Tourism Holdings Limited (THL) Earnings Call Transcript & Summary

Good day and thank you for standing by. Welcome to Tourism Holdings Limited Conference Call. [Operator Instructions] please be advised that today's conference is being recorded. I would now like to hand the call over to the first speaker today, Mr. Grant Webster, CEO. Thank you. Please go ahead.

Thank you, Desmond. Thank you, everybody. Good afternoon. I appreciate everybody attending at short notice, and it's obviously a very challenging change in the expectations for thl. Look, I will start by just noting that this isn't like COVID-19 period, it's not a GFC, we're not at a trading loss. Our balance sheet and position in the market is still strong and we believe we've got a positive outlook in front of us. Nevertheless, we feel the pain of the disappointment of this change in expectations as much as everybody else will. We have had a very challenging start to quarter 4 in a dramatic change in our expectations. We reiterate the long-term objectives and state of the business from our perspective remain very positive. It's a short presentation today, but we have provided more details than what we normally would for something like this, so that you can have a really good understanding of what has occurred and the timeline around it. So let's just jump into it, turning first to the summary slide. So as you well know, we've downgraded our expectations for FY '24 from around $75 million to between $50 million and $53 million net profit after tax. It reflects the weakening economy, which has impacted most regions in some way or another, but vehicle sales have been the major factor globally and in particular, in the Australian market. Over 50% of the shortfall that we're looking at from an EBIT perspective is attributable to the Australian retail dealership division. And we will talk about the ex-fleet sales in particular. The proportion of those that was sitting in that quarter 4 and the extremely high margin that relates to those vehicles. Rental yields have generally met our expectations in most markets, but we have seen with the slowing in the economy the domestic markets in New Zealand and Australia decline in late booking trend, and we'll talk about that in a little bit more detail overall as well. When we think about the core part of the business, the Rentals business, it does remain healthy. The Rental yields have generally met our expectations, and our outlook for the coming high season remains positive, which, again, we will cover as we move through things. It's important to note that thl is forecasting to remain compliant with its banking covenants at the June 30 quarter end and beyond but we will engage with the banks to make sure that we've got greater tolerance in case it is required, and we'll talk more about that later on, including talking about potential impairment considerations. Whilst we fully understand it, there may not be the same sense of credibility with the $100 million net profit after tax goal for 2026, we have reiterated that, that is our goal, and we have provided more detail on the assumptions that sit behind that to provide you with an understanding of why our confidence remains that we can hit that target. Just turning to the waterfall slide. This does demonstrate in simple terms, what we've just talked about that the Australian segment is the majority of the issue in this downgrade. Although as you can see, U.S.A. and New Zealand have also had declined as has the U.K., Ireland business. In fact, the U.K., Ireland business on a percentage basis of their profitability is actually the largest decline. Turning to the slide on the market deterioration and the conditions around it. So the fundamental question that you'll be asking yourselves, and obviously, we've challenged ourselves on as well as how could this have deteriorated so quickly and how come you only knew about it now. As evidence, like I said, we were ahead at the end of January. Going into February when we released the half year results, we had a short -- small shortfall in February, but [ manageable ] and we had rectification and plans for that shortage from February in March, and a number of other upsides that we were considering. We knew that we had to keep a close eye on what was happening and the trends in the business weren't necessarily favorable, but manageable within our forecasts. As the Rental income for April came to fruition, and we saw that drop in domestic in Australia and New Zealand from the Easter period and school holidays, we did end up below our domestic expectations in Rentals, but far more importantly, what we saw in April was a significant shortfall against our expectations for vehicle sales. We had promotional activity in place that focused on ex-fleet across both markets, we had priced the product appropriately. We had in -- a secondhand vehicle that was a lower price and more attractive to the market in our view, but demand dropped across the board, and those sales simply did not occur. We've reviewed that situation at the end of -- at the middle of last week. And as those final results came, expectations came through from the businesses on Wednesday night through to Thursday morning, that's when we went into a trading hold because we could see a material decline in expectations for May and June. So we have taken that trend in April and flow it through to May and June. Some may say that, that's a conservative approach. We think it is realistic based on the leads that we have, based on the deals that we have on the books and the deals that we expect to do over the coming weeks. We will talk a little bit more about that vehicle sales issue as we move forward. Moving to the next slide. This is where we want to just reiterate the positive outlook from a Rentals perspective. So the future key Rental periods are