Tourism Holdings Limited (UCH.F) Earnings Call Transcript & Summary

Brilliant. Thank you, Jamie. Welcome, everybody. I appreciate everybody taking the time today. With me here in the room, I've got Ollie Farnsworth, our CFO; Steven Hall, our Deputy CFO; and Amir Ansari, Investor Relations and GM of a number of other things in the business. Look, today should be very little new information that we are sharing given the updates that we've provided over recent weeks. And I'd just note one of the key questions that we probably get is around BGH Capital. We have had no news or contact with BGH Capital since the start of August, as you would expect. So let's dive into it. We'll go through the presentation at a reasonable pace and get into those questions that you're all keen to ask. So just looking at the executive summary, we continue to expect that we're at an inflection point in terms of earnings. We recognize that the results to date are not where we want them to be. We also recognize that the underlying performance in our industry segment globally has not been where the industry wants to be. We stay positive in what was considered a difficult year where we think we've faced bottom of the market conditions, and we saw an ongoing decline in global vehicle sales. Our balance sheet is in a very good position. We think we're past debt peak and pleasingly had that year-end debt number under $500 million. The dividend position, we'll talk about a little bit more, but we see that as a positive reflection of confidence that we have in the future as well as the understanding of the lower CapEx profile that we see in the coming years. Our strategic initiatives are well underway. I'll talk about them very briefly later, and we continue to develop the business more broadly. So just looking at our results summary, again, obvious numbers, but of note from our perspective, still close to $200 million of EBITDA, only marginally down on the prior year. Sale of services or rentals in essence, now at just over 50% of the business. It's obviously been under that in recent years for all the reasons that we know, and it's now likely to grow from here as well. This is a key point because it reinforces the growth trajectory for thl and that it is rental-centric in its growth, and we're very positive about that outlook. Fleet at over 8,500 at year-end provides us an opportunity to still maximize that growth moving forward. If you look at the global snapshot, there is room to move from a RevPARV perspective, and we are expecting higher growth in RevPARV in FY '26. Whilst ex-fleet sales remain key to the business, our expectations remain low for the rest of this calendar year, and we are seeing some signs in the market, but we're not banking on any immediate recovery in vehicle sales. Margins that have adjusted are reflective of those adjustments we expected in the business. We're happy with where they're sitting in general, and we expect them to remain around these levels, although retail margins do need to improve over time, and we have seen a good clearance of the older stock, in particular, in the Australian business, which has been particularly positive. Move forward to the return on funds employed page. It's always been a key metric for thl, one that both management and the Board remain closely focused on. FY '25 was impacted by slower-than-expected vehicle sales and excess inventory that we held for most of the year. As you can see, New Zealand remains in a positive position as does manufacturing and tourism, where our Australian business, which does include all segments, manufacturing, retail sales and rentals underperforming at 5% and our Northern Hemisphere businesses with essentially a loss in the way the EBIT is calculated on this page being substantially below expectations. The strategic initiatives are all about addressing those underperforming areas and addressing them at pace. So Retail Australia, North America and U.K., Ireland. From a dividend perspective, there may be some commentary around the dividend. And from a company perspective, maintaining a dividend, I don't think was ever really in question. The question is, where do you sit within the payout ratio? A reminder that our policy sits at 40% to 60%. If you look at that compared to pre-COVID, pre-COVID thl was 75% to 90%. The difference between hitting 40% and 50% this year is around $0.01 per share. The banks have been happy with our approach. And the key for us is this should send a very clear message about our confidence in the balance sheet that we have, our confidence in debt reduction and that we have passed the largest elements of the growth in fleet CapEx that has been required and that we have passed the point of the large one-off non-fleet CapEx, in particular, the Waitomokia investment. The DRP, there's some really obvious reasons around the BGH situation, which make it very, very challenging to have a DRP at this point in time. So we've passed on that at this point. I'll move over to Ollie to talk us through the balance sheet and capital management.

