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Edited Transcript of SKC.NZ earnings conference call or presentation 14-Aug-19 12:00am GMT

Full Year 2019 Skycity Entertainment Group Ltd Earnings Call

Auckland Aug 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Skycity Entertainment Group Ltd earnings conference call or presentation Wednesday, August 14, 2019 at 12:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Graeme Edward Stephens

SKYCITY Entertainment Group Limited - CEO

* Michael Ahearne

SKYCITY Entertainment Group Limited - Group COO

* Rob Hamilton

SKYCITY Entertainment Group Limited - CFO

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Conference Call Participants

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* Chelsea Arna Leadbetter

Forsyth Barr Group Ltd., Research Division - Senior Analyst of Equities

* Marcus Curley

UBS Investment Bank, Research Division - Executive Director and Head of New Zealand Research

* Wade Gardiner

Craigs Investment Partners Limited, Research Division - Senior Research Analyst

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the SKYCITY Entertainment Annual Results Conference Call. (Operator Instructions)

I would now like to hand the conference over to Mr. Graeme Stephens, CEO. Please go ahead.

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Graeme Edward Stephens, SKYCITY Entertainment Group Limited - CEO [2]

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Hi, and welcome to all of you. Thanks for joining. I'll assume most, if not all of you have got a copy of the presentation that was released earlier in the day. So I'm going to flip through that, not page by page, but try to take you through the highlights. In the room with me, I've got Rob Hamilton, our CFO. I've got Michael Ahearne, our COO. And they will chip in and be available during Q&A. And Ben Kay is (inaudible) most of you.

If I start with the key achievements. The way we're looking at the year gone by is we're pretty happy with where we've come out, and we've called out a solid performance in the local business. That's always the important feature of our lives is how the local property is doing. And in this year, it's being supplemented by growth in IB turnover, and we'll talk a bit to that shortly. So I think a key feature for me in all of this is probably Auckland's performance and happy with that. We are happy that we can point to $450 million now raised from asset sales, including the deal to sell the main site car park, which we announced as being unconditioned last week. So very lowly geared, gearing at 1.5x pre the main site car park sale. So that will come down when those proceeds come in, and we're very conscious of being lowly geared. We'll talk a bit to that. That does lead us to an ongoing focus on efficient capital allocation given that we're under-levered. And we are going to continue with our buyback and continue to evaluate other opportunities perhaps to efficiently allocate capital, but as a minimum, we need to continue with the buyback program previously announced.

Strategically, our major projects in Auckland, Adelaide are progressing, and we expect completion by the end of calendar 2020. Staying in the strategic space, we've launched now the online casino that we've spoken about in previous calls. That went live towards the end of last week and quite a big milestone for us to be seguing into that space. We'll talk a bit about that.

On the sustainability front, some really good progress on the year gone by on a number of initiatives. A slide to come on that. But really solid progress on that, which I'm very happy about.

When it comes to actual numbers, I'm going to flip to the revenue breakdown by business. And again, Auckland delivering just under 4% growth at a revenue level. Hamilton pretty solid. And we've got to keep pointing to Hamilton being capacity constrained. So it had a record year last year, a pretty solid performance in the year gone by. Queenstown, looking pretty good at EBITDA level and obviously small enough that anything makes a difference there up or down. And Adelaide delivering a flat performance under some pretty trying circumstances [on it] with the construction that is literally a few minutes from the perimeter of the property on 3 sides, but Adelaide holding its own through that construction.

The normalized IB comes in a lot higher this year than last because you had turnover all way up at $14 billion. And we're quick to point out the low win rates, which we would assume has generated some of that turnover. We assume that our customers prefer playing with winnings and would play longer with winnings than if they're losing. So we quickly acknowledged that in our turnover number. Yes, it's probably a little higher as a result of the low win rates on our side of the fence. But when you look at normalized revenue, IB making a decent contribution.

And I want to pause there at the line total normalized revenue, continuing operations. We've tried to give you a snapshot of the like-for-like what our business is going forward relative to what it was last year. And at a revenue level, we delivered 5% growth. We then obviously got Darwin coming into the numbers. We only had Darwin for 3 quarters of the year gone by and it wasn't for the full year prior.

And then there's a host of adjustments between normalized and reported. Yes, we would normally have, and always will have, I guess, the adjustment from the IB side of the business in the year gone by because of the success, if you like, in implementing a lot of our strategic stuff and sales being part of that. We've got quite a bit of noise, if you like, between normalized and reported. I'm going to ask Rob Hamilton shortly to take you through that.

If I turn to EBITDA by business. Yes, perhaps the only point to emphasize again is [taking] into the total normalized EBITDA from continuing operations, which is just under 4% up year-on-year, and that's trying to give you some guidance as to what the underlying business is doing at the EBITDA level. I think about go back a year to the outlook statement that we put out at the beginning of the year, if it wasn't me, it would definitely have been Ben calling out modest growth. And for those of you who know Ben, you should now know modest means around about 3.5%, 3% to 4%, anything up to 5% potentially. So I think Ben would say you sort of called it at the beginning of the year if you're looking at the ongoing operations.

I'm going to ask Rob Hamilton to chip in at this stage because there are an abnormally large number of adjustments that we had to exercise some judgment around is obviously at the core of that and try to set it up logically, but I think it's helpful if he takes you through.

