SkyCity Entertainment Group Limited (SKC) Earnings Call Transcript & Summary

Thank you, for standing by, and welcome to the SkyCity Entertainment Group Financial Year 2022 Full-Year Results. [Operator Instructions] I would now like to now hand the conference over to Mr. Michael Ahearne, Chief Executive Officer. Please go ahead.

[Foreign Language] Welcome, everyone, to the SkyCity financial year '22 results investor call. I'd firstly like to recognize the traditional custodians of the land upon which we all strive to be [indiscernible]. Ngati Whatua Orakei in Auckland, Tainui in Hamilton, Ngai Tahu in Queenstown and Kaurna people in Adelaide [Foreign Language]. With me today in Auckland is Julie Amey, our Chief Financial Officer; Callum Mallett, our Chief Operating Officer, New Zealand; and Ben Kay, our General Manager of Strategy and Capital Markets. We're sitting here in New Zealand still at the COVID-19 Orange traffic light setting. Our FY '22 investor presentation was released to the stock exchange earlier this morning. We want to take the document as read and hence focus on key themes and our observations across the period and leave time for Q&A. Turning to the key features of financial year '22. I want to make some initial comments before asking Julie to provide an update on our financial and capital settings. I will then make some final comments around recent trading and the FY '23 outlook before closing. Without question, financial year '22 was an unprecedented period for SkyCity due to the significant disruptions from COVID-19 on our land-based casinos and the heightened regulatory focus across the casino industry. The COVID-19 settings and related property closures in New Zealand and Adelaide had a material impact on our financial performance during the period. But as CEO, I'm really proud of the resilience and response of our team during this time. Our flagship property in Auckland was closed for 107 days during the first half. And similarly, Hamilton and Queenstown closed for lengthy periods and when able to open, operated under capacity limits and restrictions around social distancing. Our Adelaide property was remaining open for the majority of the year, had to operate in a highly restrictive environment due to COVID-19 settings, interstate border closures and stay-at-home orders which materially impacted CBD visitation. Management took steps in response to COVID-19 disruptions with a focus on cost and CapEx control and initiatives to support our balance sheet, including securing covenant waivers and amendments from our financiers to address the significant earnings hit experienced over the period. We maintained a flexible operating model, focused on customer experience and engagement even when we were closed and focused on our highest returning businesses. Clearly, our priority for management and the Board has been the health and wellbeing of staff and customers. We've worked diligently to ensure a safe environment to operate in to give our customers the confidence to return to our venues. Retention of staff has been a key priority for us, as we knew our businesses will recover quickly as restrictions were relaxed. Pleasingly, when able to operate without restrictions, the local businesses, particularly gaming performed strongly. Following operating restrictions being relaxed from mid-April 2022, the group returned to pre-COVID-19 revenue and earnings during May and June, underpinned by robust EGM activity, recovery of domestic tourism and effective cost control. More specifically, the fourth quarter trading in Auckland, following New Zealand's move to Orange setting was encouraging, particularly from EGMs with record activity being achieved on weekend and holiday peaks. Our table games business has been impacted by staff shortages and a slower return of local VIP customers. Overall, our flagship property delivered around $20 million of EBITDA during both May and June, consistent with pre-COVID-19 levels, a sound achievement. Adelaide did not have the opportunity to deliver on a potential post expansion during the period, primarily due to COVID-19 disruptions. However, we saw positive performance during the fourth quarter when operating restrictions were relaxed and domestic tourism in Australia started to recover. Eos by SkyCity, which is a world-class asset, performed well versus the [indiscernible] and EGMs. Well, it should be said that our expectations are significantly higher for this business over the medium term, grew strongly versus [ pcp ], taking share from a buoyant pub and club market in Metropolitan Adelaide. Our VIP business saw modest customer activity, resuming from March and April as international borders reopened and domestic Australian travel recovered. The business delivered positive EBITDA during the second half with the revised operating model been leveraged. The performance of the New Zealand online casino was again a significant highlight of the period with strong revenue and EBITDA growth despite an increasingly competitive landscape, revenue was up 35% and EBITDA up 42%, respectively. An exciting feature of the period was announcing the expansion of our strategic partnership with Gaming Innovation Group by providing EUR 25 million of equity to support the funding of the acquisition of Sportnco and in return becoming a major shareholder and have joined the main GIG board. GIG is a fast-growing dynamic online operator we have come to know well since partnering in mid-2019 to launch our online casino. The partnership has provided us with access to a complementary and high-growth gaming category and has enabled us to pursue an omnichannel strategy in New Zealand, which is a core pillar of our group strategic plan. We continue to support online casino regulation in New Zealand and hope for clarity from the New Zealand government before the end of 2022 as regards to their intentions to regulations. The Minister for the DIA has come out publicly and supported regulation. And we stand alongside her to ensure appropriate standards of host responsibility, AML compliance and community benefits, which aren't provided by other operators under the current unregulated markets in our mesh. We continue to believe that a significant omnichannel opportunity exists for SkyCity if the New Zealand online market regulates given the sizable addressable markets, which already exists in New Zealand, which we now estimate at $350 million in size. With regards to our strategic plan more broadly, there are no material changes through our strategic framework, our priorities. Our strategic pillars continues to be underpinned by financial and capital settings, which Julie will expand on. Moving briefly on to the New Zealand International Convention Center and Horizon Hotel in Auckland. We're seeing positive momentum on this project with roof construction to commence in October 2022, which is a significant milestone in terms of reinstating the building post fire. However, the project remains complex, including insurance arrangements. But we remained comfortable with our contractual position. As previously flagged, we are pursuing an enhancement of our AML and host responsibility programs across the group, focused on continuous improvements. We have made significant disclosures in the FY '22 investor presentation in terms of key enhancements and priorities across AML and host responsibility. And this is a key focus for the Board and management. We continue to have regular dialogue with AUSTRAC as we progress the AML uplift program in Adelaide. Management remains fully committed to the enhancements, which include new senior AML resourcing in New Zealand and Adelaide, improved governance and investments in ICT systems and KYC processes amongst others. Reflecting current and future risk settings and strategic priorities, the Board has implemented changes to its committee structures with the establishment of a Risk and Compliance Committee, which t Kate Hughes will chair, and progressed significant renewal during the period with 5 new directors appointed. We continue to respond to the AUSTRAC enforcement investigation of Adelaide. We are fully cooperating with AUSTRAC and sharing information as requested. We are now on our Sixth Section 167 Information Request and have shared thousands of documents and responded to the hundreds of questions. The timetable for completion of the investigation remains unclear. At this stage, AUSTRAC has not filed proceedings against SkyCity, but enforcement actions including potential material regulatory policies remains a possibility. As previously flagged, in early July 2022, CBS, the south Australian gaming regulator advised that it appointed Mr. Martin Kofoed to undertake an independent review in the site of the Adelaide in light of interstate inquiries into various casino operations in Australia. We are fully cooperating with the review and look forward to its completion and findings. Mr. Martin Kofoed is due to report back to CBS by February 2023. With regards to regulatory settings in New Zealand, we continue to have a constructive engagement and relationship with the DIA. Regular reviews were undertaken by the DIA on compliance, AML and host responsibility. I'm now going to ask Julie to make some comments on our financial and capital position before I close. Julie?

