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

Thank you for standing by, and welcome to the Ardent Leisure Group Limited Extraordinary General Meeting. I would now like to hand the conference over to Mr. Gary Weiss, Chairman. Please go ahead.

Thank you. Good afternoon, everyone. My name is Gary Weiss, and I'm the Chairman of Ardent Leisure Group. I'm joined today on the audio line by my fellow directors, Erin Wallace, Brad Richmond and Randy Garfield from the U.S. and an apology at the moment for David Haslingden who is traveling. And I'm also joined by our Theme Parks CEO, Greg Yong. Here with me in person are Chris Todd, Ardent's Group General Counsel and Company Secretary; and Jose de Sacadura, the Group General Manager of Finance. I would like to welcome you to this Extraordinary General Meeting of the company which has been called to seek your approval as shareholders in the company to the sale of the Main Event Entertainment business to NASDAQ listed Dave & Buster's Entertainment, as announced on the 6th of April this year. Your approval is also sought at today's meeting to a capital return to shareholders as part of a significant distribution of Ardent's share of the net sale proceeds. Full details of both resolutions upon which you have been asked to vote have been provided in the Notice of Meeting and explanatory statement dispatched to you by the company on the 30th of May. Those materials also included a report from independent expert, Lonergan Edwards & Associates, who has concluded that the transaction is fair and reasonable to, and in the best interest of the shareholders. Having obtained the requisite antitrust clearance from the U.S. regulator on the 19th of May, the final material condition to completion of the proposed transaction is your approval as shareholders. Assuming that shareholders approved both resolutions 1 and 2 today, it is expected that completion will take place imminently, and the proposed distribution of $455.7 million, which we notified to shareholders in the Notice of Meeting, representing $0.95 per share will be paid in accordance with the expected timetable also set out in the Notice of Meeting. The final split of the proposed distribution between the capital return and the special dividend has now been determined by the company following the outcome of our discussions with the Commissioner of Taxation in respect of the application for the class ruling. The capital return component will be $221 million, that is $0.4607 per share. And the unfranked special dividend component will be $234.7 million that is $0.4893 per share. The final class ruling will be received from the commissioner after payment of the proposed distribution and will be made available by the company via the ASX platform and on our website once issued. A further announcement regarding details of the distribution will be made upon completion. I would like to reiterate the comments I made on the 6th of April this year that the transaction reflects a significant value creation that has been achieved by Ardent Leisure and the main event management team particularly over the past 4.5 years, following the overhaul of the Ardent Board in September 2017 and the appointment of Chris Morris as Chief Executive Officer of Main Event in March 2018 and is unanimously recommended by the Board. Before I formally open the meeting, I will outline some procedural matters for conducting today's meeting, which is being held as a hybrid meeting in accordance with the company's constitution and the Corporations Act. In addition to those shareholders and representatives present here in person, others are able to participate virtually at the online platform. The full details of which are contained in the Notice of Meeting. For those participating online, a virtual meeting guide is available on the Ardent Leisure website and also via the link in the Notice of Meeting. which contains details on how to ask a question, how to submit your vote and how to seek assistance if you experience any difficulties. If you have questions already prepared, please submit them now on the platform. You do not need to wait until the relevant item of business. Any questions of a general nature and not relating specifically to an item of business will be considered at the meeting. Voting results will be announced on the ASX as soon as practicable after the meeting and will also be made available on the company's website. Finally, a recording of today's meeting will be available on our website tomorrow. Moving now to the formal business of the meeting, I confirm that a quorum is present, and I declare the meeting open. The resolutions for consideration today may only be voted on by shareholders, who appeared on the company's register at 3:00 p.m. on Monday, 27 June 2022, and their proxy holders and shareholder company representatives eligible and present in person, either physically or virtually. I propose to call a poll on each of the resolutions in accordance with the company's constitution. Both resolutions will be passed as ordinary resolutions if more than 50% of the votes cast by shareholders present and eligible to vote at the meeting are in favor of them. I turn now to Resolution 1, approval of the proposed transaction. Resolution 1 on the Notice of Meeting is to consider and, if thought fit, pass the following resolution as an ordinary resolution of the company, namely that for the purposes of ASX Listing Rule 11.2 and for all other purposes, approval is given for the disposal of the company's interest in the Main Event business being the main undertaking of the company by way of the merger of Ardent Leisure U.S. Holdings, Inc. with and into Delta Bravo Merger Sub Inc., in accordance with the terms of the merger agreement as further described in the explanatory statement. As stated in the Notice of Meeting and explanatory statement, the company will disregard any votes cast on this resolution by Dave & Buster's and Delta Bravo Merger Sub, Inc. as the acquirer of the company's main undertaking and any person who might obtain a material benefit, except the benefit sold in the capacity of a holder of ordinary securities, if the resolution is passed and any associate of such persons. The Ardent Leisure Board unanimously recommends that shareholders vote in favor of the resolution and each director holding shares has voted in support. The proxy results received for this resolution are on the screen. As the Chairman of the meeting, I intend to vote all undirected proxies in favor of this resolution. Are there any questions from the floor in relation to this resolution?

