consolidated group results shown on both reported and pro forma basis versus the prior year. As previously noted, on a like-for-like basis, revenues increased 9% while EBITDA, excluding specific items, increased $5.3 million, up 39% versus the prior corresponding period. The group reported a net loss after tax of $22.5 million for the period, $19.8 million on a pro forma basis compared to a net loss of $21.8 million in the prior period. This moderate decrease in pro forma net loss is primarily due to an increase in EBITDA partially offset by a $10.4 million increase in borrowing costs following the completion of our refinancing in April 2019. Slide 8 provides a breakdown of the specific items impacting the results. In addition to the aforementioned impact of the new lease accounting standard, we've seen a significant reduction in nonrecurring costs, led by Dreamworld incident costs being $5 million lower than the prior year and a $7.2 million reduction in restructuring and other nonrecurring costs. Please refer to Appendix 2 for a breakdown of these specific items by business unit. Now let's turn our attention briefly to the performance of Main Event, and then I'll hand the call over to Chris Morris. Moving to Slide 10. As previously noted, Main Event revenue on a pro forma basis, excluding the impact of the extra operating week, increased 4%, reflecting a 1% growth in constant center revenue as well as a full period contribution from 1 new center that opened in FY '19 and a partial year impact from 1 center that opened during the first half of FY '20. Due to the significant impact that the new lease accounting standard has had and will continue to have on Main Event's EBITDA, we believe that EBITDA, excluding all noncash lease amounts in current and prior year, is a better measure of our underlying performance. On a pro forma basis, excluding specific items, Main Event's EBITDA, excluding all noncash run items, increased approximately USD 1.2 million, an improvement of approximately 40 basis points on margins year-over-year. This margin increase was driven primarily by a 60 basis point improvement in general and administrative costs due to lower regional and central labor costs. Overall, we're pleased with the underlying momentum of the business during the first half including the recent performance of our new center openings. As a reminder, the second half of the fiscal year is a higher volume period of time for the business and the EBITDA generated along with associated margins will reflect this. With that, I'll now turn the call over to Chris Morris.

Okay. Thank you, Darin. We are very pleased with the momentum in our business and impact our teams are having in our centers every single day. In the spring of last year, we noted an improvement in our leading indicators. By the end of 2019, our guest experience measures were at all-time highs, turnover figures were at 4-year lows, and employment engagement figures were at historically high levels. As discussed at the AGM in November, this trend continued into fiscal '20. We are now seeing steady improvement in comp store sales and believe there is real momentum in the business. After starting off the year with soft sales, trends picked up in September and have continued through today. Constant center revenue growth in Q1 was down 2.2% and up 4.3% in Q2, resulting in a 1% increase in constant center revenue through the first half of the year. We are very encouraged by the underlying trends in our business and remain optimistic about our outlook. In fact, we are raising full year constant center revenue growth guidance to be in a range of up 1.5% to up 2.5%. Underlying our improved performance are a number of key accomplishments in the first half of the year. First and foremost, our ongoing commitment to improving the guest experience continue to fuel improvements in our leading indicators. We successfully launched a new brand identity with a fresh uptempo logo and messaging. This rebranding injected new energy and relevance into our brand. Additionally, it launched