[Foreign Language] Kudos to everyone listening in. As you see from our full year '22 financial results, we delivered a normalized EBITDA of $137.9 million and a normalized NPAT of $9.7 million. Clearly, this is a material reduction from our prior financial year performance, which in itself is indicative of the significant impact from COVID-19 that Michael detailed earlier. However, this full year result is in line with the market guidance that we provided during June 2022. And pleasingly, it also reflects a $102 million uplift in normalized EBITDA from the group's interim financial results. On that note, I also want to call out that our fourth quarter of full year '22 delivered circa $72 million of normalized EBITDA, which is comparable to pre-COVID-19 earnings levels and gives additional credibility to the ramp-up in performance that we expect to see in full year '23 and beyond. As Michael indicated, we were very pleased to see the continued resilience of our local gaming businesses across all of our properties, which responded positively as restrictions lifted and customer confidence returned. In particular, I want to call out that our EGMs as our highest margin contributor, delivered around 50% of our group normalized revenue in full year '22. It is also important to note that our full year '22 financial performance includes the offsetting impact from decisions that management made during the year to help reduce the financial burden from COVID-19 and to ensure the sustained financial strength of the group throughout this hugely challenging period. These decisions include a $40 million reduction in our planned same business capital spend, the deferral of non-committed wage and salary increases through tight management of our vacancies. And we also secured $17 million of COVID relief that was available to our New Zealand businesses, which was in part offset by about $1.5 million spend on unplanned COVID-19 safe guards. In addition, the business has continued to adjust operating hours and shifts to ensure that our resources remained focused on maximizing earnings that were available in a safe and compliant way. I want to emphasize that these decisions were made with no compromise of our health and safety in purpose and with no compromise of our compliance obligations and uplift that remains fundamental to our license to operate. And on that note, we spent some $9 million on AML and host responsibility regulatory compliance across the group in full year '22. This included ongoing program enhancements, expert advice, IT upgrades and responding to enforcement and other requests. While some of these one-off spend, as we highlighted in our interim results, we do fully expect a higher baseline of compliance costs on the back of increasing requirements and expectations from our regulators. We also continue to support our communities through full year '22 with over $6 million distributed through our trust through levies and initiatives, which remained a core foundation of our group. This includes valuable support to use employment through initiatives such as Project Ngai Tahu and [ TupiToa ]. And we are also very proud of the impact we make through partnerships and sponsorships with organizations such as Leukaemia & Blood Cancer New Zealand, Women in Sports. And of course, Rugby World Cup 2021, which finally kicks off on the 8th of October. As we shared during our interim results presentation, our priority throughout the year has been to preserve our most important assets, which is, our people. Our people are a critical enabler to ensuring a rapid ramp-up in operations when we are able to be open. And our business performance in the second half of full year '22 demonstrates that retaining and engaging our people during this challenging time was a very sound decision as we have been able to respond quickly as restrictions were lifted and customers returned. Linked to this, I draw your attention to the chart on Page 13 of the investor presentation, which clearly demonstrates the resilient nature of our local gaming business over the last 3 years through several economic cycles and external shocks. We continue to see the rapid bounce back of our revenues when we're able to optimize our operations, even when the environment in which we operate is changing and of course our people are core to this. Moving on to our balance sheet. We further strengthened the financial resilience of our business during full year '22 by removing considerable funding risk with debt covenant waivers for the December 2021 and June 2022 testing periods. And as an extra precaution against residual COVID-19 related uncertainty, we also secured a variation to December 2022 testing period. While they're based on the performance we are currently seeing, we expect that this variation will not be required. We continue to receive great support from our financiers who have been able to look through the uncertainties that we and many other businesses are facing. This was reinforced again a couple of weeks ago through the support we received from our financiers for the early refinancing of $160 million of debt facilities that were due to mature in mid-2023. And on that last point, I want to emphasize that we have and will continue to carry significant levels of funding liquidity headroom as a safeguard against our near-term uncertainties. Our liquidity headroom is currently at levels circa 3x higher than our treasury policy requires in a normal operating environment. And our current capital management approach is to retain these levels until we have more clarity on any applications on our business from future material uncertainties, including COVID-19 macroeconomic factors and potential regulatory penalties. One final area that I want to give you an update on is the discussions we are having with Macquarie Principal Finance regarding the Auckland Car Park Concession agreements. As highlighted in our interim financial statements, we continue to work with Macquarie on the late delivery of the car park that were compromised as a result of the NZICC fire back in 2019. And while reinstatement of the car parks is underway, it is likely they will not be delivered to Macquarie on time. There is a comprehensive disclosure in our financial statements. But I do want to call out that this late delivery could give rise to a contractual right on the 22nd of October, which allows Macquarie to exercise their right to terminate the concession agreement. If Macquarie decides to exercise their right to terminate, this will ultimately result in us taking back operational control of all of the car parks covered by the concession agreements. This will be for a consideration to be determined by a process and detailed in the agreements. To date, Macquarie has not indicated their intention. As a reminder, the Auckland Car Park business is a high-quality integrated operating asset that is a key driver for local gaming visitation with earnings of $15 million to $20 million EBITDA per annum. So while a car park buyback is not part of our current discretionary capital strategy, it is a valuable asset with strong earnings. And as you would expect, we are progressing credible options for financing a potential buyback should Macquarie exercise their rights. These options range from viable self-help using existing resources through to securing new debt that fits within our longer-term capital management strategy. And finally, before I hand back to Michael for his closing remarks, I do want to reinforce again that we remain fully committed to our dividend policy and the reinstatement of distributions once we exit out the covenant waiver restrictions. [Foreign Language] many thanks for listening and now back over to Michael for a trading update.