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Rob Hamilton, SKYCITY Entertainment Group Limited - CFO [3]

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Thanks, Graeme. As Graeme noted, we do have a relatively complex set of accounts as reported. We've had 3 asset sales. We've had some accounting standard changes, and we've had some significant tax events, which will lead to non-GAAP adjustments, which are consistent with our Board policy. We've tried to present the normalized results on the same basis as FY '18 and prior years in order to provide a suitable like-for-like comparison for the market. We've also provided significant disclosure on the rationale and the impacts of the changes at the back of the pack and in our annual report.

The adjustments fall into 4 sort of broad buckets. The first is revenue adjustments as a result of the introduction of IFRS 15, which, in terms of revenue accounting, has the impact of treating IB commissions as a negative revenue adjustment as opposed to an expense, which we have done in prior years. So that's one. We also typically report gaming GST in our normalized revenue so that we are consistent with how our peers across Australia presents their numbers.

The second is the standard IB normalization to the theo win rates. The third bucket arises out of various transactions during the year. The loss -- or the Darwin sale resulted in an overall loss, which is mainly attributable to a [rise] in the foreign currency translation reserve deficits after earnings; the Federal Street car park sale where we achieved roughly a $17 million gain on sale; various revaluations of our Auckland properties, which we have acquired over the past 18 months as part of our strategic initiatives; and the Auckland car park concession sale. While we don't have the expected gain on sale from that transaction in FY '19, that will be in FY '20, there are some deferred tax changes which do impact our results in FY '19.

The fourth bucket is other tax events as the ATO settlement, which we called out in the first half. And more recently, we have recognized a $1.9 million benefit from moving the ALP, one of our Australian entities, outside of the New Zealand tax (inaudible). It's a one-off benefit we've received. We have decided to normalize that out to provide a like-for-like comparison with our numbers going forward.

And when you boil all of the adjustments down, virtually all of the difference at the EBITDA and NPAT level were actually due to the IB normalization to theo. All of the other adjustments largely offset each other. So that's one way of thinking about it.

Graeme, I pass back to you.

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Graeme Edward Stephens, SKYCITY Entertainment Group Limited - CEO [4]

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Thanks, Rob. I'm looking at the page Result Commentary, and I think I'll just call out at the group level some of the features. So normalized NPAT, that's including Darwin in there, up 1.9%. It is a record for the company. We're not calling it out largely against the backdrop of the IB turnover. Reported NPAT is down but -- for all those reasons as Rob's just talked you through. So normalized NPAT up 1.9%. Perhaps at an NPAT level, a more meaningful number we've tried to present to you is if we take Darwin out of the numbers and also adjust for the increase in effective tax rate, which is in our normalized numbers -- we called out a year ago $6.5 million of extra tax coming our way as a consequence of some changed legislation. We have incurred that extra tax $6.5 million, and it's in our normalized numbers. We haven't adjusted that out. That is a changed landscape, which is our new world. So if we take out Darwin and adjust for that, just to show you what the like-for-like would be, the normalized NPAT's up 7.5% on the prior period. Again, some sort of look through, I guess, to what the underlying business has been doing, the underlying business that we're going to be operating going forward.

Maybe calling out some of the specifics, I guess, in Auckland. We benefited in this past period from a strong performance, very strong performance again in EGMs and in our ATG business. And you'll recall that we had a strong performance in 2018. So this is an aspect of the business that has really done well. If we look at us versus the market in Auckland, the [indiscernible] would indicate, again, we're doing really well in relation to that market by a multiple of some distance. The [recent staffing recourse we got] for the last quarter indicated we grow at 10%, we've grown at 10% versus just over 1% for the local market outside of the casino. So that's definitely a good result.

And then coming off the back of the same sort of initiatives that we've called out before looking at floor mix marketing initiatives, better utilization of -- making terraces, the same sort of reasons are continuing to yield results for us.

If I go next to corporate costs, maybe calling some stuff out there. We've got pretty good cost control, we think, in the corporate cost base. It is up year-on-year, and we would point to the ongoing investment in ICT as a big contributor to that. We've beefed up marketing functions. And I'm also going to highlight corporate bonus that's starting to return to normal. If you look over the recent years, there wasn't really much of a bonus paid at all in '17, in '18. The bonus was taken entirely in shares over a 3-year vesting period. And in '19, you're starting to see some return to normality there. If we look at bonuses over the last couple of years, there is no increase from normal to normal.

If I then dwell quickly on things like the preopening costs that [pulled] our costs and others. As these projects get closer to completion, NZICC, Horizon and in time Adelaide, you're going to see a ramp-up of preopening costs. The interest expense, I guess, we should call out again as we've done on previous calls. There's a degree of benefit from the fact that we've capitalizing interest as these projects are still under construction, and that will come back when these projects open. And I think we've flagged that in the past. Call out the tax, which has now sort of increased to 29% from 26%. That's in our normalized numbers and a feature of our life going forward.

On dividend and capital management, the dividend is being kept the same. And we've -- besides the continued capital management in the form of the share buyback over the next couple of months and see where we get to on that, we've got authority to go up to around about $125 million, 5% [shares -- of these shares have been issued.] We bought about $40 million of that before [ceasing] it a few weeks back. And we're going to resume and see where we can come out in the next few months.