Congratulations. It's been a -- certainly been a tumultuous few years since you took over control from Neil Balnaves. But plenty of ups and downs from memory. I think you -- initially, the stock was around about $2. I think it plumbed the depths of around about $0.15 approximately. So, congratulations on the recovery, which is certainly a good effort. Look, my question, Gary is at the moment, it is quite unusual in that the value of the transaction you're looking at, the value of the cash that's retained is almost equal to the share price, which, therefore, is placing a value on the Mighty Dreamworld or pretty close to the big round donut. As part of this transaction, and look, yes, we're all in favor of it, but could you clarify what's going wrong? Why is the market valuing Dreamworld at such a derisory low level? So if you could clarify that.

Thank you for the question and you're pretty experienced in markets and I would suggest that the efficient market hypothesis is arguably being really tested here. I think, look, I'm sure there'll be plenty of reasons to explain the market, but it is the market. And I think the market is as informed about the position as we all are. If you do the mathematics, the conclusion that you've described can be readily achieved. I think the market generally is looking for recovery in our Theme Parks division. Obviously, even pre-COVID that division, particularly Dreamworld, had been materially challenged because of the tragedy that occurred and the ensuing very negative publicity and the remedial work, frankly, that we had to undertake to -- in our quest to restore value. And then, of course, COVID came, which again impacted the recovery. I guess the market will just wait to see how we go in terms of the recovery and Dreamworld's, but I'd also just like to clarify one comment, you said effectively Dreamworld was being valued at the donut actually included in our residual remaining business is not just Dreamworld but WhiteWater World, which is the adjoining water park and now SkyPoint asset. We own our real estate at the Q1 building plus the walk that is part of the attraction. So there are significant assets. As has been commented upon by many, we own now the land that we operate Dreamworld and WhiteWater World out of up at Coomera. It's a landholding of approximately 57 hectares and the fastest growth corridor in the country. So yes, I think there's a lot of latent value left in what will be the residual Ardent. And our goal will be to look to drive the performance of our remaining businesses. And hopefully, that in turn will lead to an appropriate rerating of the value of our shares as implied by today's market price.

Gary, Charlie Kingston. Just I suppose it's a bit of a follow-up to that, but just based on the significant cash retained, I think it was $180-odd million as per the pro forma accounts compared to the market value today of $190 million. Clearly, the market is concerned about the use of those proceeds, whether it's invested or return to investors. Who knows? But I think that's the #1 concern of the market, how those proceeds will be spent. So can you provide any clarity, please, as to the intention to develop? I think there was a hotel plan that fell over. But if you could provide any clarity as to the use of those retained cash, that would be appreciated.

Thanks for the question. At a very broad level, the funds will be retained for investment, continued investment into our business. We think there's still an opportunity to efficiently deploy further funding as we continue the recovery plan for Dreamworld. Part of the funds will be earmarked as well as we have indicated for -- looking to pursue the opportunity to resign part of our surplus real estate for development opportunities and there's essentially a general buffer, I think it's probably a tried comment that Dreamworld has endured a very torrid period since 2016, and the Board wants to ensure that Ardent has the financial ability and capacity to ensure that the recovery program that we have overseen has given every opportunity to succeed. Just on the -- you mentioned the hotel proposal. We -- that heads of agreement that we disclosed to the ASX did fall by the wayside. But under that proposal and indeed, I believe any future similar proposals for the time being, we would not see Ardent being the actual investor in hotel or other types of infrastructure related to the tourism although that leisure precinct that we'll be looking to achieve.

