Experience Co Limited (EXP) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to Experience Co FY '23 Results Conference Call [Operator Instructions] I would now like to hand the conference over to CEO, John O’Sullivan. Please go ahead.

Thank you. Good morning, ladies and gentlemen, and thank you for your time again this morning. With me here is Owen Kemp, EXP's Chief Financial Officer. And this morning, it gives us great pleasure to be able to deliver our results presentation for financial year 2023. Just turning to Slide 3 on the agenda for this morning and as per previous results presentations that we've conducted with you, the structure will be no different. I'll provide an overview of the year, via our business update of the business. Owen will do a deeper dive into the financial results of the company for the financial year, and then I will close this segment by giving an update on strategy trading update for the month of July, and also how we're seeing the outlook for the remainder of the half. Of course, at the end of that, we're always happy to take questions and answers. Turning now to Slide 5 on business update. I'm really pleased to report this morning that EXP has enjoyed its strongest trading year since the onset of the pandemic in the second half of financial year 2020, with the business enjoying particularly strong trading volumes. When we look across or look back across the year, there are 4 major standouts that we'd like to highlight this morning. Firstly, with the continued improvement in market conditions with good domestic volumes and growing inbound volumes in key geographies and of course, a continued easing of labor pressures across our business. Secondly, our portfolio continues to improve, driven by the diversification of the business, particularly in the Adventure Experiences segment, and we are pleased with our ability to maintain strong direct-to-customer sales relationships and improve yield across the businesses. Thirdly, we've seen a continued growth of the inbound opportunity for both Australia and also in New Zealand, and in particular, the announcement of the removal of the final barriers to travel by Chinese consumers to both Australia and New Zealand, as well as an improvement in the ratio of holiday arrivals to visiting friends and relative arrivals in the month of June. And finally and very importantly, our investment in organic and inorganic growth across our Wild Bush Luxury Treetops adventures and Skydive Australia segments. Turning to Slide 6 on financial highlights; and whilst Owen will take you a deeper dive on the financials of the business for FY '23, I'm pleased to report that consistent with our trading update in late July around quarter 4, our business recorded revenues of $108.6 million and underlying EBITDA of $11.3 million and a net loss after tax of $500,000. As at 30 June, our balance sheet had $8.6 million in cash and $6.8 million in net debt. As Owen will outline, the result was primarily driven by the overall contribution of the Adventure Experiences segment, at $13.5 million underlying EBITDA, up from $5.6 million in FY 2022, and a vast improved contribution from our Skydive business segment at $4.1 million in underlying EBITDA versus a $2.1 million underlying loss in FY 2022. Turning to Slide 7 on the inbound recovery, and before I hand over to Owen to go through the financial results of the business, I think it's very important for us to reiterate just where the Australian visitor economy's journey is on towards a full recovery towards pre-pandemic levels. As we've noted before, this is a key part of Experience Co's journey towards recovery in FY '19 earnings capacity. Pleasingly, Tourism Australia and the ADS report that our recovery continues in line with expectations. Overarching aviation capacity into Australia is back at 86% of pre-pandemic levels. This is without a material improvement from markets such as China, and also we've still reduced capacity from key inbound markets from the UAE and also in Singapore. We are also seeing continued growth in and recovery in overall visitor arrivals relative to FY '19, as well as the recovery of the visiting friends and relatives in holiday arrival segments into the country. Importantly, within this statistic in June -- in the month of June, we saw a continuation of the holiday arrival segment exceeding the VFR segment with 40% of all the rides in June being for holidays to Australia versus 36% or VFR. And in particular, still maintaining scope for growth from key source markets, and also important markets for Experience Co of China, Japan and also the United States. So with that, I'd now like to hand over to Owen to provide you with an overview of the financial results of the business for financial year 2023.