Dwelling a little more on capital allocation. We've previously put out our framework for how we prioritize capital. Obviously, first and foremost, stay-in-business, then we look at how we might grow the business through investing. If we look at debt repayments next, distributions in the form of dividends and capital returns. And we again have a fairly [considerable] price [slot] when it comes to maintaining our credit ratings, the discipline we apply to projects we're going to invest into. And we've flagged historically the internal benchmarks we used, 12% post tax IRR, 9% post tax [rate.] We had another look at our WACC for what it's worth, with interest rates and yields coming down and concluded that although it might be a little lower in current world, we're going to maintain these hurdles. The shift down wasn't significant enough to justify [dropping in.] So -- and we remain committed as we flex for a while now to a minimum $0.20 dividend and expecting that to grow once the major projects are completed.

If we take that framework and look at where we are right now, yes, it has been a topic for some debate in the last couple of weeks and months, in particular, with the car park deal looking like it was going to close. And our immediate priority has to be to complete the major projects, that's the Adelaide and convention center project [here.] And those are comfortably funded from existing debt facilities. So no issues there. We are evaluating a number of future growth investments, some of them which if they were to go ahead would be quite large, whether that's hotels or development at Auckland. There are some quite big stuff that we're evaluating. But none of this is going to happen in the next year or 2 in all likelihood, certainly not in the next year or so. So no heavy lifting in future growth.

We've realized significant capital. Now I'm looking at $450 million by the time the car park deal settles in the near term. And so our gearing is low, 1.5x before receiving the $220 million from that deal.

And we got [part of the] bottom of our framework saying, therefore, we guided to return capital to shareholders. And that is leading to the share buyback program being reinstituted. I was sort of [saying] that we acknowledge we are probably on the conservative side of life in not doing more right now. And that's a conscious position taken off to some debates. Just given the outlook for the world, for New Zealand, for economies everywhere, it does look more challenging. We are a conservative company by nature. And we just thought we should watch what's happening in that space, impact, if any, on our numbers over the next year. We've got the buyback program going. We're consciously under-geared and just feel that it's -- where we stand during the course of the next year. There's always the ability to do more. And our capital allocation probably indicates we are done in the bucket of returning capital for some time unless one of the big projects were to come off, which doesn't look like it in the next year. So a conscious positioning to be probably a little conservative in a world which we just think justifies that stance at the moment and maintaining the yield with the existing dividend. That yield is about a 5% after-tax yield on our current share price. If you [gross] that up with all the imputation credits, you have pretax yield. It's a 7% yield pretax, and we think that's a pretty good yield in the world today. Our (inaudible) investors are increasingly looking for yield, and we've characterized us as, we have very (inaudible) protected, conservative and a good yield indiscernible for the time being. Until those bigger projects come off, then we can start to show more growth.

I'm going to flip through the deck, pausing briefly while I'm on the debt and debt maturity. We have a bit of debt maturing next year. And we'll probably start some work, Rob and the team, in the next couple of months to replace debts in a very lowly geared environment anyway. But we'll be out in the market and replace it probably -- possibly, let's say, with another New Zealand senior bond issue.

And that takes me to the outlook. We try to set a new base for you in a world that's been a bit complicated by all of our deals. So the first slide on the outlook is trying to take you from where we finished the year gone by to what base you should have as a comparative for the year we're going into. So the EBITDA level, once you've adjusted for Darwin and car parks and convention centers that are closing in the near term, we recommend $303 million of EBITDA is probably where you should set your base. And at an NPAT level going through the same level of adjustments, at a normalized level, we'll be -- we're coming out at $150-ish million, $151 million of NPAT is where you should set the base having adjusted for the structural changes in the business. Off that base that I have flagged, we do see more challenges in the domestic and international economic environment. And to be fair, that's all stuff we are reading and trying to interpret more than what we're experiencing in our day-to-day business at present. But we think we've got to take some cognizance of signals that are out there that it's going to be a little more challenging.

Despite that, we do expect to get some growth in our group normalized EBITDA on the like-for-like comparatives that we've spelled out for you. And we're guiding towards group normalized NPAT to be flat on a like-for-like basis. There's some cost pressures we're dealing with. I'll dwell on costs a little (inaudible) actually. So yes, [frankly said,] the NPAT growth at EBITDA.

And I guess a comment on where we stand to date, is trading in line with those expectations, good start in Auckland, and in the IB world, pleased to report that our win rate is above theoretical, so the pendulum does swing. And so, yes, a good start in both IB and in Auckland.

Our CapEx, just some guidance, we expect to stay in line on our plan, business CapEx of around [$80] million. And we've got quite a big year ahead of us with the big projects started to complete.

I think at that stage, I wanted to talk quickly on costs. We've obviously taken note of cost-cutting initiatives elsewhere in our industry in more than one place and ask ourselves the question, is there more we can take out? And I think we've done a lot consistently over the years to remain lean. And so we don't see low-hanging fruit in our world to cut costs. Yes, if I look at corporate costs as an example, I would say, over the last 2 years, we did -- took out about 20% of our corporate costs as people have left and not been replaced and [walls] have been increased. And we've replaced that cost with other things that are focused on sustainability, marketing, for example. So you're not seeing the in and the out, but the out has been in the order of about 20% at unit level. If you look at our margins, they're pretty good, and we adjust for things like [earning] tax. And trying to interpret a like-for-like against our peer group. There's no obviously low-hanging fruit, but it is an absolute focus for us in the environment that we're in.

If I flip to some of the strategic stuff. Operationally, in Auckland, we're going to be managing a bit of disruption whilst we're renovating, significantly enhance our VIP offering for slots and tables. And that's not IB, that's the -- either the local VIP or what we call interstate business coming from places like Australia. So that's a couple of months worth of disruption, which we're able to manage, and hopefully we can without any significant impact.

