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

Thank you for standing by, and welcome to the Ardent Leisure Group half year financial results conference call. [Operator Instructions] I would now like to hand the conference over to Dr. Gary Weiss, Chairman of Ardent. Please go ahead, sir.

Thank you. Welcome, everybody, to our results call. It is said that a week is a long time in politics. In the case of Ardent Leisure, the past 12 months has seemed an eternity. A year ago, we reported particularly encouraging results. In relation to Main Event, following the appointment of Chris Morris and his team some 18 months earlier, Main Event was evidencing strong momentum with a return to good like-for-like sales growth and the resumption of a well-defined and executed program for new center rollout. Against that backdrop, we announced our intention to initiate a process to introduce a partner to our U.S. business to help accelerate growth. In relation to theme parks, following the appointment of John Osborne and his team some 14 months earlier, Dreamworld had experienced its best Christmas/New Year trading results since 2016, and there was a program underway to refresh the offering with a pipeline of new rides and attractions and with SkyPoint on track to deliver its best-ever trading result. All of this was, of course, upended by the COVID-19 pandemic, the greatest global health challenge for over a year -- over 100 years. Ardent has met the substantial challenges arising from the global pandemic by refining our business models and reshaping our operations and I do particularly want to call out the impressive leadership of the teams at Main Event and Dreamworld over this period, and also significantly strengthening Ardent's financial position through the partnership with RedBird Capital in relation to Main Event announced in June last year and through the financial assistance package negotiated with the Queensland government in relation to our Theme Park business. The last few months have seen us battle the devastating second wave of the pandemic in the U.S. and border closures in Australia. Despite these very significant headwinds and challenges, both of our businesses have, in relative terms, performed well in the circumstances. Ardent's businesses have shown considerable resilience in the face of these particularly adverse challenges. And with effective vaccines being rolled out and hopefully the end of the pandemic on the horizon, we believe that our businesses are well placed to resume the growth that was well underway 12 months ago and with it the restoration of value for Ardent shareholders. I will now pass to Darin Harper to take you through the results.