Thanks, Julie. I wanted to make a few comments around recent trading and the financial year '23 outlook before closing. I'm pleased to say that the strong growth trends observed in the fourth quarter have carried over into financial year '23 year-to-date. And we're looking forward to New Zealand moving into the green setting at some point in the future. We've achieved strong group revenue performance during financial year '23 year-to-date. Group revenue is comparable to pre-COVID-19 levels, including IB, with group local revenue up 14% on pre-COVID-19 levels. The domestic consumer environment remains positive. And the properties are benefiting from an extended period without operating restrictions and an ongoing recovery of domestic visitation. Combined New Zealand revenue has been consistent with pre-COVID-19 levels, with positive local gaming performance, particularly EGMs in Auckland and Hamilton, while table games revenue remained below pre-COVID-19 levels. We've seen a strong start in FY '23 in Adelaide following positive fourth quarter with 10% EGM market share achieved. The strong start to the year provides confidence around our pathway of back to pre-COVID-19 group EBITDA, which we expect to achieve in FY '23, assuming no significant changes to the operating environment and settings. Whilst we're seeing strong revenue performance year-to-date, we are also seeing significant cost pressures across the group. We expect our earnings in FY '23 to be predominantly derived by our cash-generative domestic businesses that leverage the recovery of international tourism following opening of international borders. Significant and ongoing focus on cost control and operational efficiencies are required to address inflationary pressures and increased compliance costs. Our focus on people, retention and recruitment will be critical to delivery of our FY '23 budgets. Staff shortages are expected to be a challenge over the medium term. We've recently increased wages and salaries for staff across the group, which was particularly satisfying following effectively a 2-year pay freeze in response to COVID-19 disruptions. In summary, FY '22 was a really challenging year, but our key priorities as a management team remained unchanged. We have an absolute focus on executing our operational strategies, which includes maintaining high standards of customer service while ensuring our financial resilience to set the business up for success. We remained focused on successful execution of NZICC and leveraging the benefits of our investments in Adelaide and Auckland and delivering on the omnichannel opportunity in New Zealand. Responding to regulatory reviews in Adelaide and ongoing enhancement of our AML and host responsibility programs obviously remains a key priority for management and the Board. I want to personally thank all of our investors, shareholders and financiers both on this call and more broadly for your ongoing support. And finally, I would like to take the opportunity to acknowledge that this is Ben Kay's last financial results after 8.5 years leading our Investor Relations function. Ben is taking on an exciting new role as CFO of a leading New Zealand VC fund. I'm sure you will join me in thanking Ben for his commitment to engaging and addressing the investment community during his time at SkyCity and in wishing him all the best. I will now hand back to the operator for Q&A.