The consequence of the investment into our premium gaming we expect to obviously be beneficial once that's done invested in the early part of 2020. Perhaps just calling out our brand refresh. We haven't made a big song and dance about that. But new brand out there. Can I emphasize low-cost implementation and [caveman] approach to rollout. Nothing changed at (inaudible) that didn't have to or couldn't change with ease, and we're replacing [staff] as and when it needs replacing anyway.

But a nice new brand that's, I think, more reflective of what we are and the direction we're traveling in, dynamic entertainment company. Personally, when I look at the old logo and the new one, the old one does look a bit dated. And so calling out some enhanced focus as we should on costs in the world that we're in.

When it comes to optimizing our existing portfolio. I think we've delivered on everything we said we were going to, our capital lighter approach, Darwin gone, Fed Street car park's gone. I haven't spoken yet about the ongoing development and feasibility analysis for our Auckland master planning. We've relocated our Fed House. For those of you who visit us there, we're now in the AA Building, which we acquired some time ago. And that enables us to look at the footprint, including Federal House, for future redevelopment. That's well advanced and lots of good thought going into it. But no buttons getting pushed for at least a year or 2 ahead of us as we fine-tune. No big buttons anyway as we fine-tune our thinking there. And we continue to flag it for some of the really heavy lifting, I think we're probably looking for a development partner to help us unlock that value.

We continue evaluating opportunities in Hamilton and Queenstown. We've acquired the land in Queenstown. We've always felt there's a better use for the riverbank opportunity that we have in Hamilton. We're looking at the options for hotels and feasibilities and other forms of investment there. It looks [that the] regulatory change is going to have to take place for us to really deliver what we'd like to. And that's a discussion we haven't yet started with our regulator here, but we probably will commence with in the next couple of months.

Convention center and Horizon Hotel projects. We have guided over the last few months to convention center opening second half of 2020, that's calendar 2020. And there's a subtle change in [waiting to] towards the end of second half. I guess the good news, we are down [2] months and trying to guess which month it's going to open in. And [planning on] living in Auckland, you can't help but notice the progress on site. It's looking pretty good now.

The implication of that subtle change of months might be that we aren't confident enough to go ahead with conference bookings that are currently open to us in October and November. We are likely to shift those to the early part of 2021, purely because I think we want to have a high degree of confidence in our ability to meet those commitments and deliver a high standards of convention. So we're in the cusp of trying to make calls like that. But overall, the project's advancing, and I think we can say will complete during 2020.

Adelaide expansion, on time, on budget, all going very well at this stage. And long may that last, for anyone going to Adelaide, again, the [facade] is going on, the [gold facade,] very good relationship with the contractor, the opening -- completion on the inside [store,] 26th of September 2020, which means the opening is expected during October and near the T20 World Cup event that we want to be open for.

The adjacent car parks are under construction beyond our control, but we watch it and engage where we can with Walker Corporation and looking like they will complete near -- near there or thereabouts in conjunction with us. The regulatory review, we expect some [completion] to that by the end of this year and expect that note acceptors will be part of it. And yes, [so in] Adelaide in the old building, we are pretty advanced with The Guardsman, which is food and beverage bar with a few slot machines in it that will open in a couple of months from now.

We look to growing and diversifying our earnings. We touched briefly on the online casino, we can take questions on that shortly, but up and running. And at last (inaudible), I think I'm ahead of Rob Hamilton and he's losing the most, but that's to be expected. But we're in business. Our hotel strategy quite narrowly focused on evaluating hotel opportunities on our existing precincts for the time being, but we are moving ahead to try and restructure our assets so we can put hotels in one bucket and start to disclose hotel performance. It's an asset class which is in demand. And I think separately categorizing it and the full property deck enables investors to start placing a value on the hotels that we have and may have in the future.

And a brief mention of some of the really exciting nongaming attractions that are coming. All Blacks start moving into our Auckland Convention Center in November, Weta not long after them. Together with Ngai Tahu, we've created a must-see destination in Auckland.

A brief touch on sustainability, which remains really core to our social license to operate and a part of our business we really do focus on within an eye on the medium and long term. In the culture and character goals that we've set for ourselves, focusing in our staff. We launched new values. And that sort of [glimpse] change the name. We've been through hell of a process with our staff on that to get their view on what they like and what they want and why they want to come to work at SkyCity. We've also undertaken the first increase to $20 by 2020. That's our minimum wage commitment that we made a year or 2 ago.

When it comes to our customers, I'll touch on the brand relaunch, but we're also doing quite a lot of work in the host responsibility space. It's a space we've got to keep up in our gaming. And we've been trialing for some time facial recognition, which we're now going live with there, which should really up our ability to identify harm and manage it properly.

And in the digital space, quite a lot happening. That's not going to evidence itself in the year ahead, I would think, as the IT program still just finishes off the [tech debt] piece, catching up from the pasts, but quite a lot happening behind the scenes, so then benefit from that work in the digital space.

Turning to our communities. We have tried to take and I think are taking a leadership position on climate change in New Zealand and looking to do the same in Adelaide. South Australia is looking to do some good stuff in that space, and we (inaudible) our partner. And then a strategy determined that's starting to get rolled out now is how we look at our supply chain, ethical sourcing, local procurement wherever possible, we've finalized a strategy there. So that's probably getting a lot of actual implementation in the year ahead now that we know what sort of stuff we want to do.