Thank you, John, and thank you all for joining us this morning. As John mentioned, the FY '23 results are consistent with the 27 July trading update released to the ASX. In what has been the strongest period since the emergence of the pandemic, volumes were overwhelmingly the key driver towards revenue almost doubling FY '22 to $108.6 million. And pleasingly, net loss after tax contracting to $0.5 million, primarily on the back of the operating leverage coming through EBITDA in the year, with underlying EBITDA up to $11.3 million on the back of a $2.4 million loss in the corresponding line in FY '22. Just turning to the P&L; we did see margins in the second period to be slightly impacted by investments in the staffing shortages and -- but we are seeing those shortages and inflationary pressures ease, certainly towards the back end of the period. In relation to the profit and loss in this period, we do have one thing that I would like to draw to your attention. So while loss before tax did improve to close to breakeven, it did include a net increase of $2.7 million in net terms attributable to the accounting recognition arising from the revaluation of the aircraft. We were delighted to see an overall revaluation increase based on independent valuations of $9 million in the balance sheet, of which $2.7 million find its way into the loss before tax. Reading down the P&L for those with the keen eyes for detail, you'll see the remainder of the valuation sitting below profitable loss after tax in the other comprehensive income line. And at the end of the period, we finished with net debt of $6.8 million. I'm now turning to the revenue, and it really was a revenue story on the back of the increased volumes. Pleasingly, we saw Skydive achieve its highest volumes post pandemic in both Australia and New Zealand, tracking at close to 50% in Q4, following a challenging few years. As John alluded to, adventure experiences traded strongly in the year. But as noted in recent updates, we did see the impact of the domestic shoulder season play out, especially in the second half in February and March and the impact of the Bamurru delay in project, as we gradually see a shift to an international customer base, in line with John's earlier [indiscernible] observations and the improvements we're seeing there. And as to international recovery, we do expect the impact of these domestic shoulder seasons to be less pronounced than what we've seen certainly in this year. And in [ closing ], we continue to focus on revenue per customer across the business and are seeing increases across the portfolio, which has been really pleasing. Moving into Skydiving; we did see the momentum continue through the period and as John said, pleased to see that returning to an underlying EBITDA of 4.1%, primarily led through the second half. Australia continued to recover through the period, but most pleasing was the pace of recovery in our New Zealand business, with Q4 '23 at just shy of 50% of pre-pandemic levels and pricing returning to, in the NZD 500 per customer. And John will come to this later in the presentation, but a key read-through on the New Zealand's return as it's been driven from the international markets. And in the second half, the all-important China market, which opened up in early January, on the back of New Zealand ADS status. And we'll come to that in more detail later in the presentation. During the period, we also continue to be agile and look for other revenue sources in the period, including utilizing our aircraft fleet for charter work and leveraging our engineering capabilities in performance aviation to increase our revenue streams. As we've discussed many times, we've invested in rebuilding our staffing capacity and this continued in the second half, along with ensuring appropriate retention, to make sure we can open out our market-leading drop zones as these markets return. And we'll continue to look to match the demand improvement with investing and retaining appropriate labor levels. And finally, as we see the key international source markets return, such as China, we've continued to reengage with third-party distributions in key source markets as they open up. Moving into the following slide in Adventure Experiences; it has been a great year for this segment, and includes the full year of Treetop Adventures, which has made us a more resilient business and improved our quality of earnings. We did see the second half, as I alluded to earlier, impacted by elements of seasonality, in particular the domestic shoulder season in February and March, where we just did not have the international markets that we typically see to offset a softer domestic market that we always see in those periods. Reef Unlimited volumes in the year were at 90% of FY '19 levels. And although we remember that FY '19 wasn't the best year on record for this market, it's pleasing to see that, that is primarily being driven by the domestic market, but we are seeing that rotation to international improve, as we get to the back end of the second half. Over the course of the year, you may recall that Treetop performance in the first half of the year was impacted by the inclement weather conditions in the key July and October holiday period. We are delighted to see the second half not see those impacts and into July, and John will mention this later, we've seen some strong trading in this category. And just reflecting overall on the inventory performance experience in FY '23, it has demonstrated the continued benefits of a diversified experience portfolio, its earning base and customer base with experienced -- experiences contributing $13.5 million to underlying EBITDA. Moving into the balance sheet; we ended the period with $8.6 million in cash holdings and net debt at $6.8 million. As discussed earlier, the tangible assets increased, largely on the back of a $9 million increase in the fair value of aircraft assets that we independently valued in the month of June. We saw operating cash flow improve in the period, despite some working capital absorption into receivables, and some unwind of revenue received in advance, or contract liabilities as they're termed and disclosed in the balance sheet. In the period, we had CapEx and net investing activities, prima facie looks a bit higher for a year-on-year basis, but that comprised approximately a $2 million of working capital outflow, which gets classified into this line item. And we also had the investment in Bamurru, AJPA and Treetop's new sites, leaving with maintenance CapEx in the order of $8.5 million in the period. In relation to the capital structure, during the second half, we extended the NAB corporate facility maturity to 31 March, 2025, and reset the minimum cash covenant to $2 million until the 1st of November 2023. So in relation to the balance sheet, we'll make the following comments. We have a strong balance sheet in terms of the quality of the fixed assets with minimal net debt leverage. As any business should in our sector, we'll continue to monitor the liquidity levels closely entering FY '24. Most importantly, we'll continue to build a high-quality growth pipeline and explore appropriate debt options to support the growth objectives of the business, as earnings recover into FY '24. So John, I'll hand back to you to take us through the strategy, trading update and outlook.