Great. Thank you, Grant. Net debt closed at $492 million, which has had favorable momentum over the past few months. We expect this to be peak debt and for our leverage to come down accordingly. Some of the key drivers for this were a moderation of fleet CapEx and improved inventory management, somewhat offset by a higher-than-normal non-fleet CapEx, which is not expected to reoccur at these levels. Of note, the first tranche of our syndicated bank facility comes up for renewal next August and refinancing is underway and going well with our banking partners. I'll move us along to the operating cash flow slide. There are 3 key areas of influence on this, both in FY '25 and key themes moving forward. So firstly, we have a lower fleet CapEx requirement. We feel like we can lift RevPARV without significant investment. Secondly, inventory built up more than we would have liked with slower-than-expected vehicle sales. This is close to writing itself, and you would have seen that correction occur in FY '25. And then we have an expectation of improved earnings over the coming years. So this all results in a better operating cash flow position for the business moving forward. This slide is just a reminder that we think about real depreciation rate as a key metric for longer-term performance of the business. It considers both the impact of purchase price and the impact of vehicle sales value. We've got a really high focus on our build and buy cost in all regions, which are a significant part of the strategic initiatives that Grant will talk through shortly. These initiatives create a cash saving that's realized through lower depreciation rates over the life of the vehicles. Of note within the table is that the North American segment is where we have higher cost of vehicles from the COVID period, and that's required a higher depreciation rate to be applied. With regional synergy plans and those vehicles phasing out, we expect it to return back towards historical levels. I'll pass back to Grant for some commentary on the divisions.

Thanks, Ollie. Brilliant. So let's quickly go through the New Zealand Rentals & Sales. So look, the rentals growth continues. We've got currently a very strong positive outlook, which we've covered off in the last few releases. But we also still have plenty of room to move. We're still at the end of FY '25, around 30% down on pre-COVID levels, and we expect our operating leverage to be better in FY '26 period as well. In this market, sales are still not where we want them to be, but we are certainly happy with our overall view of market share from a vehicle sales perspective, and we're confident that we've got the product range that's required in this environment. In Australia, a similar situation from a rentals perspective, getting better and actually a more positive outlook than New Zealand at the moment, but also around that 30% sort of down on pre-COVID levels, so some room to move. A reminder that this segment includes rentals, sales and the Australian Manufacturing business as well. So the RevPARV opportunity also exists in Australia, and we see that utilization gain already, and we've got good plans for that to continue to improve throughout the year ahead. Some good site changes over the last 12 months and moving into this year as well with a new site in Perth, a new site in Sydney, not too far from opening and some smaller changes in other areas as well. So Australia does have the ability in this business to be our leading rentals and sales business, and we hope that the current momentum continues and expect that we can deliver on that. Moving through to North America. We know well and truly that this is a market that's had a challenging operating environment in the last 12 months. The tariff impacts plagued the year and the rental revenue, whilst positive in Canada was down as indicated previously in our commentary in the U.S.A., which should be a timing issue. As we see right at the moment, we have seen some improvement in some weeks, other weeks, we've seen some issues. People at the moment are still talking about price, talking about the Trump factor more clearly, and they're also starting to talk a little about immigration. We don't see any direct correlation to the immigration impacts to our core markets. However, it is interesting to note that it's gaining more media attention. U.S.A. also is still well down on pre-COVID. Canada is in a better position, nearly flat with pre-COVID sort of levels. The U.K. and Ireland, we've talked about, and it was all really the FY '25 story was one about the start of the year, where we still had significant issues from a supply perspective, and we underperformed from a rental sales market. Operating costs have been reduced over time with some significant changes. For us, the size of this business and the road to a recovery is the one that is of the largest concern. That's why it has its own strategic initiative, and we have that business under review. From an Action Manufacturing perspective, yes, it's been a tough market in that third-party revenue and the profitability that goes with that as well. We have started to see some signs of recovery in that part of the market. But again, like you're seeing in a lot of New Zealand commentary, it's certainly nothing that you can bank at this point in time. The business itself from an operating perspective is still performing really well, and we still see some margin opportunities within the business. Tourism businesses, again, positive momentum, good operating leverage and pushing us in the right direction that we want to be heading. From an industry trend perspective, if we move to that within the outlook slides, we continue to remain very positive about the broader tourism space on a global basis, noting that the U.S.A. sits slightly to one side in that conversation. We do see, again, some green shoots from a vehicle sales perspective, but we remain subdued about the expectations in the coming 12 months. Anything that really starts to turn in that market, we'll see us upside from our broad expectations. When we look at FY '26 on the next slide, no, we have not provided any guidance at this point in time for FY '26. We think it's just too early to do so. Broadly speaking, as you know, in our growth road map, we have expectations that we will achieve the $100 million goal in 3 to 4 years. This year, in FY '26, we'll see a step-up in the cost-out plan. It will see the capital discipline come to fruition with lower debt and us really looking to leverage that rentals growth that exists whilst we remain cautious on sales. From a strategic initiatives perspective, there's nothing significantly new to note at this point in time. But a reminder that the U.K. and Ireland is under a strategic review, and we are concerned about the amount of capital that we have tied up in that business, delivering no return on funds employed. Australasian manufacturing needs to be able to find the right way for us to leverage the lower cost operating model that we have in New Zealand. Now some of that is location, some of that is process, some of that is materials and some of that is equipment. So across all of that, we're in the process of determining the right way for us to be able to deliver those savings through into the Australian business. The Australian retail sales has had a significant reduction in inventory. We've adjusted some of our brands and rationalize what we have from a product perspective. That's making that business a lot leaner. There is further steps to go to make sure that we substantially reduce that inventory in that business. And of course, North America, we remain heavily focused on delivering a 15% return on funds employed for that business. Now that we're in a tariff-free situation, we believe there's real potential for us to move forward at pace with the synergy goals and targets. In terms of the net profit after tax goal that was announced as part of the growth road map, no change in our expectations here, no change in the core assumptions. What we have had in terms of feedback is really strong alignment between those assumptions. It's been well received. The information that we've provided is well received, and we look forward to delivering to these targets. So in summary, I guess, when we look at our industry, we see rental companies in Europe, in particular, that have gone into liquidation. We see manufacturers that have consolidated and dealerships that have been losing money or indeed even up to last weekend going into liquidation in Australia. We haven't excelled at all. However, we have responded. We've reduced debt. We've adjusted our fleet lever, and we've grown market share where appropriate as well and set this business up for a better future, one where we have revenue up in our core rentals business and costs starting to come down. We're an operational business that's been through big waves of impacts, COVID, the merger and the tariff and economic situation, all which have impacted the business over consecutive years. But now we sit at our new global support services site in Waitomokia, where we've delivered an outstanding new environment for sales, for service and for customer delivery alongside significant productivity improvements. We've delivered the single digital platform on a global basis with 7 system changes across the organization. We have new fleet designs. We've lowered our customer fleet. We've got new channels to market, whether that be better use of AI and non-tourism. And we've got a business that remains responsive and looks forward to a better future. Thank you very much, Jamie. I will hand back over to you to open up for questions.

