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Edited Transcript of RDC.AX earnings conference call or presentation 18-Feb-20 10:30pm GMT

Half Year 2020 Redcape Hotel Group Pty Ltd Earnings Call

Mar 10, 2020 (Thomson StreetEvents) -- Edited Transcript of Redcape Hotel Group Pty Ltd earnings conference call or presentation Tuesday, February 18, 2020 at 10:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daniel John Brady

Redcape Hotel Group - CEO & Director

* Timothy Fawaz

Redcape Hotel Group - CFO

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Conference Call Participants

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* Edward Day

Moelis Australia Securities Pty Ltd, Research Division - Research Analyst

* William Macdiarmid

Ord Minnett Limited, Research Division - Small-Caps Industrials Analyst

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Presentation

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Daniel John Brady, Redcape Hotel Group - CEO & Director [1]

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Thank you very much, and welcome all to this webinar. Tim and I are pleased to present today the first half results. And it's a strong performance, delivering distributable earnings growth of 10.9%, which we're pleased to report. It's on the back of some good revenue growth of 6.2% on a like-for-like basis. So the health of the business is in good shape. This is continuing investing in our people, improving the customer experience and enhancing our portfolio of community-centric hubs. This is also supported by our improving customer NPS and staff satisfaction results, which we use as our lead indicators for performance. And along in this period, we continue to manage the capital well with gearing materially reduced to the lower end of the target range. And this provides available headroom for us to grow in future acquisitions if such opportunities come along.

The distribution equates to an annualized yield of nearly 8% on yesterday's share price, and this is supported by operating cash flow. And as a result, we've upgraded earnings guidance for the full year to $0.092 per security or greater. So a good period for the business.

And as we move through to Slide 8 for the financial highlights. See that the guidance uplift was supported by the good underlying business performance. And the strong revenue growth reflects the improved gaming revenue. And nearly 25% of food and beverage increased due to the refurbishment program and shift in portfolio composition. Pleasing to achieve this like-for-like revenue growth across all channels. And as the half has continued like that, we've seen those sorts of trends continuing to this half also.

This resulted in an operating EBITDA up nearly 20%, and this was supported by the ongoing cost discipline of the business. The business remains highly cash generative, which really highlights the underpinning of its ability to deliver the future distributions.

Move on to Slide 9 in the portfolio update. Throughout the period, we've successfully bedded down acquisitions that had previously been undertaken. So those acquisitions are all trading well. With active portfolio management throughout the period, we had the acquisition and completion of Eden Brewhouse and also the divestment of the St George Hotel, Belmore. Throughout the period, we also announced that we've contracted to sell the hotel Royal Hotel Granville and also acquire the Kings Head Tavern at South Hurstville. So this active portfolio management really highlights the idea that we continue to look to our assets to understand whether or not we can add future value to them or not, and where there are other opportunities in the market that we can go to and add it to the platform, add the expertise, add capital to realize greater growth. This is possible in our sector due to the highly fragmented nature of it. And as we go into the second half, a similar form of acquisitions may be anticipated.

Throughout the period, we invested a further $6.8 million in growth capital, and this is in line with our refurbishments program. The refurbishments program, as we have it throughout the portfolio, has a -- we have a 5-year view on what projects are coming down the line. And throughout the second half of this year, we'll spend somewhere around -- just shy of $20 million.

The progression of the asset optimization plans including Cabramatta continued. Throughout the period, we have started to launch applications in regards to Cabramatta and commencing one at Keighery. We've also fully rounded out the opportunity previously flagged at Revesby Pacific, which at this point in time we've established that the pub is as its highest and best use. Throughout the period, we grew NAV per security to $1.16 with the overall portfolio value now at $1.06 billion.

So with that, a very pleasing half. I'll hand over to Tim to now take you through the next slide.

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Timothy Fawaz, Redcape Hotel Group - CFO [2]

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Thanks very much, Dan. As Dan alluded to, we've reported a very strong top line growth of 12.7%. And as Dan mentioned, our like-for-like performance was a strong 6.2% increase on the prior half. Pleasingly, all of our trading departments delivered positive like-for-like growth in the half. We continued our focus on tight cost control, which resulted in our like-for-like costs, for our like-for-like venues tracking below CPI, and that was largely driven by the impact of our ongoing cost-out program, which we implemented in the second half of F '19.