Thanks, Owen. Turning now to Slide 15 on strategy; management still remains very committed to our longer-term strategy that we've presented to the market before and the outlook for the business. We still maintain that a post recovery earnings capability of the core business remains at $40 million EBITDA. Whilst the time that this is achieved by -- will be solely dictated by the rate of return of international visitors, and particularly the Chinese inbound market, management sees no reason to vary this longer-term outlook and remains excited by the opportunity. Our focus, of course, in delivery on this, is executing recovery in our legacy business units, particularly Reef Unlimited and also Skydive across Australia and New Zealand, whilst also continuing to focus on growing the contribution of our successful Treetop segment and Wild Bush Luxury segments. We, of course, as always, remain active in seeking bolt-on and complementary acquisitions for the company. Turning now to Slide 16 and focusing on the investment that took place during FY 2023. As outlined earlier in our presentation, our focus on growth this year has been predominantly organic with expansion across Wild Bush Luxury and Treetops Adventure segment, supported by the acquisition of the Australian Jump Pilot Academy in our Performance Aviation business unit. I'm really pleased to report that since May, our Cape Tribulation Treetop's adventure site has been achieving pre-reconstruction business case visitation volumes, and our Taronga Park Zoo site, while still operating at a reduced capacity through delays caused by the Taronga Conservation Society construction schedule continues to contribute strongly to the portfolio, whilst also reaffirming our position of dominance in this segment, in the Sydney market. Trees generally as a segment has been very strong in July and August, and we are very, very happy with the contribution that it's making to the business. The new suites at Bamurru Plains continue to attract strong booking interest and the 30% new operating capacity in the site will be advantageous to the business, as the premium international visitation sector returns to Australia and in particular, to the top end of the Northern Territory. And finally, the acquisition of the Australian Jump Pilot Academy is really about ensuring that we have a steady pipeline of pilots and pilot capability to allow us to flex back to those pre-pandemic levels within our Skydive operating segment. Turning now to Slide 17 on international leverage; as we've said many times before, and we'll continue to say again, whilst Australia's inbound recovery is fantastic news, the name of the game for EXP is really down to the return of the international market and in particular, the Chinese traveler. The longer-term predictions of Tourism Australia and offset economics on the return of the Chinese market remains consistent with previous presentations and updates, and very much the thematic for our business is the international opportunity remains. After its reopening in January, it's a very positive sign to see that both Australia and New Zealand now have fully uninhibited access through the reinstatement of ADS status for our Australian business. This is a massive positive for us and as we believe, it will contribute towards better aviation capacity and also a larger addressable leisure market being able to come to Australia. Flight capacity into Australia remains close to 70% and is expected to grow to 80% by year-end with the addition of capacity into ports such as Brisbane, Adelaide and Perth as well as second-tier city aviation access from China into the main [ gateway ] cities of Sydney and also Melbourne. But as we have said before, we are looking towards the results of Golden Week and into November to get the exact picture on how this market's recovery will behave through to FY 2024. Turning now to Slide 18; and before we open up the call for questions, we'd like to provide you with a very quick trading update and outlook. In July, the business traded at an EBITDA positive and a cash flow neutral basis. Across our segments, in Skydive, we continued to grow our PCP basis of volumes by almost 30% across Australia and New Zealand. Primarily, this was driven out of the New Zealand business, which saw almost a 60% increase in volumes for the month of July ahead of FY 2022. The Reef Unlimited business enjoyed another strong month of trading on the reef, despite some weather affecting our Port Douglas operations. This market, in particular, is highly exposed to that Sydney and Victorian leisure markets, who are extremely weather-sensitive. And certainly, what we are doing at the moment, is watching the impact on higher outbound travel by Australians, as well as the transition into the international market and the effect on this region of Australia. The standout performer, as I said before, however, was Treetop Adventures, which exceeded its volumes by over 20% on budget and 30% on prior year. It enjoyed incredibly strong trading out of New South Wales and Queensland, particularly driven by the Cape Tribulation site. We're a big believer in this category of attraction, given its direct-to-market nature, lower price point and leisure-based attributes. We certainly believe that within our portfolio, it's certainly cost of living proof. Wild Bush Luxury performed to expectations with good bookings at Bamurru Plains and a strong reception of our Maria Island winter product. Looking forward, our outlook remains positive. To reiterate, the Chinese recovery is about to commence with the removal of the last remaining barrier to travel to Australia in its ADS status reinstatement. Secondly, our view on the longer-term earnings capacity of the core business, excluding any new acquisitions or organic growth opportunities still remains about $40 million of underlying EBITDA. Thirdly, the focus of management is around ensuring that we return to these FY '19 earnings and business performance as quickly as possible, with market conditions improved. And finally, consistent with previous practice, no earnings guidance will be provided for FY '24. Thank you once again, ladies and gentlemen, for your time. Look forward to taking your questions.