not expected to be significantly impacted by that domestic change that we've seen recently. We are more an international business, particularly in New Zealand, Canada, the U.K. and Australia. And in general, that international business remained strong and positive with yields in line with our expectations. Now we did expect and planned for yields to decline somewhat, we have been clear about that for some time but yields have not declined any further than what we expected. So we do see the impacts at the moment to be reflective of the current economic conditions, and we do expect those conditions to improve over time. Importantly, we don't see any structural change in either the demand for purchasing RVs or on an international basis for renting RVs. It's an important point here to also just note that the Manufacturing and Tourism businesses are generally tracking in line with our expectations. The New Zealand Tourism business is slightly down in quarter 4 with that movement in domestic activity, but it's outperformed in quarter 3. So let's just move to the outlook. As indicated, we have retained that goal for $100 million NPAT and we've considered the underlying assumptions behind that goal very carefully and would consider those against the current trading performance, and we'll talk about those on the next slide. But the movements in FY '24 clearly does mean that FY '25 is also going to start poorly. Quarter 4 isn't just going to end and on July 1, everything turned rosy. So we do expect that quarter 1, probably going into quarter 2 of FY '25 will start more poorly than we expected. And we do, therefore, expect FY '25 to be lower than the current -- materially lower than the current analyst consensus expectations. Those current numbers are around $87 million for FY '25, and we've indicated that we think we will be below the FY '23 pro forma result of $77 million net profit after tax. So let's just have a look at the FY '26 assumptions. So I just want to reinforce at the outset that we think these assumptions are reflective of the ongoing expectation of growth in Tourism, which we are seeing, and we see nothing at the moment that means that international tourism is expected to decline. If you look at airline capacity, if you look at airline yields and if you look at hotel capacity starting to grow again around the world, it all certainly supports that long-haul and international tourism is expected to grow over the coming years. They do reflect a recovery in vehicle sales. And the RV sales market, we would note, has seen these kind of drops historically and globally, and recovers in reasonable time frames, particularly as interest rates drop. What's important in here is to really acknowledge that we have allowed for Rental yields to drop from FY '24 to FY '25 and then in most markets, some small growth in FY '26. Hire days are expected to reach pre-COVID levels in the core markets of Australia or in the U.K., but we note that New Zealand and the U.S. remain under pre-COVID levels but we expect our utilization to be broadly in line with historical numbers, and we expect the synergies and fleet flow-through, which means some jurisdictions, Australia and New Zealand, in particular, will have higher than historical utilizations. We expect for that FY '26 number that ex-fleet sales volumes will be broadly in line with the pre-COVID levels. Margins importantly also in line with the pre-COVID levels. U.S.A. and Canada should achieve slight growth over those margins, given the synergies that we expect from a fleet perspective between those markets. The full realization of the synergies that we've indicated previously, whilst noting that costs do -- are going up and are expected to go up in line with what you're seeing in other industries and other businesses. The Australian retail dealership, it is important to note that we have allowed for continued softness in this division for some time. We do not expect it to hit the boom periods that it hit on a margin and volume basis during COVID, and we see that as an opportunity for where we're been conservative and an opportunity for growth. In general, Tourism numbers, we expect to align with general growth. So from our perspective, those assumptions are realistic. We do, again, understand that the market may take a different view on those, but we think they are based on sound assumptions that align with where the market is more generally from a Tourism perspective and vehicle-sales perspective. Just turning to other implications. So just on the financing point. So we have been asked already this morning to release our covenants. We don't release what our covenants are, and we'll continue to consider that. But at this point in time, we don't release those. What I'm very happy to say is we -- no surprise, we have a leverage ratio and equity ratio, we have a debt servicing covenant as well. So just a reminder that we are forecasting to be in compliance with those covenants. Question has been raised around equity and whether we need to be raising equity. There is nothing we see today in our balance sheet forecasting or the debt servicing capability of the business or the profit outlook for the business that indicates that we would need to consider any kind of equity raise. So I would remind everybody very clearly that even during the COVID-19 pandemic when we were in a loss situation and Apollo was in a loss situation, we did not raise equity. We have a large number of fleet. We can manage our debt levels very effectively, and we will do what is required on that basis. Just quickly talk about asset impairments. We will have done a very quick review of a number of different areas based on this reforecast. And we have noted that we will be considering the U.K., Ireland business in particular. And it's probable that there will be an impairment in relation