I think a good place for me to stop and open to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Chelsea Leadbetter with Forsyth Barr.

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Chelsea Arna Leadbetter, Forsyth Barr Group Ltd., Research Division - Senior Analyst of Equities [2]

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I guess if I can start, firstly, coming back to the outlook commentary. And I appreciate you've, I guess, given us some high-level comments, but perhaps digging a bit more firstly on Auckland and what you're thinking about for the year. I mean you have commented on disruption clearly. Just trying to understand, I guess, where the modest underlying earnings growth, where you think that might come from.

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Graeme Edward Stephens, SKYCITY Entertainment Group Limited - CEO [3]

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I think it's time to hear from Michael. I think that -- he's the one driving that business, and we counseled the outlook. But Michael, why don't you...

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Michael Ahearne, SKYCITY Entertainment Group Limited - Group COO [4]

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Yes, look, I'd characterize it with a pretty strong performance in our overall gaming business and [geared] on volume, and we're working to deliver that. I think it's fair to say that EGMs are stronger than tables structurally, and we'd probably continue to expect to see that. And probably the other category of gaming product, ATG, we're seeing some -- the automated table games, we're seeing some nice growth in that category and some movement of what would be traditional table players away from tables into ATG. So I think that's where we see growth.

I think the hotel business, which is a big contributor of our -- in contribution in Auckland. The market in Auckland has become far more challenging in terms of supply, and this continued additional supply we would expect in the market. We've competed very well in that market. But it's a market where we see pressure particularly on [rates. Big occupancy would define above rates.] And our costs, you can see that we have cost pressure in our business, and we do a lot of work to offset that. But that sort of continued focus will be there.

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Chelsea Arna Leadbetter, Forsyth Barr Group Ltd., Research Division - Senior Analyst of Equities [5]

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I guess, I just summing -- if you sum that up, it's really about continuing what we've seen this year, but particularly some strong continuation in the EGMs and ATG space to kind of offset some of those headwinds.

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Rob Hamilton, SKYCITY Entertainment Group Limited - CFO [6]

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I think I'd also call out our deal from convention center is closing. Which we've highlighted that on the first page of our outlook statement, just to give you an idea as to the impact that does flow through into Auckland, some [indiscernible] effect of that [until the] your year-on-year comparison, Chelsea. Also, as called out, we're looking to develop the [Glarier 9] nine of our existing property to develop new premium gaming rooms of both EGMs and tables. And I've always seen, Michael has seen good growth in our premium end of the business in FY '19. We expect there's a bit more opportunity in that as we go forward. Yes, particularly, once those new facilities are opened.

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Graeme Edward Stephens, SKYCITY Entertainment Group Limited - CEO [7]

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I think that's right. So the challenge is to have not have a disruption impact for the few months that we're renovating it (inaudible) and obviously quite a few initiatives in place on that. And then a high degree of confidence that once the new facilities opened, they're going to be very well received. It's quite a step change to our products, and we have been benefiting at the high end of our local business. I think, Chelsea, the question we ask ourselves is, I think, you're trying to get to, is how sustainable is growth in EGMs. And it's been a great year this year, and we had a great year the previous year, [all from net run lost.] The feeling is that there are new products coming up that are -- that's going to be good for casinos, with the right (inaudible) and a couple of other things like that. And the [mass] is stuff that we think our customers like. We were able to be fairly nimble in floor mix. The games that have gone well to date, continue to go well. So we have a reasonable expectation of our EGM business growing, but [here we get the baskets] higher. I think if you go back to '19, I didn't really call it out, but we weren't that lucky on our tables, not just in IB, but across business. And not a feature worth calling out, but on balance of probabilities, we'd hope for a little more luck and [hold] in our tables, so that there's probably more upside than downside in that world. You mix it all together, if we can hold our own in the hotel space, [indiscernible] done pretty well, hang in for the new facilities for local VIP, which is early next year, manage the disruption between -- that's sort of guiding us to that degree of confidence, or certainly an expectation that we should be able to go up like-for-like.

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Chelsea Arna Leadbetter, Forsyth Barr Group Ltd., Research Division - Senior Analyst of Equities [8]

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Okay. I appreciate that. And I guess, similar thematic but turning to Adelaide. I'm just trying to understand a little bit more around what you're factoring into your guidance in terms of cost efficiencies and improved gaming activity, what that actually kind of means -- that's going to drive that?

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Graeme Edward Stephens, SKYCITY Entertainment Group Limited - CEO [9]

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So Adelaide [undergoes] restructure and in its normalized numbers, I think I called out it's about just under $2 million, $1.7 million or so of one-off restructuring costs. So we should start to now get the benefit of that saving coming through. So that's an immediate help to EBITDA at Adelaide. We are seeing improved performance out of the property in recent months, clearly, to put that down to anything in particular, we did replace the General Manager there. We called it out -- we made an announcement to the market on that a couple of months ago. David Christian, he was running Darwin, he's now running -- back running Adelaide. And seems to be having a good impact. We won't credit him with it all just yet, but we think he'd have a positive impact. The real focus in Adelaide is to try and get back EGM business. It is -- we acknowledge it's going to be challenging, while the construction's there. But yes, given the step change in cost base, early signs in the last couple of months. And just straight need to drive better performance in Adelaide, we've got to back our team to deliver year-on-year performance that's better.

Sorry, Rob's highlighting The Guardsman as another product offering. Guardsman will open in a couple of months. We're hoping that will generate extra business, in particular on game days in Adelaide. So a few levers for David to pull. [I got not sort of suppression] that you've got to show some improvement. And he understands that, and I guess, (inaudible) you got to go up.