[Operator Instructions] Our first question is from John O'Shea with Ord Minnett.

Just a question in terms of obviously your $40 million target that's out there. Can you give us some sort of sense as to -- obviously, it's difficult to predict I understand with the uncertainty around, when the Chinese and to what extent the recovery comes back there. But how should we think about that in terms of the timeline of that recovery, is my question, and has that kind of changed a little bit in your mind that obviously, the longer it goes on -- does that change the timeframe or can you just talk me through how I should think about getting to that number in timing?

You should think about that as we've said previously before, John, is that we expect to achieve a run rate probably in the back end of FY '25, that equates to that figure. And then we expect that during FY '26, you should see the business having that earnings capability. But I think the thing that I would add as a caveat to that, is that it really comes back to the rate of international recovery and the rate of the Chinese recovery, because of the Chinese market share within -- particularly within the Skydiving segment across Australia and New Zealand. And as we've said previously, that will be clearer to us and I think clearer to the Australian industry as a whole, once we've been through Golden Week, and we look as we look forward out to Chinese New Year. So no change from where we've been previously. But having said that, we will monitor the results of Golden Week and have a better understanding of that [ major ] recovery from there, because that is the first major holiday period where we've got better flight capacity. We've got ADS reinstated for both markets. You've got an FIT market that's able to travel and you've got our business open to a more normalized operating capacity.

That's clear, guys, and thanks for sort of going through that for me. Just turn to the CapEx side, you mentioned Owen, the maintenance sort of CapEx, sort of about $8.5 million, is that a sort of a reasonable expectation as to...

Yes, I think moving forward -- yes, yes. I think particularly as we look at the Treetops portfolio now into the business, it's probably about $8.5 million, $9 million sort of area, John. I think we had previously [indiscernible] $8 million to $9 million, and $8.5 million, $9 million feels like the right bet. Now I do apologize, John, in terms of how it comes through, it's one of those accounting things come in the cash flow statements. It will be a bit in working capital and then unwind in one period, if you have it over the end of the -- I think that I'll just [indiscernible] update people on what's actually happening in the cash flow sense on those amounts.

Sure. Look, I guess one final one for me. Are you seeing -- you mentioned obviously about the strength in outbound and the fact that, obviously, in part, the adventure business, you put aside Tree, you have been a beneficiary of that strong domestic leisure travel. Have you seen sort of -- have you seen that sort of translate into the adventure business outside of Tree in terms of that shift, if you know what I mean? Have you seen any -- or is the international side sort of helping to sort of bridge that gap, [indiscernible].

Yes. So I think what we're seeing, is we're seeing that peak domestic travel to places like Cairns, in particular. You're seeing that starting to adjust now as Australians go offshore. But what you're also seeing simultaneous to that, is that you're seeing the increase now in inbound visitors into that region. So you're seeing a slight softening and -- but it's still very, very healthy numbers. But you're also seeing that increase in -- particularly out of markets like U.S., India has been a very strong market, for North Queensland for us, in particular, out of Cairns, and also the U.S. as well. Port Douglas is a little different because it's primarily for our business, New South Wales and Victoria are the main source markets up there. It's a very low number, but it's still been consistently strong, so to the fact that Victorians seem to be sensitive to wind on the reef, so they don't go out as much.

The next question is from Allan Franklin with Canaccord Genuity.

Actually just a third line of question around trees, and perhaps just how to think about the capacity within that business, just [ to denoting ] Taronga, you said just 25,000 sort of annual capacity out of there. We're looking to sort of prior periods, you have been able to do more than sort of [ 400,000 packs ], what was it in FY '21. So is it sort of fair to assume that these sort of upside case for capacity there, is it 450,000-plus or is there sort of a range that we can sort of think...