[Operator Instructions] And our first question will come from Mark Robertson of Forsyth Barr.

Congratulations on what looks like a pretty solid result given a pretty tough operating environment. I'm keen for you to just expand a little bit on what you're seeing in terms of the labor constraints and cost inflation for sure. I appreciate you've given a little bit of guidance for that. Given, I guess, the high level of vacancy, is it possible to expect a little bit of a step-up in FY '24 in future years as you fill those positions and then the underlying, I guess, cost inflation comes through?

Mark, look, what I would say is -- right now, we have about 400 vacancies across the group and that's effectively for demand that we see today. Now we're making progress. That number was 500 a month ago. So we are making progress on recruitment, but it is challenging. There's no doubt about it, it's challenging. But I look at as opportunity in the long term as we -- it means that we have demand from a customer perspective across our business. One of the things the team are doing really well is allocating the resources we have in the most profitable businesses and like the way we run at restaurants and so on. We focus on the hours that are both profitable and therefore you see that refinement happening. We are particularly focused on areas such as table games, as an example, because that is an important business for us. And there's a particular focus on recruiting staff there and we're making progress. So what I'd say from a cost perspective and probably Auckland is most recent so and the largest, so it would be worth just giving you an update. So we've recently -- would apply to 70% of our workforce, front line team, given the pay increase that ranges between 4% and 13%, which gives you some color on the type of wage is at an average about 6% for that frontline group. So that's some color. I think there'll be some questions. We are managing that inflation well low, and we'll have a number of offsetting elements to deal with.