Just a follow-up for me, Gary. Look, it's pretty challenging out there at the moment. Inbound tourism is pretty weak. Domestics are very strong. So the theme parks may well be trading okay at the moment with domestic, but at the moment everyone is looking for synergies. It's a tough world. The world is not going to get any easier in the next year or so. So are you open to a merger with BGH controlled village assets. I would have thought the ACCC would probably allow that to go through these days.

Well, the short answer, David, is I have no -- I don't have a view on that final proposition about any anticompetitive issues that might arise in the hypothetical situation that you've described. As we've seen from the Main Event transaction, we're very focused on rebuilding value here for shareholders. And that will remain our very, very clear focus.

And just another clarification. I appreciate you're not necessarily going to be the provider of funds for the hotel if it gets up and running, but it's public knowledge that they're also looking at a hotel on the, was one at SeaWorld, but on Movie World. Clearly, in America, a lot of the theme parks have hotels and they're successful. But are you concerned, Gary, that if you're a family going up to the Gold Coast, would you prefer to stay on the ocean so the kids can play on the beach and then go to Dreamworld for 1 day? Are you concerned that people won't be particularly interested in staying in land a long way off the ocean when they've got the opportunity to stay in multiple hotels right on the ocean?

Look, I mean you're asking me to make comments about the future and individual families' reaction to various situations. David, the point I'd simply make is that the corridor between Brisbane and the Gold Coast is probably the fastest-growing area, a region in Australia. There's significant growth in Coomera. You've got Westfield Town Center that opened up a few years ago. So major cost go going up. The owners of the land adjoining Dreamworld recently indicated they're proceeding with an application for development approval for a $1.5 billion development on the land adjoining Dreamworld. Very, very significant activities that are going on in the precinct. You have the Gold Coast Marina activities not too far from us and so on. We do believe that there will be demand for accommodation, but as I said, I think we just need to wait and see what does develop. We will need development approval for any site for any form of accommodation. So that process is going to be underway, and we'll just see where things evolve.

Just a final one. I won't take up any more time, but you've been running Ariadne as an investment company for a long time. How are you going to handle the potential issues if an investment opportunity comes up? Ardent is going to have a lot of cash. It seems as though it's got a fairly general approach to how it spends that cash. How are you going to handle the situation where an attractive opportunity comes up? Is it going to be allocated to Ariadne or to Ardent?

Well, I know full well what my obligations as a Director and as Chairman of Ardent are David. So have no issue on that front.

Is there any demarcation line? Is Ardent looking at certain types of...

As I said to one of the questions, our clear focus is to allocate the funds that are retained for the -- to promote the development of our residual businesses and the opportunities which our landholdings provide. Are there any other questions?

One more for me, please, Gary. Just going to the operating performance of the remaining business, the theme parks, which I think, has lost money at an EBITDA level for 6 years now. Now obviously, there was the tragedy, which you mentioned and COVID, which have a genuine impact. But 6 years is a long time. And on the pro forma accounts normalized profit before tax is shown to be $33 million for calendar year '21. I believe it was. Now over that 6-year period, 1 broker out there estimated that you spent $110 million in capital, $70 million of which has gone to growth initiatives throughout the theme parks. The question is, considering that huge amount of capital that's been spent yet consistent losses, again, that is clearly what the market is worried about in retaining this business that some of that cash could quickly evaporate in further losses. So can you provide any sort of clarity as to when you see the business turning around to profitability and when shareholders can expect some returns on that capital spent in any future CapEx?