to that business, which we will review as part of our business planning and year-end processes. The value of any potential impairment has not been allowed for in these forecasts and we can't give an indication of what that value may be because clearly, we haven't done the work yet. So we just can't put the -- can't perform a [indiscernible] on that one. I'll quickly just go on to the divisional review, and this flips us through to Slide 12 with the expectation for fewer ex-fleet sales. This is a really important point with this change. I really want to talk about this ex-fleet and the expectation that we are going to have fewer ex-fleet sales across Australia and New Zealand in particular, and the material impact that has in the short term on our outlook and position. As you can see, there is a significant margin on these ex-fleet vehicles and it is the way that we account for it, you need to think of the retail margin, you need to think of essentially wholesale margin or the rental to retail margin and indeed the manufacturing margin that is all linked and associated with these vehicles. Internally, it works through a group elimination process, where the profit is eliminated internally and only realized when the vehicles are actually sold. So these are very high-margin vehicles. They are the vehicles most noticeably that have not sold in the way that we expected them to, although clearly, we've seen a drop in vehicle sales overall in both the New Zealand and Australian markets. We do believe that our expectations were realistic. When you look at our previous sales periods, when you look at the pricing activity that we put into place, when you look at the marketing activity and when you look at what was selling effectively relative to the higher-priced new vehicles, it's these used ex-fleet vehicles, which were the vehicles to get behind and push for the last quarter of the year and in fact, right through that from February. The reality is we have found that market has declined and indeed through April has been well below expectations. We will continue to drive those vehicle sales and importantly, those vehicles are there to sell, and that margin is there to be achieved. It is not like a rentals day that you can't recover once it's lost. Those vehicles are there, and we will move them through. Just moving to the next slide on vehicle sales. The detail is there, and I think you can go through it. What we have seen in the last few months is the U.S. achieved lower margins on vehicle sales than we expected. There is a product called the NADA book, which is an external third-party business that values vehicles for financing and for manufacturers within the U.S. industry. That had been identifying the used product from '22 and '23 as declining in value over recent times. But importantly, the latest update that came out just at the end of last week indicated that those '22, '23 vehicles are actually seen as increasing in value by 3% to 4%. So that gives us some confidence that the margin drops have actually concluded and in fact, we may start to see some upside in those older vehicles. Canada saw a margin drop as planned, but we did have a change in retail strategy and retail pricing strategy and changed our campaigns. And in that market, actually, those campaigns actually worked, and we're outperforming our expectations. Just quickly moving over to Rentals. The Rentals commentary, I think, is reasonably clear in those bullet points and again, the detail we've covered earlier in the presentation. So let me summarize, I guess, where we are at. When you think of all of that, there are some that could say that we've been conservative in our reaction, in our approach. This is how we see it today. We have intended to continue to be open with the market to make sure, obviously, that we are complying with our continuous disclosure obligations but challenge ourselves consistently on what we're expecting, why we're expecting it and being honest with the market. We will continue to drive ourselves and look to do better and do more. But this is where we see this sudden trend and move in April and flowing through to May and June. April has been poor, the trend is not our friend. The Rental shortfall in April in New Zealand, as I said before, you can't make up. But those vehicle sales shortfalls can be made up and at some point, those ex-fleets vehicles will be sold and be sold at good margins. So it's a very poor quarter 4, and it does mean as I said before that quarter 1 of FY '25 is going to be challenging as well. And that's why we've indicated that -- the numbers that we have or the broader reduction and expectations for FY '25, but we remain positive that the core of this business in Rentals and the outlook on a global basis is positive. We're positive about those assumptions through to FY '26 of $100 million NPAT, and we're positive about the core structure and approach of the business. We will, however, out of this, continue to challenge ourselves on what we could be doing differently from a forecasting perspective, how we might assess the market differently through these challenging economic periods, and we will react as appropriate. Finally, I'd just reinforce that we know how to manage this business in these challenging times. We understand the balance sheet and management of debt in fleet is critical, and we are still making a substantive profit this year. It is not a loss-making situation. It is different to COVID, and we believe that this is a big pickup that we are very, very concerned about and unimpressed with our performance, but it does not change the structural performance of this business or the industry and the strong balance sheet position that we have. So we do thank you again for your attendance. I look forward to the Q&A and Desmond, we'll hand back over to you to open that up.