Our gross profit performance was strong, increasing by 14% versus a top line increase of 12.7% in the half. And effectively, our strong gross profit improvement was underpinned by better volume and improved stock management processes within the operation. As a result of each of these levers and the improvements that we delivered, our operating EBITDA improved by 140 basis points up to 24.1%.

I might now move to Page 12, which is our balance sheet, and just call out some of the key elements within our balance sheet. As previously announced, we executed our new debt facility on the 2nd of September 2019. The key features of our $503 million facility included a weighted average term of 4 years. All 4 major Australian banks are now participants. We've delivered improved covenant coverage with our new facility. And pleasingly, we delivered 110 basis point improvement in pricing, which is consistent with our last update. Gearing has now landed at 35.9% as at 31st of December, which is at the lower end of our target range of 35% to 45%.

Our director NAV is now $1.16, which is a slight diversion from our statutory NAV of $1.15, and that's reflective of the accounting standards that permit the revaluation of land as fair value only and not the element to component parts of our venues such as licenses and goodwill. There is no material impact as a result of the implementation of AASB 16, the new lease accounting, and that's reflective of the fact that the business owns 30 of its 32 operating businesses.

In terms of our next slide, which is Page 13 on our distributable earnings reconciliation, I'll take most of the information there as read. But I think some of the key callouts I would like to just draw your attention to, is the difference between our underlying and our statutory NPAT. And the difference is $4 million, which comprises $3.8 million which is the cost of closing out our existing -- our old hedge book under the old finance facility and a $200,000 write-off of our amort of our old facility.

Our maintenance CapEx is consistent with expectations. We did indicate at the end of F '19 that our spend this year would be circa $6 million, and we're tracking in line with those expectations with half 1 ordinarily higher than half 2. Our distribution guidance of $0.0875 continues to be in place with the half distribution of $0.0441, in line with the expectations.

As Dan mentioned, our operating cash flow is now starting to normalize. And if one excludes the one-off impacts that we've covered in the pack previously, it was $24.5 million versus a distribution of $24.2 million, which indicates the highly cash-generative nature of the business and equally the sustainability of our distributions.

I'll now pass you over to Dan to continue the presentation.

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Daniel John Brady, Redcape Hotel Group - CEO & Director [3]

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Thanks, Tim. Moving to Page 15 and to the outlook. This strong operational performance is expected to continue into half 2, consistent with the first half. This provides the confidence to upgrade the earnings guidance to $0.092 per security or higher and with distributions maintained at $0.0875 per security, consistent with payout -- our payout ratio guidelines. This is delivering on yesterday's share price of 7.81% yield. The underpinning of the like-for-like revenue growth above CPI with half 1 trends will continue into half 2.

In terms of key priorities, it's -- as a people business, our staff satisfaction remains a key KPI. We do have a view that if we're driving that performance, that will drive our customers, which will drive the performance of the business. Ongoing focus on maximizing the value of our portfolio through both acquiring and divesting where appropriate to ensure that we're contributing towards future growth and look to further improve performance through our operational expertise and applying capital to our refurbishment pipeline.

With the headroom in the debt facility, this supplies support to our growth plans. And pleasingly, this builds on the overall positive momentum of the business. So with the pack presented, I think we'll move to questions.

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Unidentified Company Representative, [4]

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We'll open for questions now.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

And your next -- and your first question today comes from Will Macdiarmid from Ord Minnett.

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William Macdiarmid, Ord Minnett Limited, Research Division - Small-Caps Industrials Analyst [2]

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Congratulations on what's a really strong results. Can you just talk through some of those minor refurbishment activities that you commented on the result there? Was there any disruptions in the first half, which we'll sort of see normalize in the second half, so we should see a bit of an uplift?

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Daniel John Brady, Redcape Hotel Group - CEO & Director [3]

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There will be -- within any of the refurbishment programs that we do, there's disruption. They're factored into our forecasting. So I don't see that those, in terms of disruption, normalizing having any effect on the future outlook. However, obviously, with refurbishments delivered, we've -- there is an opportunity there for outperformance, which we've seen, to some degree, over some of the other refurbishments that we've undertaken in recent times.

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William Macdiarmid, Ord Minnett Limited, Research Division - Small-Caps Industrials Analyst [4]

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In terms of Mt Annan then, what's the rough time line of completion for that project?

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Daniel John Brady, Redcape Hotel Group - CEO & Director [5]

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That will be in disruption from now through to the next 6 months. So whilst the program won't take 6 months to physically build it, to relaunch and reposition the venue and to start to see it come through will be around 6 months. Having said that, like all of our refurbishments programs though that downtrade is factored into the forward look.