That's awesome, yes. Congratulations, Ben, on the new role. All the best.

Thank you.

The next question comes from Justin Barratt of CLSA.

I just wanted to follow up on Julie's comments just in relation to the dividend. I think you alluded to the fact that actually that dividends are likely to be paid in the interim of FY '23, if you can meet the full covenant. I just wanted to confirm that was the case. And if you could give us an indication of what those covenants are that would be really appreciated as well.

Yes. Look, I'll make a comment. So obviously, dividends are dependent on earnings. So that's the first thing I'd say. But subject to the earnings being as we expect them to be and to continue, our intention is to put the Board in a position so that they can make that decision. I don't know Julie, do you want to make any comment?

I'll just add that the covenant we're referring to, we have a waiver on our debt gearing covenants. So we just need to pass the standard test and all indications are at the moment with the performance we've seen that we'll pass the standard test on that.

The next question comes from David Fabris of Macquarie.

We can see the strong trading that's coming through in the June quarter in FY '23 and the comments you expect to recover to pre-pandemic EBITDA in '23. To help us understand this, can you talk through any structural improvements you've made to the business, particularly on the domestic side since COVID to drive revenues? I mean, we can see the expansion in Adelaide pretty clearly. But have there been any changes to floor configurations or changes to loyalty in New Zealand? I'm just trying to think how you could do better on the revenue side versus pre-pandemic levels.

So I'll make a few comments and might get Callum to talk a little bit more specifically about the Auckland and New Zealand business. Look, the first thing I would say is that the structure of earnings in this financial year is different to 2019. Some examples would be -- we have an online business now which has generated something like $13 million in the prior year. So that's a feature. But that -- the international business, which was a large contributor, back in 2019, we'd expect that to be substantially smaller. We are seeing growth in some of our high-margin businesses. EGM performance across the group has been really encouraging and that has a really nice flow-through through to earnings. So some of those elements from a mix perspective that are assisting us. Now, I might get Callum to talk about some more specific things and what we were doing operationally to help ourselves.

Thanks, Michael. Thanks for the question, David. So look, from a New Zealand perspective, there's been significant changes to the operating model, not one outstanding feature but multiple things we've looked at. Firstly, what I'd say is, in the last 3 to 4 months, we've finally been able to leverage our investments that we've made across the last couple of years. So most importantly, those are around our 8 table games room, Ultra and BLACK EGM room and also the investments we've made in and around the main gaming floor in Auckland with both Flare bar and Food Republic. On top of that, we've got the attractions. So all BLACK's veteran Sky slider game, we've never really had the opportunity to leverage those. So that's sort of a quick first point. Then from an operating model, we've made significant changes across the last few years. And some of them forced upon us by COVID and some decisions that we knew were the right productivity initiatives to put in place. So particularly in Hamilton and Auckland, we've seen significant changes to operating hours. In Hamilton, for instance, now we close the entire site midweek for a few hours each day. In Auckland, we have different operating hours, particularly around food and beverage. Where we can, we're making sure that we're passing through all of the costs that we're seeing. And food and beverage is an obvious example of the space we're able to do that. Been working really closely with our suppliers to make sure we leverage our buying power through them. And we've been really focused on leveraging existing technology that we have, simplest form through Kronos, our rostering system to make sur we're really rostering efficiently, but also bring in significant new automation measures. So particularly around F&B, we've got new pastry machines, chocolate machines are now robotic waiters that some of you may have seen. So really trying to make sure that we're more productive and where we can, making up for that challenge in the labor space. And we've also really focused on split. So in food and beverage, for example, really focused on beverage versus food split. There's been considerable work done with gaming configuration, that really is the biggest change that has been in the 8 Ultra and BLACK room space.