Thank you, Gary, and good morning, everyone. On Slide 2, let me start by reminding everyone that our statutory results for the first half of the prior fiscal year FY '20 included 1 extra operating week due to FY '20 being a 53-week year. We have presented the prior results on a pro forma basis, consistent with our presentation in the prior year, and have included a reconciliation to the reported results in the appendix of the presentation. For the balance of this call, when discussing year-over-year variances, this will be against the prior year pro forma results unless otherwise noted. Furthermore, please note that the lease accounting standard was implemented at the start of the prior year, and thus, our current and prior year results both reflect the impact of the new standard. We have continued, however, to quantify the impact of the lease accounting standard in our specific items, and this can be found on Slide 4 of the presentation. Lastly, I will refer you to the appendix of our posted results presentation for a listing of defined terms used during the call. Turning our attention to the key highlights on Slide 2. Our results for the first half of FY '21 reflect the significant impact that COVID-19 has on the results of both of our businesses. Group revenue was down over $109 million and EBITDA, excluding specific items, was down $38.8 million versus the prior year. On a U.S. dollar basis, Main Event revenue declined $54.4 million and EBITDA, excluding specific items, decreased $27.3 million. Despite the significant headwinds from COVID, we are pleased with the underlying sales results of the Main Event business, which we will discuss in more detail later during the presentation. During the reporting period, we had several of our centers closed for varying lengths of time due to state or local restrictions, but by January of 2021, we returned to having 42 of our 44 centers opened. We also opened a new center during the first half of FY '21. And despite the ongoing impact of the pandemic, our results have been remarkably strong. We are very pleased with the performance of our last several new center openings, demonstrating the effectiveness of our revised real estate approach. With regard to Theme Parks, revenue was down $23 million, with both Dreamworld and WhiteWater World being closed until 16th September 2020. Despite the decline in revenue, EBITDA, excluding specific items, was down less than $1 million year-over-year. Furthermore, strong annual pass sales from the local drive market, a disciplined approach to capital spending and the JobKeeper wage subsidy boosted cash receipts, resulting in trading for the period being cash positive. John will walk through the performance of Theme Parks in more detail later in the presentation. Moving to Slide 3. As noted earlier, revenue for the group declined $109 million or 44.3% due to the negative impact of COVID-19 on both businesses. EBITDA, excluding specific items, was a loss of $19.8 million, which was down $38.8 million from the prior corresponding period, reflecting the revenue decline as well as the high operating leverage nature of the Main Event business. Corporate group office costs declined $600,000 versus prior year as a result of prior restructuring decisions and tight management costs. Net borrowing costs increased from $11 million in the first half of '20 to $17.7 million in the first half of '21 mainly due to the inclusion of the RedBird paid-in-kind preferred stock dividend, amortization of capitalized borrowing costs incidental to the RedBird transaction, and lastly, a change in net debt balances in the current period. Lastly, we had a lower tax benefit in the first half of '21 due to the current period being impacted by a $19.7 million tax expense relating to Australian and U.S. tax losses and Australian deductible temporary differences not recognized as deferred tax assets during the period. Turning to Slide 4. Here, we have provided a breakdown of the specific items impacting our results. In addition to the aforementioned impact of the new lease accounting standard, the specific items for the first half of FY '21 also include an impairment charge of $4.1 million related to leased right-of-use assets associated with one Main Event center that was previously impaired. Additionally, we incurred $4.4 million of restructuring and other nonrecurring charges in association with the RedBird transaction, write-off of [ debt ] site costs for Main Event and a penalty associated with the cyber breach, which is expected to be recovered in the second half of FY '21 via insurance proceeds. Also important to note is the continued immaterial costs associated with the Dreamworld incident. Now let's turn our attention briefly to the financial performance of Main Event, and then I'll hand the call over to Chris Morris. Moving to Slide 6. As previously noted, Main Event revenue declined, on a U.S. dollar basis, $54.4 million or 37.7%, primarily reflecting a reduction in constant center sales due to the impact of COVID-19, which resulted not only in lower consumer demand but also in temporary center closures during the period. Additionally, we had 2 permanent center closures during the second half of FY '20, and these were partially offset by full period contributions from 2 new centers that opened in FY '20 and 1 new center that opened in the early FY '21. Regarding our constant center revenue performance, on a like-for-like basis for the first half of the year, including both open and closed centers in the constant center base representing 40 locations, we were down 43% versus the prior corresponding period. For reopened centers, our revenue was down 37.7% versus the prior corresponding period. Chris will discuss our sales trends in more detail in a few moments. Main Event centers began gradually reopening in May 2020 with 42 of 44 centers reopened by September 2020. However, during the November and December 2020 time frame, 5 centers were required to be reclosed due to the pandemic. As of the 29th December 2020, 38 out of 44 Main Event centers were reopened and operational as compared to 43 centers in the prior corresponding period, with a further 4 centers reopening in January 2021, resulting in our current status of 42 of 44 centers reopening. Excluding specific items, the EBITDA loss for the first half of FY '21 was $9.4 million, which is a decrease of $27.3 million versus the prior period. While the decline was driven by reduced revenue associated with COVID-19, it was partially offset by improved cost of sales and labor efficiencies as well as lower other operating and overhead costs, resulting in more favorable negative flow-through. With that, I'll now turn the call over to Chris Morris.