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William Macdiarmid, Ord Minnett Limited, Research Division - Small-Caps Industrials Analyst [6]

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Okay. And then in terms of the cost-out then, that's sort of been ongoing for approximately 12 months or so. Is there likely to be any additional incremental impact from that in the coming 6 months or beyond? Or is that program must be completed now?

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Daniel John Brady, Redcape Hotel Group - CEO & Director [7]

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Well, we do view cost management a bit like cutting toenails. So the types of cost-outs that we've spoken about in this pack are sustainable, and we'll continue to look at other sustainable cost-outs. And it's just a part of the discipline that we apply to the business. So one would expect that we'll continue to have that type of cost discipline running through, albeit that we would expect to normalize at a CPI rate.

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William Macdiarmid, Ord Minnett Limited, Research Division - Small-Caps Industrials Analyst [8]

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Okay. And then finally just from me, obviously, a really strong like-for-like revenue growth outcome. Can you possibly segment that in some way to sort of the benefit you've got from, say, gaming margin versus food and beverage improvements and so on? What made up that growth?

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Daniel John Brady, Redcape Hotel Group - CEO & Director [9]

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It's across the board. And so even if you're looking through the revenue, and you'll see things like retail that look in negative, that's actually the footnote there that talks to the fact that, that was the comparison to where another venue, a large retail venue was divested. We had growth there as well on a like-for-like basis. So it was across the board. And it really highlights, I think, some of the health of the market for us in certain revenue streams such as people's choice to entertain themselves in community-based venues but also at the platform focus on staff satisfaction and customer NPS, which have become now the very cornerstone of what we do. It's what we drive at. It's what we think about, and it's how we point to our resources, which are clearly excellent lead indicators for us to be able to manage the forward performance and growth curve of the business.

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Operator [10]

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Your next question comes from Edward Day from Moelis.

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Edward Day, Moelis Australia Securities Pty Ltd, Research Division - Research Analyst [11]

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Just on the gaming revenue growth. Can you just talk about the, I guess, the operating environment for gaming at the moment? Just given the margins were impacted towards the end of FY '19, just sort of where you think we are in that margin cycle.

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Daniel John Brady, Redcape Hotel Group - CEO & Director [12]

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Yes. So last year, when we were presenting the full year results, we were talking about margin compression, particularly at the first half of -- the first few months of the second half of last year and also spoke at that time about it starting to normalize out. And we were talking about that in briefings and what have you. That's exactly what did happen. And I think there was a common question about is this sort of a cyclical thing? And it does happen from time to time and we did experience that compression at that time. However, it has improved and it's improved -- we would think that it's sustainable over the coming period, so that we won't be experiencing a similar margin compression issue as to what we experienced back then.

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Timothy Fawaz, Redcape Hotel Group - CFO [13]

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And Ed, when we look at the numbers, we're obviously very pleased with that 14% increase in our margin versus top line of 12.7%. And clearly, as Dan mentioned, the -- we've made some improvements in our gaming area and equally in our on-premise. There were some good results just in terms of better buying in that stock management piece as well.

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Edward Day, Moelis Australia Securities Pty Ltd, Research Division - Research Analyst [14]

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And then just on the refurbishments, could you also just give a bit of color about the returns you're generating and sort of plans to generate out of the current refurbs?

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Daniel John Brady, Redcape Hotel Group - CEO & Director [15]

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Well, look, it's still the benchmark that we've spoken about, which is a -- we forecasted 20% IRR. That's how we deploy our growth capital. Keep in mind that we own the property, and that's a 5-year view on how we look at an IRR. And the program this year will be, for the full year, probably slightly less than the year before, and that's really about our discipline in and around how and when we apply growth capital, i.e., if venues are -- we may have a D.A. approval, we may have things in place. So all the forward planning is being done. However, if the venue is starting to perform better, and we don't need to apply the growth capital just at that point in time, we may waylay that. And obviously, on the strength of this result, we're being prudent with capital as what we do.

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Operator [16]

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(Operator Instructions) Okay. I have no further questions at this time. So I'll hand back to your presenters. Please continue.

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Daniel John Brady, Redcape Hotel Group - CEO & Director [17]

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Thank you so much for everyone being interested in our organization. Very pleased with the results. And we'll knuckle down to delivering the full year and speak then. Thanks very much.

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Timothy Fawaz, Redcape Hotel Group - CFO [18]

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Thanks, everyone.