In terms of capacity Allan, certainly and yes, that capacity is there. It's just a matter of getting a clean run like -- if we get like in July, as John alluded to, that could fill that capacity quickly.

I mean we -- sorry Allan, I think one of the things what we saw during FY '23, was that you had some, I guess, off the scale, whether events that really hit New South Wales, in particular, at that peak sort of holiday period time in July, but also in October, which when you remove, as we saw in July of this year, I mean, this was a category that did -- in July did over 45,000 customers. So for us, it's -- for us, what we've seen is that, as Owen said, that operating capacity is certainly there to hit those numbers.

Perfect. And just maybe a line of questioning around incoming demand and just how you think you will get the attention and/or the lion's share of that incoming demand, please? Just on the sort of marketing and...

Incoming demand being international?

Sorry, correct, yes. And probably demonstrably more of the Chinese inbound as well, please?

Yes. Well, I think it comes down to a couple of things. I mean, certainly, what we're certainly doing now is, we're spending more and more time working with third-party distributors, because whilst we've spent a lot of time building up that direct-to-consumer market, and that will be -- that will continue to be a primary focus of our sales team. The inbound market will naturally revert to online travel agents and also your bricks-and-mortar travel agents, particularly out of markets like China, who are a big user of the OTA channel, and Japan, who are a big user of the alternative channel. So I mean we're doing, as you'd expect any international tourism company to do. We're working alongside bodies like Tourism Australia, Tourism Queensland, Tourism New Zealand and attending trade shows. We've maintained those relationships throughout, however particularly with the OTAs and those key inbound agencies. So we're certainly working through that. I think the other thing we've done, is we've done a lot of work, we've increased the mill activity. So getting the profiles and new things that we have, as opposed to what our competitors do. So we do have the newest pontoon on the Great Barrier Reef. We have a new experience in the Daintree Rainforest. We've been emphasizing that as well as the new expansion at Bamurru Plains. And all of those sort of factors, they account for something when you're in those markets, because you're able to talk about something new. So it's really working those third party channels, and emphasizing the -- I guess, the product differentiation that we have, vis-a-vis our competitors. And the business has had -- back in FY '19, the business had a good reputation, particularly in Skydiving for that international market. I mean it's -- so it's certainly -- the good thing is that, we're not coming off a zero sum base. So that's how we've been approaching it.

Sure helpful. One other one, please. Just on New Zealand, perhaps how you're thinking about that? I mean, we obviously do talk to capacity and Australia in a lot of detail. New Zealand, obviously has a half a step ahead of the Australian market in terms of that Chinese recovery? How are you sort of seeing things there, noting Q2 and Q3 in New Zealand are, I guess, a little bit heightened in terms of peak seasonal trade, and are you sort of seeing a good level of sort of bookings ahead of time, I guess?

Yes. Well, I mean, I think remembering that it's the Skydive segment, so you don't really get visibility until sort of 72 hours before the experience is enacted. But I mean, look, we're seeing out of New Zealand. I think the recovery there has been a good lesson, I think, for Australia in that they came out of the box. They came out of the box really hard, particularly with that Chinese market, having ADS status and not so much, because we're ADS focused in our customer base -- it's probably more, it just increases the addressable market that's going into New Zealand. So certainly, what we've seen there between FY '22 and FY '23, we saw in volume over 300,000 [ the net ] increase in volumes going through that Skydive business. The Skydive business there still with a lot of capacity to go from where it ended up. And I think their arrival data is, it's similar to Australia. I think they're sort of around about sort of -- I think it's around 60%-odd back of where they were, with good inbound capacity from major markets, particularly markets like -- particularly in markets like the U.S., China and India. So we think that the opportunity there still is really strong. The biggest inbound market today, obviously, is still Australians. But for us as a business in Skydive New Zealand, about 20% at the moment of our market is coming out of Australia. And to set some context that's less than 10% of our customers in New Zealand are Chinese, where it's pre-COVID, you were closer to 40%. So there's still a lot of upside in that business from that market, China, particularly, but also just generally the inbound story there.

This concludes the question-and-answer session. I'll now turn the conference back over to John O'Sullivan for any closing remarks.

Thanks, everyone, for your time and your support during FY '23 as always. I hope you all have a good day. Thank you.

That does conclude your conference for today. Thank you for participating. You may disconnect.