a new wave of vibrant creative applications supporting all of our marketing. We reconfigured our game card packages, enhancing the value proposition while driving per cap spend. We successfully rolled out Kids Eat Free Tuesdays during the first quarter of the year. Going forward, this will be a permanent value offer similar to our long-standing Monday Night Madness. We completed the rollout of the VR platform with over 15 distinct experiences with evolving content. We brought seasonal news to our fall LTO program with the launch of the Halloween promotion uniquely, positioned us to drive both value and experience at the same time. We implemented a national gift card program resulting in Main Event gift cards being sold in 5,000 retail outlets across the U.S. And we successfully exited and closed one of the 5 impaired locations, Pittsburgh, Pennsylvania as part of an ongoing portfolio optimization program. This was a negative cash flow center. So accordingly, its closure will be accretive to margins moving forward. For the second half of the year, we are focusing on the rollout of new birthday party packages and a new website to broaden our appeal and improve the guest experience. Growing birthday sales is a top priority for us in the second half of the year. We're currently implementing certain day-part strategies to drive increment revenue during times with excess capacity. We're investing in and implementing technology to enable an even better guest experience. We're implementing handheld tablets to improve the quality of the guest greeting; mobile point of sale allowing for a seamless, engaging guest experience while eliminating long lines; various kiosks throughout the center to provide consumers with more transactional options. And we're developing a one of a kind mobile app. We're building upon new sponsorship partners. We recently announced a category first partnership with Dallas Cowboys. This partnership will provide us with an array of marketing rights, benefits, designations that will unmistakably connect the brand with the Cowboys and its events, properties, players and the many memorable experiences that Cowboys create that capture the passion of families and football fans. We will continue to seek out relevant partnerships, allowing us to connect our brand to local communities while cementing ourselves as the leader in family entertainment. Moving on to new center development plans. Since the beginning of the year, we have opened 3 new units. All 3 openings were ahead of schedule and under budget, and all are performing higher than original expectations. Baton Rouge, Louisiana opened in August; Grand Prairie, Texas opened in January; and Laredo, Texas just opened February 16. One more will open in May of this year in Wesley Chapel, Florida, bringing the F '20 total to 4 centers. We're currently projecting 5 new center openings during F '21 and reaffirming our target of 5 to 8 new units per year next year and beyond. There remains considerable white space for ongoing development. Our brand continues to be well received across many developers, and we are now becoming the preferred tenant among many landlords. Landlords like our family-friendly positioning and the quality of our buildout and product offering. So in summary, our teams all across the U.S. are making incredible progress. Our people-first culture is inspiring our teams to go above and beyond and our unwavering commitment to improving the guest experience is starting to generate results. We're pleased with the positive momentum in our business and believe we are well positioned for the balance of the year. We have a strong brand and a leadership position in a growing and robust category with ample white space to grow for many years to come. We will continue to use our size to create competitive advantages, invest in smart marketing to build brand awareness, lead through innovation and deliver a guest experience that is unmatched in the marketplace. With that, I'll now hand the call over to John to walk you through an update on Theme Parks.