Okay. Thank you, Darin. Good morning, everyone. The first half of the 2021 year has certainly been challenging. However, I'm proud of how our teams across the country have managed through the numerous challenges associated with COVID-19. While still facing headwinds, we're pleased with the positive momentum in our business and believe we are well positioned for a strong recovery. Let's go through Slides 7 and 8. Constant center revenue performance sequentially improved for the first 3 periods of the first half of the year, ending the September quarter with constant center revenue down 14.4% in the month of September. Then as we moved into the December quarter, sales softened as the second surge of COVID-19 cases spread across the country and we lapped the highest seasonal period for corporate event sales. As we've discussed previously, corporate event sales were very challenging this year given the pandemic. Companies were very reluctant to book corporate event sales given large public gatherings. However, constant center revenue recovered in January, regaining the momentum we experienced prior to the second surge of COVID cases. Constant center revenue was down 18.8% in January, which is well above 4-wall EBITDA breakeven levels. In fact, in the month of January, 37 centers generated positive 4-wall EBITDA. Overall, we are pleased with our performance so far this year as our business is recovering at a pace quicker than anticipated. Additionally, we are very happy with the performance of our new centers even during the pandemic, which we believe validates the revised real estate approach by our current management team. Moving on to Slide 9. Throughout the first half of the year, we have continued to make considerable progress on key strategic initiatives. First, we have continued to ensure a safe environment for our guests and team members as the health and safety of our team members and guests has been and will continue to be our top priority. We're committed to supporting our team that's working so hard to take care of our guests each and every day. Currently, 42 of our 44 centers are open. Orlando, Florida and Albuquerque, New Mexico, are the 2 closed centers, and both are expected to be closed through the remainder of this fiscal year. We completed a systemwide rollout of new virtual reality attraction, Star Wars Dojo, and leveraged the Star Wars IP to bring excitement and awareness to our business. We've continued to invest in technology as part of our commitment to lead through innovation. We recently rolled out a new e-commerce ecosystem, including the launch of a new website and mobile app. Additionally, we implemented a new CRM and e-mail platform, enabling better targeting and data capture. These are important milestones for Main Event as we begin to use our size and resources as a competitive advantage in the family entertainment category. We will use this platform to engage with our guests and bring new and interesting solutions tailored for their needs. With the onboarding of our new chief operating officer, we are adjusting and elevating our service model to deliver an even better guest experience. Slide 10. As a result of the success of our new center openings and our belief in our long-term strategies, we are actively rebuilding our new unit pipeline. We remain on track to opening a new unit in Chesterfield, Missouri no later than September 2021 and are projecting a total of 4 new centers to open in fiscal '22. In addition, we are in active conversations with another 8 to 10 sites for future development. As we look out the remainder of this fiscal year, there remains near-term uncertainty regarding the efficacy of the vaccine rollout and overall consumer recovery. With that said, however, we are pleased with the progress of our recovery to date and believe we will continue to see improvement in the second half of fiscal year. We remain bullish on this category and believe we are well positioned to be the leading growth brand for many years to come. So with that, I'll turn it over to John.