Yes. Obviously, I'm not in a position to provide an update on current trading conditions at our Theme Park division. We will do so when we release results in August. Yes, it's been an enormous challenge to deal with the hope for recovery in our Theme Park division and particularly at Dreamworld since the tragedy. This has not at all been an easy task, but we do believe that we have the team. We have made, as you've correctly observed, significant investment and what we think has been, has fundamentally required to help position Dreamworld for a recovery. We know from the past what this business is capable of doing. It's delivered it in the past. Our goal is to clearly -- our most immediate goal is to get Dreamworld back to generating positive cash flows. As I said, we think we've got an outstanding team at Dreamworld. We think we have tackled a lot of the issues that have bedeviled Dreamworld. We think, clearly, the business would have been in better shape in terms of operating results than where we are today. Indeed, there were some very promising green shoots. If you go back to the half year results, and we released in February 2020, some very encouraging signs there. But then, of course, we had to contend with COVID. And with COVID came border closures and all the rest of the other issues that have significantly impacted the potential for recovery here. So it's really only from April this year with the Easter holidays that's probably been the first time in over 2 years that we have finally got some clear air without issues of border closures and so on. And so as I said, we will update the market on our results when we release results in August. But our clear goal is to seek to return Dreamworld to generating positive cash flows.

Do you think just considering the CapEx that you have spent over the past 6 years. Do you think that you'd be in a position to -- I'm not asking for a forecast, but just the earnings capacity of the assets based on the capital that you have spent. Do you ever foresee when things do recover from everything I've read, domestic tourism is absolutely booming at the moment? Do you see a Dreamworld being in a position where it can earn more than what it did back when visitation was higher, considering all the capital you have put into the business or the CapEx is that just what you've needed to spend to stay competitive and relevant?

Look, as has often been said, it's very difficult to make predictions, particularly about the future. And I don't intend to do so today. So all I can tell you is that, as a result of this transaction, you'll have a very well capitalized Ardent. We have already invested materially in our Theme Park division. We believe that we've done a lot of the heavy lifting needed to reposition Dreamworld to hopefully find a path back to generating positive cash flows and generating an appropriate contribution to our business. But as I said, we will update the market in August and obviously, in a timely manner thereafter, and shareholders can monitor the progress that we're making and our goal of at least in the future of finding a way back to positive cash flow and hopefully growing from there.

Gary, you touched on the tragedy, are there any insurance claims that you might recover from that tragedy, or are there none of those? And are there any residual potential liabilities from the tragedy?

So not going to comment specifically, David, but a lot of the matters are in the past. And the one major item that I'm sure you'll be aware of is the class action that we still need to contend with. All right. I don't think we've sort of rather straight off the topic of the first resolution, but nonetheless, a welcome questions. We will have time at the end of the meeting for questions on more general nature of Ardent, but does anyone in the room have any further questioning? No, Chris, is anything -- any questions online?

No. No questions online, Gary.

Okay. Thank you. On the basis that Resolution 1 has been passed, consistent with the Notice of Meeting, resolution 2 will now be put to the meeting. Resolution 2 on the Notice of Meeting is to consider and, if thought fit, pass the following resolution as an ordinary resolution of the company that's subject to resolution 1 being passed by the requisite majority and completion of the proposed transaction occurring under the merger agreement, the issued share capital of the company be reduced by up to $255 million in accordance with Sections 256B and 256C of the Corporations Act 2001 that such capital reduction be affected subject to the Board's discretion by the company paying each shareholder the amount of up to $0.5316 per share on the terms and conditions set out in the explanatory statement. There are no exclusions from voting on this resolution. The Ardent Leisure Board is of the opinion that the proposed capital return is fair and reasonable to all shareholders and unanimously recommends that shareholders vote in favor of this resolution. Each director holding shares has voted in support. The proxy results for this resolution are on the screen. As the Chairman of the meeting, I intend to vote all undirected proxies in favor of this resolution. I also direct the shareholders' attention to my earlier comments regarding the makeup of the capital payment as agreed with the Commissioner of Taxation. Are there any questions from the floor in relation to this resolution? Christopher, have we received any online questions in relation to this resolution?

No online questions, Gary.

Before closing the meeting, I will take any questions or any further questions for general nature, which have not been specifically addressed as part of the preceding items of business. So does anyone here have any further questions? No? Chris, any questions received online? No?

No.

As there are no further questions, that now concludes the formal business of the meeting. Shareholders are reminded that they can submit their votes online until 5 minutes after the meeting closes. The results of the polls will be announced to the ASX later today. On behalf of the Board and all the Ardent team, I'd like to thank you for your support today, and I now declare the meeting closed. Thank you.