Thank you, Chris, and good morning to everybody. Darin has already covered the financial performance of the group, including the Theme Parks division. So I will just briefly touch on the key results before providing an update on our key achievements during the first half of financial year '20 followed by an update on the current projects. Turning to Slide 16. The Theme Parks division has experienced growth in revenue and attendance for the first half of the year primarily driven by strong trading during the school holiday periods. Revenue was up 4.9% compared to prior period as a result of improved attendance and an increase in the average per capita spend. In September, we increased the cost of the annual pass by $10, resulting in no adverse effect on sales. Excluding specific items, the Theme Parks division recorded an EBITDA loss of $2.9 million, which is a 44% improvement on last year. Improved revenue and per capita spend, along with the general expense reduction program implemented 12 months ago, are the key drivers for this improved result. It's also worth noting that this result was achieved against the backdrop of increased operating expenditure in the areas of safety, systems and maintenance. While there is still a lot of work to be done, we are encouraged by the positive trends we've seen in the first half of the year. With the restructuring that has already occurred within the Theme Parks division and a disciplined approach to investment, we remain confident that the turnaround plan will continue to deliver improved financial performance. Turning to Slide 17. Our team has delivered on several key projects during the first half. In August 2019, we opened Australia's first flying theater, Sky Voyager. This ride has enjoyed huge success around the world and is now entrenched as Dreamworld's most popular attraction. It was also announced in August that we were embarking on a major transformation of WhiteWater World. This transformation included the refurbishment and repainting of 8 water slides and the construction of a new water slide complex known as Fully 6. These works were completed on schedule prior to Christmas. The new Fully 6 slides and the improved presentation of WhiteWater World have been welcomed by our guests over the summer months and the success of these investments augurs well for the planned product investments at Dreamworld. During the first half, we also continued to successfully stage several major events and pop up attractions, such as Winterfest, Happy Halloween, Monster Inflatable and the internationally acclaimed Fun House. These events and attractions have been well attended by annual pass holders and new guests alike and continue to drive improved attendance and guest experience. The delivery of these projects and attractions, supported by well-targeted marketing campaigns, has seen attendance at the Park over the Christmas holiday period be the best it has been for many years. It is particularly encouraging to see our guest satisfaction scores achieving all-time highs during these periods of increased attendance. Moving to Slide 18 and the Coronial Inquest. We have been advised by the Coroner's office that the findings and recommendations will be released on Monday. Dreamworld has taken substantive and proactive steps to improve safety across the entire park in recent years and continues to enhance existing systems and practices as well as adopt new ones. Dreamworld has embraced the Queensland government's new major amusement park regulations introduced on the 1st of May 2019, and we congratulate the Queensland government for introducing these world-leading regulations, which provide for more prescriptive major inspections of rides, improved instruction and training of ride operators and a fundamental shift to a safety case licensing model, such as that for major hazardous facilities from the 1st of May 2021. The significant enhancements already made to our safety systems build on the welcome new regulations, best practice in the theme park industry and draw upon safety and engineering systems and processes from high-reliability industries such as the Australian commercial aviation industry. Turning to Slide 19 and the outlook for the second half of financial year '20. Trading during late December and January has been positive. The results are pleasing and a testament to our investment in new product. The coronavirus has caused concerns around the world, and will no doubt have significant implications for many industries. The duration and full impact of the coronavirus remains uncertain on our business. Our initial observations are the Dreamworld has seen a downturn in attendance, given the timing of the outbreak coincided with Lunar New Year, but the SkyPoint is likely to be most impacted given it typically relies more on the international market than Dreamworld does. In order to mitigate the impact of the coronavirus, we have renewed our focus on the domestic market, and we are adjusting operating costs at both SkyPoint and Dreamworld, where possible, to reflect any changes to trading patterns. We have also maintained a continued focus on team member and guest safety. We will continue to monitor the situation closely and, if necessary, provide a further update. Since the start of the year and during the first half of February, we've seen significant and prolonged periods of storms and severe weather on the Gulf Coast. This resulted in Dreamworld and other theme parks in the region closing for several days due to flooding and also to ensure the safety of team members and guests. The combination of the extremely bad weather, uncertainty associated with the impact of the coronavirus outbreak and the possible impact on attendance resulting from the release of the Coroner's report means it's unlikely that the Theme Parks division will breakeven in financial year '20. Despite these short-term setbacks, we are confident that our turnaround plan is working, and the positive results achieved in first half '20 demonstrate that the recovery is well underway. Planning is well advanced on the new multi-launch roller coaster, which we announced in August last year. Fabrication of the coaster is well underway, and the first components are expected to be delivered in March to coincide with the commencement of on-site works. We're making good progress with several other key projects planned for progressive implementation over the next year, including a new ticketing and digital marketing system and the refurbishment of ABC Wiggles World, which will include a new ride. The theme park industry is showing strong growth around the world, and we believe that the successful execution of our planned investments, along with a continued focus on operational excellence, will unlock pent-up demand for high-quality, out-of-home experiences consistent with the worldwide growth in this category. I'll now hand back to Darin to talk about the group's corporate costs and capital management.