[Operator Instructions] Our first question comes from Kieran Carling from Craigs.

First question from me is just on your fleet target for FY '25, which has been walked back from 9,500 to 9,000 vehicles. Can you comment on what your current fleet CapEx commitments are for FY '25? And what is factored into that fleet guidance in terms of your future commitments versus thl's ability to sell vehicles?

Kieran, I sincerely apologize. You broke up during that question. I'm not sure if that was at our end or your end. Could you repeat the question from the point where you said that our FY '25 vehicles -- fleet expectations are down by about 500.

Yes, sure. So with the fleet target now under 9,000 vehicles versus 9,500 previously. Can you comment on what your current fleet CapEx commitments are for FY '25? And what is factored into that guidance in terms of your fleet commitments versus thl's ability to sell vehicles in FY '25?

Yes. So Kieran, I won't give any specific details of exactly what the numbers are. Clearly, you'll be able to work out with a lower sales number this quarter, our net fleet CapEx goes up significantly because we've obviously got less sales for this year. So you will see the FY '24 number is a lot higher than what we indicated previously. And that obviously flows through to debt being higher, not that we gave a debt number at the half year. So we're not -- at this point in time, remember, this is not a year-end presentation. This is an update on guidance. We're not providing guidance into FY '25 on fleet CapEx at this point in time or debt numbers. You know that we will manage that accordingly to the market and the market conditions. And what the indicator is around that fleet coming down is that we're going to run things tight, we're going to keep utilization really tight. And obviously, with the sales market being a little bit more volatile, we can play between fleet numbers and sales numbers if we need to a little bit more. So we've got a little bit of ability to adjust between that.

Considering the sharp decline in expectations through Q4 and your FY '25 guidance for NPAT to be below $77.1 million, should we be interpreting guidance as being in the ballpark of $50 million, similar to FY '24? Or in between $50 million and $77.1 million, or is there just too much uncertainty to say at this stage?

No, somewhere in between would be the number. I'm not going to provide a number today. We've got a lot more detailed assumptions and actions that we need to consider as a result of this as we work through numbers for the next year. You got to remember, we've done a high-level assessment of all the numbers and the indications based on all our revenue numbers. We've got to look at all the other parts of the business. We've got to continue to look at that CapEx, the cost structure and so forth and so on. So it's way too soon for us to be providing a number. But it's clear based on where quarter 1 will be from a vehicle sales perspective that any previous expectations the market had are just too high.

And then final one is, if we look at the shortfall of ex-Rental vehicle sales in Aussie and the $13.5 million gross profit impact, of that impact, you sort of talked about it being more of a timing issue. You've still got the vehicles there to sell in future periods. But of that $13.5 million, what are you confident that you can realize in future periods?