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Chelsea Arna Leadbetter, Forsyth Barr Group Ltd., Research Division - Senior Analyst of Equities [10]

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Okay. And just last question in terms of the NZICC and Adelaide preopening costs. So the $8 million that you're guiding to, is that something I should think about as an ongoing cost, I guess, going forward, when those projects are -- it's not a sort of a one-off in nature or anything like that? So you're going to have to try and get earnings to cover that when the NZICC opens?

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Graeme Edward Stephens, SKYCITY Entertainment Group Limited - CEO [11]

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Absolutely. So at the moment we're incurring costs of IB asset, and there's a possible ramp-up a bit in a year ahead of us. If we have delays in the convention center, then we will be delaying employing people. So we -- the trick is we've got to employ between the [Auckland] developments and the Adelaide ones, it's about 1,500 people. So it's not a small number. We've got to find them, employ them, train them. We've got to find the senior people that are going to lead them. And the trick is to do it with enough time that they can get all of that right, but not so much time that we've got people hanging around, costing us money, but with no revenue being generated. We're trying to read the tea leaves on when is the actual opening of the convenient center, minus a couple of months, when do we need the staff. But a feature of the year ahead is going to be an increase in those preopening costs. And then ultimately, once the assets are opened, that should be offset by revenue.

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Operator [12]

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Your next question comes from Marcus Curley with UBS.

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Marcus Curley, UBS Investment Bank, Research Division - Executive Director and Head of New Zealand Research [13]

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Just a few from me. Just wondering if you could talk about your confidence in growing the IB turnover this year, obviously, against the backdrop of I suppose, as you say, a comp that was supported by a low win rate, just what's happening in terms of player acquisitions, your confidence levels against the backdrop of what looks to still to be relatively hard VIP Asia-Pac market?

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Graeme Edward Stephens, SKYCITY Entertainment Group Limited - CEO [14]

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Yes. I'll start, and Rob can finish. The area [indiscernible] to rob. I think to start with, if we could do the same again, not necessarily grow the turnover, but do the same again, that will be a reasonable achievement given the fact that it's been supported by a really low win rate. So assuming a normal win rate, doing the same turnover, I think we'd be quite happy with. We have invested into sales, marketing people that are starting to get a bit of traction now. We do not have enhanced facilities in the year ahead, and we'll have them in the year after that. So that's a trajectory for growth over the medium term. It's obviously a really tough space to predict. I'll point to the fact that the bulk of our business is still coming from direct play. So we know the players, and that's useful in the sense if you know them, then you can expect them to come back. The downside of that is, should we be trying to widen our customer base and getting to know the players and more and more plays, that takes time. So we have a higher proportion of our play coming out of direct play, and that might be useful in the year ahead. We're not quite sure what's going to happen in the world of junkets, no one's indiscernible Crown, but I mean, it's difficult to ignore the media and related responses in the case of Crown over the last couple of weeks. And we're not sure what that means for us, so that's added another layer of uncertainty in a world which is inherently difficult to predict. But we do -- if we put the Crown thing to one side, I think we're doing a lot proactively to grow that business responsibly. And we still turn away a lot more people than we take. So we have had a pretty conservative attitude to it, and we're not going to change that. And in all of it, yes. When you're in the business world, well, if you did it this year, well you're expected to do at least that again next year, and that's the target we've set for the team, and it's not a ridiculous target I mean Rob, do you want to add?

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Rob Hamilton, SKYCITY Entertainment Group Limited - CFO [15]

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Yes. I think you've taken care of most of the key points, and we have invested in the business to achieve some growth, and I think we've done that in both FY '18 and FY '19. Even if you adjust for some additional turnover from the year from the relatively low win rate. I think we've yet to realize the full benefits of that investment. And clearly, we've engaged some more people in our sales team. (inaudible) we've significantly upped our service levels, we've got some more work to do in Adelaide in terms of consistency of our service levels there. We have taken a little bit of [share, and as to the] broader Australia and New Zealand, the IB markets over the past 12 months. So we still continue to be a relatively small player in the overall market. So as a [indiscernible] we've yet to realize the full benefits of some of the changes we have made and will make going forward. And just to emphasize that we are -- this relies on junkets. We have seen an increase in the number of customers through our IB [routes] in FY '19. We remain indiscernible very comfortable with our internal processes, as they relate to [meeting] customers and combined with the AML processes, et cetera, and we continue to take a relatively conservative approach in the business, recognizing that it is [naturally] the highest risk part of our business.

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Marcus Curley, UBS Investment Bank, Research Division - Executive Director and Head of New Zealand Research [16]

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Okay. Could you talk a little bit about the NZICC capital costs. I suppose my interpretation is that you're saying not materially above the $700 million number after allowing for the penalty payments received. So in essence, I assume that's what you're saying is the penalty payments are effectively mostly offsetting any cost inflation that you've seen on the $700 million. When do you think you'll be able to sort of finalize that number in terms of the outcome with Fletcher?