Thanks, John. I'm just going to quickly hit the highlights on the next few slides, and then we'll open up the line for Q&A. On Slide 21 and 22 notes our ending debt, net debt position of approximately $133 million as well as undrawn capacity of approximately AUD 128 million. As mentioned previously by Gary, we continue to monitor our capital requirements taking into account our existing capacity, our growth objectives and new opportunities. And lastly, on Slide 23, note the significant reduction in our corporate group costs over the last few years. We've taken our recurring cost base of over $16 million to approximately $8 million annually, and our nonrecurring costs have significantly declined. So this concludes our prepared remarks. And with that, we'll now open the call to Q&A.

[Operator Instructions] Your first question comes from Sam Teeger from Citi.

Gary and team, good job over there with the turnaround. Just in terms of the first question, yes, good to see you getting out of the Pittsburgh site. How do you rate your prospects of getting out of other loss-making sites? And just from a cash flow perspective, how much did you have to pay off the landlord to get out of the lease?

Sam, this is Chris. Thanks for your comments. I'll start, and I'll turn it over to Darin, and Darin will walk you through the economics of Pittsburgh. But listen, we've talked about this before, we're always looking for opportunities to optimize our portfolio. We had an opportunity with the Pittsburgh location simply due to the landlord was a REIT, and that particular REIT, we were in discussions around several other potential opportunities for that REIT to finance our development. And so it allowed us to work out a negotiation where it made sense for both parties. The other 4 properties that are impaired, we simply don't have that type of relationship. We're always active in conversations, trying to make the best of the situation. But at this point in time, we have no immediate plans to exit those locations. But again, always keeping an open eye, always having conversations and looking for those opportunities. But all that said, I will tell you, from an operating perspective, we've made considerable improvement in all 4 locations. The total EBITDA increase of the 5 impaired centers and the numbers that we reported, there's a $500,000 increase in EBITDA across those 5 units. So we're making steady improvement on shoring up the P&L, both in the middle of the P&L and on the top line. So making the best of the situation, but there's only so much that we can do, given the current dynamics of the landlords. Darin, do you want to go through Pittsburgh?

Yes. I won't get into all the specifics, Sam, but the way that we were able to structure it given that this was an existing landlord for us and our ability to redeploy assets that we had in Pittsburgh, to redeploy them elsewhere and reduce capital costs. On an NPV perspective, it was accretive to us. So -- and overall, it was a really good negotiation that's left us with a very de minimis liability to address moving forward.

Right. And moving on to the second question, just keen to explore this Dreamworld outlook in a bit more detail. Given the park makes most of its money during the peak of school holidays and the coronavirus only became an issue in February and wet weather only arrived after the peak of school holidays, just wanted to understand your thinking around the pushback in breakeven. And also, but appreciate that the coronavirus might reduce Chinese visitation, which will be less than 10% of total visitation, but when do we expect to see an increase in that 80% of visitation who are Australians, both locals and domestic tourists who are probably going to be traveling overseas less right now given coronavirus concerns and also the weaker dollar, making it more expensive.

Yes. Thanks, Sam. Look, I think just trying to unpack that question into a couple of areas. I think the impact on SkyPoint, as I mentioned in my comments, is likely to be greater than the impact on Dreamworld. That's because SkyPoint has a higher reliance on the international market, particularly the Chinese market. With respect to Dreamworld, I would agree that -- and I would be optimistic, although it's early days to say that Australians will do exactly what you've said. They still want to take their holidays. Rather than traveling to parts of Southeast Asia and other international destinations, they're possibly likely to travel domestically. So therefore, in the later part of the year, coinciding with future school holidays, it could actually be more local travelers than we've had in the past. So I would agree with that. In terms of the immediate effect, I think the confluence with the end of school holiday period and the Lunar New Year really did have an impact on February, along with what was extremely bad weather. And I guess potential impact of the Coroner's report means that we have at risk potentially a couple of months in the second half. So that's the reason for the comments that I made.

Right. And just given your calling out SkyPoint, of the, say, $40 million in revenue -- sorry, $38.7 million in revenue for this division, what relates to SkyPoint and what relates to Dreamworld?

We haven't actually disclosed that in the numbers, Sam. But I think it's fair to say that the thesis that locals will travel more, the impact won't be material overall, but it really does depend on what does happen with the coronavirus. And like most of us, I get 4 to 5 e-mails every morning describing to me what's going on with the coronavirus from various authorities. And I've got to say that I get 4 to 5 different answers from the 4 to 5 e-mails that I get, so it's a bit too early to call, I think.

Sure. And just in terms of what's happening in the park at the moment, seeing you are going to be retiring the Rocky Hollow Log Ride, but there's been some other ride retirements as well, do you think you need to accelerate the rate of investment in new rides to offset some of the retirements that are quite popular with some of the locals?

Yes. So just probably to bring you up to speed, we have actually retired the Log Ride. I think you said we're thinking about retiring, but we have actually done that. That means we've actually retired 3 rides in the last year, which are well documented. We've installed Sky Voyager, which has greater capacity than -- or equal capacity to, say, 2 of those rides. We've got our roller coaster coming during the next 12 months, all things being equal. And I agree with you, I think we do need to look to accelerate the -- some decisions on future rides, and we're working hard on that. I think I mentioned in the presentation that we are developing a pipeline of new rides, and we certainly got some advanced thinking around what they should be. That 3 rides out not as popular as people think or thought in terms of the usage of them, brand-new state-of-the-art ride, even that's got more capacity than those and new water slide capacity, which opened on time and on budget. And we've got a roller coaster on its way. And don't forget the pop-up attractions that we've had great success with, and they will continue over the course of the next year as well. So they also take up some of the capacity that you might be talking about.

Great. So do you think you'll breakeven now in FY '21?