[Operator Instructions] Your first question today comes from Andy Bowley from Forsyth Barr.

I feel a little bit out of breath just listening to you go through that preso so quickly, but I appreciate the commentary. A couple of questions from me. First of all, around the cost base. And I'm mindful of the comments you make around expectations for FY '26 where you talk about a significant step-up in the cost reduction program. But the question is really around FY '25 costs and really ex depreciation operating costs. I'm keen for you to talk to the -- what I'd consider a sizable increase during the year. Where is that most acute or evident across the group? And what kind of cost increases are we talking about within that operating cost bucket?

Yes. So when you look at the increase in hire days right across the business, and that increased activity, one of the impacts that you had from an operating cost perspective in the last 12 months is that, we did have slight reductions in yield. We've talked about the fact that yield has stabilized and we see small increases in yield moving forward. So you do have that step-up in operating costs in the last 12 months. So it's activity related, obviously, labor, repairs and maintenance, insurance-related repairs. Those are the primary areas where you've seen those operating costs. We do have a strong focus on making sure that there is really good operating leverage in those areas moving forward as we continue to get the hire day increases. So we feel that it's under control. But yes, we did have that activity increase costs in the last 12 months.

And then maybe just talk to the cost reduction program, if you could please at least Grant, where will we see the biggest efficiency benefits across the group?

Yes. So the core areas that are focused on, one is depreciation through lower build cost, and that's something that's already coming through in both the North American markets and Australia and New Zealand markets. So we've got real confidence about what's been delivered in that space. The second is pure savings from a digital perspective and other group support costs. And that's as we've completed and exit a number of large projects across the business, not just on the digital front, but also the likes of the property improvements that we've had as well. And then you've got some broader efficiencies that are coming through on a global basis.

Okay. Great. Now secondly, I'm interested in the forward bookings for FY '26, where the commentary has been pretty good in recent times and some strong increases in Australasia and less so in North America. Can you give us a sense of what the percentage increases you've given that previously for those respective markets? And then in terms of where we stand today, how much of FY '26 anticipated rental sales are now booked?