Well, it's one of those ones where -- look, it's not -- as I pointed to, it's not the sort of the fresh food nature that rentals day is. But you also can't -- we can't be just saying that sales will continue to sort of fall short and compound at some point into the future. I think that these vehicles in particular, that have particularly high margins, and then we will realize that over the coming period and what that period is, it's going to be months, but we will realize that over those months. So that shortfall we will achieve over a period of time, but it's probably in some ways at the expense of some new sales and those sorts of things. So we'll get that higher margin. But on a total volume basis, the market is down.

Our next question comes from the line of Andy Bowley from Forsyth Barr.

So a couple of questions from me. The first of which revolves around $100 million NPAT goal in FY '26. I recognize there's a fair few changes that are in place with regards to the immediate outlook here and reduced FY '25 fleet expectations at year-end there. So a reasonably material decline in fleet expectations at the beginning of FY '26. How has that impacted the assumptions leading into FY '26 that you've outlined here relative to where you were this time last week. Clearly, there's a fair few moving parts here and I recognize the $100 million is only an aspirational goal, but there's a number of clearly detailed assumptions that go behind it.

Yes. So it's -- Andy, I'll try to keep the answer simple whilst it's actually quite complex. In terms of that 500, where you end up, so we look at fleet on a month-by-month basis. It's right through that period. And obviously, you've got the seasonal adjustments between the different countries and what we expect to sell. So we'll change the sale profile over the next 2 years. So when you pull all that together, and really try and tighten everything up, that's where you get that ability to pull down that fleet number knowing that we've got -- what we've got in terms of sales and purchases coming through the next 12 months. So basically sort of going, look, you might sell some more, hold a little bit on rent. So you're playing around being more fleet efficient. What you also see in general terms is some of the flow-through of the demand in New Zealand actually being stronger for the next couple of years, even though it still remains behind pre-COVID levels. So New Zealand is still performing particularly well. And when you look at a few of the synergies and cost lines flowing those through.

Okay. I think I get that. In terms of confidence levels, to be able to put that number in your release, clearly, you are still reasonably confident that, that is achievable. I guess that's not really a question, it's a statement. But if you'd like to comment, Grant.

[Technical Difficulty]

I'm not sure if [Technical Difficulty] problem is with me, but I'm not able to hear you here, Grant.

[Technical Difficulty] Desmond are you there?

Yes, please go ahead.

Okay. Andy, can you hear us now?

Loud and clear, Grant. I'm not sure if you picked up my question, straight statement with regards to -- yes, effectively confidence levels around your $100 million of NPAT in FY '26.

Yes. So we believe that there's enough tolerance there for us to have that goal. Clearly, it's a much bigger step from '25 to '26. There's no doubt about that. And it is predicated on a recovery in the vehicle sales market, which we do confidently believe will occur. It is one of those cyclical areas. And that's where it comes up, right? That's -- if you look at those core assumptions, and that's the big thing that's changed to the down, you put that back to the positive and recognize that we've had a bit of domestic issues in Rentals over a winter period. It's not hard to get back there.

And then maybe lastly, in relation to that $100 million, can you give us an idea of how big your gain on sale for used vehicles is within that number to at least provide some level of confidence that, one, it's achievable, but two, it's realistic relative to where vehicle sales have been historically.

So the 2 assumptions that we've indicated are: One, that ex-fleet sales will be in line with pre-COVID levels or slightly above where we've got changes like new sites in New Zealand and so forth, nothing significant. And two, that margins are in line with pre-COVID allowing for [ with-era ] synergies, for example, North America. So in essence, the value of vehicle sales won't be significantly different to pre-COVID levels.

Albeit pre-COVID was a little bit muddied by the North American challenges in terms of that slowing used vehicle market and new vehicle market. I don't know if you can clarify that answer in any sense with regards to those changing dynamics in the pre-COVID era.

Look, so the U.S., North American fleet numbers that we have in there for sales, we would consider -- have definitely numbers that have been achieved pre-COVID but weren't achieved, you're right, in the worst of those years when we had the exit fleet situation in the market, but they're not out of the norm...

Our next question comes from the line of Grant Lowe from Jarden.