Thank you, Chris, and good morning to everyone listening today. Dreamworld and WhiteWater World remained closed until the 16th of September. This, along with ongoing border restrictions and snap lockdowns, led to a decline in attendance and revenue compared to the prior period. Despite the challenging environment, the division recorded a modest EBITDA loss, excluding specific items of $3.7 million compared to a loss of $2.9 million in the prior period. A focus on pricing and products for the local drive market, a reduction in the cost base of approximately $6 million compared to the prior period and the JobKeeper wage subsidy has resulted in trading for the division being cash positive. Effective implementation of our COVID Safe plan continues to be our highest priority. The incremental increase in expenses associated with the various planned measures is in the order of $750,000 per annum, excluding capital expenditure and other one-off costs. We believe that many of these measures will become standard practice. Therefore, much of this incremental cost increase is likely to continue post pandemic. In relation to Dreamworld and WhiteWater World, border restrictions and snap lockdowns have resulted in all international and key interstate markets being largely unavailable since reopening on the 16th of September. Despite this extreme disruption, attendance to the 26th of January was approximately 70% of the prior period. The local drive market focus created sales momentum with pass sales and cash receipts between the 12th of August and the 26th of January being 92% and 49% better than the prior period, respectively. The staging of pop-up activations continues to be a successful strategy. Between October and January, we staged Happy Halloween, Bluey Live Interactive and the Monster Trucks Spectacular, and they all attracted large crowds and repeat visitation from our existing and local pass holders alike -- sorry, our existing and new pass holders alike. The various initiatives supported by our targeted marketing campaign resulted in the local drive market attendance during the September school holidays and the Christmas school holidays to the 8th of January being 35% and 11% better than the prior period, respectively. Unfortunately, attendance since the Greater Brisbane lockdown, which occurred between the 8th and the 11th of January, has fallen sharply. This lockdown effectively brought a premature end to the Christmas holiday trading season for us and many tourism and leisure businesses in the -- in Southeast Queensland. Construction has commenced on Steel Taipan, our new, $32 million, world-class multi-launch rollercoaster, and we are targeting a completion date of quarter 4 of calendar year '21. In relation to the SkyPoint Observation Deck and Climb in Surfers Paradise, the restrictions have had a significant impact with attendance between the 10th of July and the 26th of January being approximately 27% of the prior period. The lower attendance has, to some extent, been offset by a higher yield per guest resulting from promotions, including consumer buy-in events and other offers, which target the local drive market. The historically strong corporate events business has also been significantly impacted. However, an increase in recent inquiries is very encouraging. Prior to the pandemic, SkyPoint was on a growth trajectory, and there is no reason to think that earnings will not return to historical levels in the future. Our immediate focus will continue to be providing a safe environment for our guests and team members, staging activations and experiences that encourage repeat visitation and increased spend by our local pass holders, attracting interstate visitors where border restrictions allow, reducing discretionary costs wherever possible along with the successful delivery of projects such as Steel Taipan. The Australian government's vaccine program leaves us feeling optimistic about the prospect of a strong recovery. However, we believe that uncertainty is likely to prevail for the next -- for at least the next 12 months. The work we have done over the last year means we are well positioned to take full advantage of the strong rebound that is expected when the pandemic-related restrictions ease and eventually comes to an end. Thank you, and I'll now hand back to Darin.

Thanks, John. Let me just touch on a few points for the next few slides, and then we'll open up the line to Q&A. On Slide 19, I'll draw your attention to the net debt for the group of $117.2 million as of 29 December 2020. This is an increase of $38.8 million from 30 June 2020, and was driven primarily by lease payments, cash flow used in operations and capital spending. Included within these outflows were unfavorable working capital adjustments primarily associated with deferred vendor payments as of 30 June 2020, that were already paid during the second half of FY '21 -- sorry, already paid during the first half of FY '21, totaling over $10 million. The group had a cash balance of $105.4 million as of 29 December 2020, which is comprised of $27.3 million and $78.1 million cash available to the Australian and U.S. businesses, respectively. Cash in the U.S. business largely reflects the investment from RedBird Capital in June 2020. Turning to Slide 20. Please note that the debt structure as of 29 December 2020, still primarily consisted of the credit facilities for the U.S. business, of which no additional capacity exists due to the fully drawn term and revolving facilities. Main Event continues to have covenant waivers through to and including the March 2021 quarter from its lenders. While $5.5 million was drawn on the Queensland Treasury Corporation loan facility as of 29 December 2020, this amount was fully repaid in January 2021, resulting in no borrowings under the facility currently. Also, as a reminder, under the terms of the group's financing facilities, cash and debt held by the Australian and U.S. businesses are subject to separate ring-fencing provisions, whereby each business cannot access cash or facilities held by the other. Lastly, in view of the ongoing uncertainty of the current environment and the Board's previously stated intention to continue to invest in Main Event and Theme Parks, the Board has decided not to declare an interim dividend for the first half of '21. Finally, on Slide 21, note the significant reduction in our corporate costs over the last few years. The group has taken its recurring cost base of over $16 million to a run rate of less than $7 million due to significant efforts to permanently reduce the cost structure given the changes to the business over the past few years. This decrease has been partially offset by higher insurance costs in the current period. This concludes our prepared remarks. And with that, we will now open the call to questions.

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

Can you hear me okay?

Yes.