I appreciate the color there. Can I sneak in one more question?

Go ahead.

Just with the Adelaide inquiry, I mean, what are your thoughts around New Zealand going the same way? I mean the issues across IB wouldn't just be contained to Australia, was my thought.

Look, there's no indication from the DIA that such an acquirer would be undertaken. We have a strong relationship with the DIA. The DIA undertake regular reviews and audits of our systems and practices, in AML and host responsibility. That's the feature of how the DIA regularly goes.

The next question comes from Rohan Sundram of MST Financial.

Just I might start with a question just on the environment. And I appreciate the tables are lagging slots. But are tables improving as we're seeing the consumer stresses? And if they are, I'm just wondering if you're seeing any signs of consumer stress or pockets of weakness anywhere in your portfolio, and looks like you're more than able to offset it elsewhere?

I was struggling to hear you on that. Well, you might just repeat that question? Sorry, Rohan.

Yes, I just wanted to understand. I appreciate it's a really strong start to the year and a very good fourth quarter, but we are seeing signs of consumer stress. And I'm coming from a positive angle with you. So I'm just wondering if you are seeing any weakness anywhere in your portfolio other than tables? And if the softness is in tables, is that actually recovering at a time when consumer stresses are increasing, which is a positive probably for…

Yes. So look, what I would say is not all of our businesses have recovered to pre-COVID level. Obviously, EGM has and it's actually beyond that. And that's very helpful in an organization that has a very high weighting to EGM revenue. But as you call out, table games is not back at the pre-COVID levels. IB as an example, is that while there has been a recovery, it's minimum. What we're seeing is VIP Australian business largely in that business. International tourism is very light. Let's say, in Auckland, for example, we would be a business that would see a lot of flow-through from tourists coming to venues like Sky Tower flowing through our restaurants, we don't see that. And it's probably worth calling out here in New Zealand, we are still at the Orange setting. I think I said it on the call that we're still at the orange setting. So there is restrictions in place. All of our staff, for example, if you're working at the property, are still wearing masks. And that -- I think it still has a flow through to consumer sentiment. So I think that -- when we eventually do move to green or those settings removed, there is potentially a positive there as well. So that's a little bit of color for you.

And just one more, just a quick one on IB. I noticed it was a stronger, a much stronger turnover half, a good rebound in the second half. As you progress with that business and taking into account the structural changes we just talked about, can that business get back to a pre-COVID type of margin that it used to do?

Look, I think it's highly unlikely the IB business gets back to where it was previously from an earnings point of view. I think that's our view is like we obviously don't deal with junkets anymore. We've reduced differentials and we've gotten much strong processes around sources of wealth. And so I think that would be my view on it.

No, sorry. Yes, that's fine. But I just meant is that margin potential still there even off a much smaller base, in potentially leaner business?

The specific on the margin of the business, yes, look, I think so. I think so. Obviously, we have to manage that business in a different way than we did in the past. So I think, yes. When I look at every part of our business, we are looking for ways to maintain or enhance margin to offset the pressures that we have. That's a consistent theme I think you find across every part of our business.

The next question comes from Laurence Gandler of Credit Suisse.

I want to just maybe clarify some things on cost, particularly in Auckland. Obviously, with the structural changes you put in place, I sense that perhaps your cost base despite the inflation in wages may be below your FY '19 base. Is that sort of directionally how to think about it? Or do you think it will be higher than FY '19 base, and we need revenues really to drive EBITDA?

Look, Larry, at a high level, you are correct in that the operating model that we have now requires less operating hours to run, even though the actual individual cost of labor is higher because we're putting up wages. So that's the view. Now over time, we will get to a point we hope, that we're going to require more and more of those hours. But I think that's how I do that. Callum, is there other thing do you want to add to that?

Yes. To use Food and Beverage, an example, Larry, pre-COVID, we're running at around 15% margin. And we're confident this year and what we've seen in the last few months that we will be up more like 20% margin in F&B, which is showing, obviously, what we're doing around labor, but some of those other initiatives I talked about as well.

Okay, great. So if revenues were flat, you'd say your OpEx would be -- actually flat with pre-COVID, your OpEx would be lower than pre-COVID?