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Graeme Edward Stephens, SKYCITY Entertainment Group Limited - CEO [17]

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Yes, look, I'm glad you -- sorry, I meant to cover it up front. What we've done here is repeat previous guidance. So to recap that guidance, the project budget's, $703 million. And what we said, I think, the last time we reported was -- is a specific issue relating to aluminium composite panel, ACP, which had a rough indicative cost of around $25 million, and we're arguing over that. And who gets to pay for it. I would flag on the positive, it will be -- I think I can say the first new build that is entirely absent of ACP. So we've [cleverly] made the decision. I mean, our (inaudible) staff from Australia, for example, where existing buildings are having to replace [planning.] We took a decision to take the hit up front, while we were building -- that was a good decision. But the $25 million of costs we flagged over and above the $703 million and you flagged an [argument] around that. And then what we said is, other than that, we don't see any material additional costs for ourselves. I think the message we're trying to send, and hopefully, was heard is $703 million plus $25 million, $725-ish million, and is in relation to $725-ish, we considered in material, immaterial would be adding up to 5%. If we try to give some guidance. I cant -- -- I mean, we're saying we're still of that view. So within those parameters, we don't see us having to spend anymore. We're absolutely, actively engaged with Fletcher, trying to square away the many issues that arise on a contract of this nature. It's not only ACP. As for when we conclude that it could be once complete -- it could be in advance. Yes, we're engaged on a weekly basis partly to monitor progress and partly to sort of clear the air in some of the stuff. I'd describe the engagement as constructive. There's no doubt on both sides, we want to get the thing built and finished. So whether we find a settlement before, during or just after, I don't think it will be long after, but tough to put timing to it. But we're happy with the guidance we've given on our likely total investments.

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Marcus Curley, UBS Investment Bank, Research Division - Executive Director and Head of New Zealand Research [18]

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And so how does the $40 million of [indiscernible] factor into it?

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Graeme Edward Stephens, SKYCITY Entertainment Group Limited - CEO [19]

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Yes, sorry -- so the way we are looking at the $40 million -- $39.5 million in LDs, which we've collected, the last chunk of that will go to funding our additional costs. We've got genuinely additional costs every month that runs [indiscernible] running costs a [week] and those costs are not only the people directly involved from our side on the project, but things like insurance. The cost (inaudible), and the last chunk of it will offset additional costs that weren't part of the $703 million. If there's any spare change left, that would be nice. And would factor into, if we pay up a little to settle some plans, you've probably got a bit of spare change in that at the end. But I think treat those LDs as offsetting genuine additional costs. Probably, you (inaudible)

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Marcus Curley, UBS Investment Bank, Research Division - Executive Director and Head of New Zealand Research [20]

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Okay. And then finally, Graeme, I suppose, not a lot of discussion around concrete decisions on the hotel investment. Have you consciously sort of put this on the back burner a little? Or am I reading too much into it?

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Graeme Edward Stephens, SKYCITY Entertainment Group Limited - CEO [21]

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No, I think that's probably right. Conscious or unconscious, we've prioritized on more strategic things right now. We've raised more than enough capital out of those for the time being. At the same time, our plans for the hotels under our control are taking a little longer and require regulatory change. In the case of Hamilton and Queenstown, if they were to ever happen. So we'd like to do hotels in both, we need some regulatory shift in both, and it's a little opaque as to how long that will take once we commence the process, and we haven't commenced the process to engage with our regulator. So I guess, a longer time frame around the hotels, including the (inaudible) building in Auckland. And nearer-term focus on asset sales and strategic stuff that is more important. No burning need for the capital right now. So perhaps less urgency around the hotel strategy; in concepts, no real change. We are going to -- I think, as I said earlier, try and restructure the group, like literally, legally, so that we've got entities owning hotels and management companies in place and an ability to put out our existing hotel earnings and revenue in a way where you can start to interpret it a bit better with proper cost allocations. That's all work that'll happen in the -- within the next financial period. But materially increasing the number of hotels other than the Horizon and the Adelaide ones will start they're going to open next year. That's a year or 2 away. We keep discussions going with potential investors. But yes, if you'd probably -- a lack of urgency in the sense that we don't need it right now, but no lack of work happening behind the scenes to make sure we're ready for it -- I mean, another way to look at it is every -- with the hotels [available,] taking it from plans to holes in the ground, and holes in the ground to something above ground, and then opening and then trading, at each step of the way, you add value. We've got enough [capacity] in on our balance sheet to move ahead with projects like Hamilton and Queenstown, subject to regulatory approval. The longer we actually develop on our own, the more value we create. So another reason not to be pushing ahead if we don't need the capital right now is we creating value as we go.

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Marcus Curley, UBS Investment Bank, Research Division - Executive Director and Head of New Zealand Research [22]

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Right. And maybe just a really quick one, Rob. Can you give us an update of where you sit with the Adelaide EGM licenses, the ones that you need for the expansion?

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Rob Hamilton, SKYCITY Entertainment Group Limited - CFO [23]

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Yes. We don't need to buy any more licenses. So we have more than enough to take us through for the expansion at this stage. We have the ability to have up to 1,500 EGMs in Adelaide. I think off the top of my head, Michael, correct me if I'm wrong, we've got between just over 1,000 EGM licenses. And we've had between 700 and 750 machines on the floor during the last financial year. I know that's a...

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Michael Ahearne, SKYCITY Entertainment Group Limited - Group COO [24]

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I would characterize it, that the -- what we [think is higher win] for (inaudible) more machines (inaudible) with the[20] machines in Adelaide.

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Graeme Edward Stephens, SKYCITY Entertainment Group Limited - CEO [25]

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Maybe as, if I could segue off that point Marcus, we haven't gotten all products we're entitled to have in Auckland on the floor. So trying to come back to one of Chelsea's questions earlier, how do we keep growth going? part of our master plan creates new space within our [redline] for more gaming. And we don't have all the product on the floor at the moment. So we've got the ability to incrementally improve Auckland for some time to come.