So on the first one, the numbers are pretty much where we've said. There's been no substantial change. So the Australasian business is still sitting around the 25% mark. The U.S.A. and Canada sort of balance out. They're past the sort of high season. So it's not as relevant a number now. But U.S.A. is still in decline. Canada is still in growth. So that's positive. U.K. has actually had a very positive forward booking outlook. From a percentage perspective, I haven't updated that in very recent times, but we're ahead of our intakes last year as a percentage of our overall expectations. But obviously, if I give you the detail of that, I'm pretty much giving a rental number for the year.

What was that on last year then without giving us what proportion of last years have we got to?

Well, I don't work it out as a proportion of last year. You can -- basically, if we're ahead and we're obviously 25-odd percent up across Australia and New Zealand, that gives you sort of -- obviously, we've got a larger proportion than we did the same time last year.

But I guess what I'm trying to get to is how much certainty can we place on what you're telling us around the forward book in terms of how much of next year's P&L is now effectively bagged?

Yes. So look, my answer to the question framed in that matter is that, we have said before the 25% growth rate we don't expect to hold for the year. So basically, we have got an earlier booking trend is our view, but still substantive double-digit growth is where we expect to be sitting.

So you're pretty -- and forgive me in terms of not catching it entirely, but earlier on in the presentation, I think to that first or second slide, you -- was it strong RevPARV growth you alluded to in FY '26?

Yes. Yes.

And your next question comes from John O'Shea from Ord Minnett.

Grant, can you hear me okay?

Yes, can hear you fine.

Look, I guess I just wondered if you could outline perhaps how we should think about the evolution of the business just in -- if you stand back strategically and just think about how things have evolved from -- obviously, we've had the post-COVID sort of unwind, if you like. And now we're evolving to perhaps a -- my question is, now we're evolving to a more normalized environment in terms of moving forward, how we should think about -- I know you've given some numbers around fleet numbers. Can you just articulate the Board's thinking around the rental business and how important that's going to be moving forward as opposed to the vehicle sales part of the business and how you will then approach the capital expenditure environment in those circumstances? Do you understand what I'm asking?

Yes. Yes, I think I do. That's a great question. Thank you, John. So look, the reinforcement that I said at the start around the growth in rentals and rentals being the core of the business is exactly what you're talking about. Vehicle sales ultimately in this business should make good money as part of our business model, but fuels the core rentals business model. I really don't like the idea when people call it disposals because there is real value to be had in that sales side of the business, and we continue to extract value. However, the reality is rentals is where it's at. From a fleet growth perspective, I mean, we obviously had right from the start of the merger, a very clear view that we could achieve the same or greater revenue on less fleet and that there's that broad utilization opportunity and synergy in fleet that existed. So we're happy, again, with that slower profile for fleet growth over the coming couple of years. But again, as we said before, there's big utilization gains still to have in the business. So bringing that back up strategically, yes, the Board is really focused on the fact that rentals, rental growth is what it's about. Vehicle sales, we still need to be moving to keep our market position to keep the business model working, but let's win in rentals.

And your next question comes from Vignesh Nair from UBS.

Can you hear me?

Yes. Great.

Okay. Awesome. Just a couple of questions sort of following on from Andy earlier. Like just on costs. Firstly, on probably CapEx, you're sort of talking to flattening out, I suppose, fleet growth CapEx from here on, sort of sitting at about 8,100 vehicles and targeting 9,000 in FY '28. Just wondering how sort of investors and analysts should think about bridging the sort of current number into the 9,000. You're talking to sort of pretty good RevPARV growth of 4% and sort of it feels like that's continuing into FY '26. Just wondering on a steer on into next year, what we should think about overall fleet size and how to bridge that into 9,000, please?

Yes. So the average rental fleet size was 8,100. The closing rental fleet was 8,500. So you're starting off of that higher base. So there's some room there. From a broad gross CapEx perspective, I'll get Ollie to talk through the gross and net CapEx expectations broadly because we haven't given those numbers, and we're not giving those numbers. But the RevPARV opportunity is probably a little bit greater than what you're thinking within there. So we just don't need to grow the fleet substantially. The 8.5% to 9%, again, that's much, much smaller growth rate than what we've had over the last few years. We've averaged over 30% growth in our fleet number for 3 years in a row. The other thing that we have got within those broader expectations of 9,000 vehicles is that, there is some or all of a reduction of the U.K. and Ireland fleet within that as part of that review. Ollie, do you want to make a comment on gross-net CapEx?