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Operator [26]

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Your next question comes from Wade Gardiner with Craigs Investment Partners.

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Wade Gardiner, Craigs Investment Partners Limited, Research Division - Senior Research Analyst [27]

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Just clarifying what you're saying before about when you're talking about the improvement in EGMs and the good growth from ATGs and some of that came from table players. So where are the ATGs actually reported, are they reported under machines or under tables? And if they're under machines, does that mean that it's essentially cannibalizing some of your table play? And therefore, what's the sort of the true underlying growth in the EGMs that you've got from other [factors?]

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Rob Hamilton, SKYCITY Entertainment Group Limited - CFO [28]

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Wade, Rob here. In terms of the -- how they split, we have 2 types of ATGs. So we have what we call the FATG, or fully automated, and the SATGs, the semi-automated. The difference is the semis have a live dealer and are classified as a table game for regulatory purposes. We classify the FATGs under EGMs. So they're fully automated. And we classify the SATGs under table games. We have seen good growth in our ATGs over the past 12 months. We've had a new manager out of Australia, focusing on that product. We've seen good growth, particularly in the SATG side of them. So that comes through and is reflected in our tables performance. If you take out the SATG performance in our tables, fewer tables is slightly down year-on-year, predominantly volume or [drop-driven] as opposed to at a whole. We expect to see further growth in the SATGs as we go forward. I think as Mike also called out earlier. We don't achieve the same level of win that we do from our ATG products as our competitors in Australia do. So we do see that as an area of upside. Michael, do you want to comment any further on the -- on the ATG specifically?

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Michael Ahearne, SKYCITY Entertainment Group Limited - Group COO [29]

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Yes. Look, we -- if you look at the on our floors, we've introduced ATGs into new areas on our floor. So [backrooms,] VIP rooms and other areas. So actually, the unit number hasn't actually increased. It's how we've actually managed the product and deployed it across the floor to -- the change and that's allowing growth across the board there. So we expect to see that [continue.]

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Rob Hamilton, SKYCITY Entertainment Group Limited - CFO [30]

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So to your specific issue, I don't think we've seen any cannibalization of the EGM product at all. I think the EGM growth has been very good. As Michael and Graeme have called out, what we may have seen at the margin, and it's really at the margin is a shift from live tables to the automated tables, and we're geared up to -- that's a benefit from that if that trend continues.

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Graeme Edward Stephens, SKYCITY Entertainment Group Limited - CEO [31]

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Yes. I think, again, it's a [service] that only we have. It's great to see it's starting to take off. It hasn't been materially enough to separately disclose. In time, maybe it becomes separately disclosed. But it's really good to see some growth coming out of that because it's the only place in town to play on them. So if we can get to the same sort of levels of win that Australia has experienced with that product, I would be very happy

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Rob Hamilton, SKYCITY Entertainment Group Limited - CFO [32]

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ATG is still less than 5% of our total win in Auckland on the gaming floor.

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Wade Gardiner, Craigs Investment Partners Limited, Research Division - Senior Research Analyst [33]

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Okay. Can you just sort of explain the -- or give a bit of clarity around your approach to funding. I guess, if you look at your guidance for next year, $5 million of interest expense, there's been some $40 million capitalized, it's -- so $45 million on debt levels that should average out somewhere around the $500 million level? Are you talking sort of 8% or 9%? What should we see going forward.

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Rob Hamilton, SKYCITY Entertainment Group Limited - CFO [34]

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I think we've got a -- our biggest CapEx load falls in FY '20, Wade. So I think I need to have a quick look at your debt level numbers. Assuming we complete the full buyback, which is -- will take us from some $39 million dollars to date, up to circa $125 million, and with the CapEx that we're forecasting for FY '20, we expect our debt levels to be up around $800 million towards the end of the year. And for our gearing to peak in [S&P] terms, at a little under 2.5x at the end of FY '20. So we still have -- so I think on that basis, our average interest rate, using your calculations should come down. We still have some legacy U.S. private placement notes on issue. They've got a [U. S. 100] expires in March 2021. They've got an interest rate in the high 8s. Unfortunately, still sitting out there. So we're quite keen to move on those. But we're not in the position to do so yet. Clearly, our marginal cost of borrowing under our bank facilities and if we were to do another New Zealand bond, is significantly lower than what you suggested. And you look at where our New Zealand bond is trading at the current time, and it's around the -- low- to mid-3s, gives you a sort of rough idea.

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Operator [35]

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There are no further questions at this time. I'll now hand back to Mr. Stephens for closing remarks.

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Graeme Edward Stephens, SKYCITY Entertainment Group Limited - CEO [36]

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Look, thanks again for joining. I think we had a clash with Tabcorp. So for those of you who have prioritized us, it's appreciated. I think we're going to catch up with a lot of you over the next sort of days and weeks. And by the time we've finished seeing you guys, the Rugby World Cup won't be far off, and you've heard enough accents on the phone to know that there's a winner amongst us. Possibly the last thing I'll call out, actually, before I close is the fact that our annual report is live and available, and I should really recognize the individuals here, probably led by our General Counsel, Jo Wong, for the effort that went into making that thing happen simultaneously with everything else. So move quickly, grab a coffee now, there's lots of good stuff in there and make sure you've read it before we see you. Guess that's it. Thanks.