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Edited Transcript of SKC.NZ earnings conference call or presentation 12-Feb-20 11:00pm GMT

Interim 2020 Skycity Entertainment Group Ltd Earnings Call

Auckland Feb 21, 2020 (Thomson StreetEvents) -- Edited Transcript of Skycity Entertainment Group Ltd earnings conference call or presentation Wednesday, February 12, 2020 at 11:00:00pm 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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* Anthony Longo

CLSA Limited, Research Division - Research Analyst

* David Fabris

Macquarie Research - Research Analyst

* Desmond Tsao

Goldman Sachs Group Inc., Research Division - Associate

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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 Interim 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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Thank you and welcome to all of you.

It's an interesting set of results. And I'll be surprised if anyone on the call has had the opportunity to fully digest it. I think Chelsea Leadbetter, in his research a couple of days ago, summed it up with the headline, No Shortage of Complexity. And a lot of emphasis in the way we've presented it to trying to unpack that complexity for you. Despite that, I don't think it's going to be something we unpack fully on this call.

So we've decided instead to restructure it as a high level take in this forum to be followed by a more technical call aiming to commence at 1:00 p.m. And on that technical call, Rob Hamilton, Ben Kay, I'll be in it in the background, but I wouldn't expect to hear my voice. We will take you through some of the complexities of the accounting adjustments that have gone into the results.

So I'm going to be pretty high level on this call knowing that, that one is coming. We're obviously available for follow-up, and I know we're seeing many of you one-on-one over the week or so ahead.

Perhaps before diving into the numbers, some of the key features of the last 6 months I pulled out on Slide 4. The fire has clearly been a big issue for us, a very disruptive event. I think the ops team, led by Michael Ahearne, responded extremely well in this situation and our crisis response was proven to be pretty good. It was well rehearsed and then thrown into action. Since that time, we've been working with Fletchers to try and get the process going again.

Fletchers have the responsibility for developing the reinstatement plan, and we are expecting to get that by the end of February. We've yet to receive it, but we are hoping -- we're told it will be with us in the near term. And it's the conclusion of their plan to date that we are unlikely to be able to hit 2021 for APEC. So we'll tell a little on that just, but that's been a massive event and the likelihood is we won't hit APEC, and we're communicating that today to the market share in New Zealand.

I think the likelihood is equally low that if -- they're going to miss it, by not by much. I would say by a couple of months. So I have an expectation that certainly by early 2022, everything should be done. But we'll know more about that when we get their plan and program in the near term.

The results have obviously been impacted by that, but not just by that, by the Auckland car park concession, which concluded in the period just gone.

The operating performance in all of it, and I'll talk a little more in detail shortly, has been positive in New Zealand. We've had growth. We are growing really well in Auckland, and are still continuing to grow in Auckland at double-digit on a like-for-like basis down at Hamilton and Queenstown.

It's been okay in Adelaide with a relatively poorer start to the year Q1, but a much better Q2 and a couple of months in a row now of decent performance, which is hopefully reflective of its future. It's fair to say that the environment is very challenging, not only the construction of the expansion, but -- and the car park and everything else around them, but internally in the existing building, we've pushed ahead with our master plan for the existing. So we've been renovating gaming floors and disrupting from within.

But hopefully the last few months indicative of the next few in Adelaide because the performance has improved. The expansion is on track with the opening scheduled for October 2020. I think at this stage, comfortably within the time frame to be up and trading for the T20 World Cup cricket in Adelaide, which is (inaudible) November. So Adelaide continues to move ahead with the expansion all on track from our perspective.

The online casino was launched, and although we're severely limited in how we can operate it, and we can't market from within New Zealand, and we are adhering rigorously to the letter of the law. Despite all of that, we've had some pretty encouraging customer sign-ups in the first 6 months with month-on-month growth coming through there.

And we'll return to dividends, but just to flag, a feature of the company has been a decent dividend, within a decent yield based on last night share price, 5.6% yield. There is no change to that policy $0.10 interim dividend declared. And we continue to emphasize yield nature of the stock in a world that doesn't offer lot of yield right now.

I think I'd like to address coronavirus upfront before, again, moving on too deep into the presentation. It is a very current topic monitored by us and by a lot of others on an almost hourly basis; daily, certainly. We've got a crisis response team that meets and is prepared for what might still come. But at present, we prepared a lot of them to mobilize anything and there are no confirmed cases in New Zealand and [turn on to] 2 in South Australia.

And we haven't had any discernible significant impact on the domestic business over the past 3 weeks or so that this has been a real issue for us. We've had some hotel cancellations. But [Arcus] and the like, but we've been able to replace those actually at higher room rates because of the fact that it's been long weekends and it's summer here. So actually, in the hotel, there'll probably be net beneficiaries to date, but longer term cancellations aren't going to be helpful.

And we've seen a slight reduction in visitation. And that's number of people in Auckland and Adelaide coming to precinct. When we look into the more granular detail, no discernible impact at all in EGMs. EGM is obviously a part of the business where we've got a lot of stats, so you can go back in granular detail day by day, week by week, over a period of time. So to date, fortunately, no discernible impact in EGMs.

We are seeing some softness in table games and that might be related to corona. I'm sure there is something in that. But at the same time, we are renovating core components of our tables, areas in Auckland, in particular, we do level 8, level 9. We've had disruption into some part of the businesses. It's volatile.

If you look at the last few weeks, weeks like these in November, in December, they're not abnormal weeks but softer than we'd like. So perhaps a little bit of an impact there, but in all of it, no significant impact to date in the core domestic business. And to remind everyone, our domestic business is about 90% of our lives, about 10% represented by IB.

Now on IB, there is no doubt that corona has impacted us. In particular, given that it happened over the Chinese New Year. Our IB business, which represents 10% of our EBITDA is dominated by a few key players. We flagged that, historically, a number of those key players were due to visit us every Chinese New Year. They're China-based players, and were not able to get into New Zealand, they couldn't come.

So the loss of that business is -- can be directly attributed to corona. And I think it's reasonable to think that, that will be a negative impact still for little while over IB. It is obviously too early and definitely too uncertain to start estimating any future impacts that might arise from corona, based on past precedents of this sort of thing we are hopeful that it will be temporary, and it seems reasonable to expect that it will be. But it's definitely too early to understand if there is an impact, and [then to begin] to measure it.

So the guidance we give later in the presentation, so the caution that we don't know yet of the impact of corona, and it makes its assumptions on the back of where we stand today and looking after the next couple of months.

I think perhaps one last point to flag on corona is as much as 90% of our business is dominated by local business, is represented by local business.

If we look to -- we're trying to ascertain how many of our customers overall come from China. And excluding IB, we estimate that would be about 5%.

And those are Chinese tourists staying in hotels or visiting the Sky Tower and Chinese tourists that might come as uncarded player onto our gaming floor, and it would include some of our higher-end players that are domiciled partly in New Zealand and partly in China. When you put them all together, it feels like a little less than 5% of our business is exposed to China. So whilst the virus remains

largely located within China, the exposure to it is limited to quite a small component of our business.

I'm going to move on to some sort of high-level takes on a like-for-like basis. So skipping over all the reported to normalized, normalized to like-for-like, all the complications in that, which will be unpacked in the 1:00 call. I'm moving on in our deck to Slide 14. And trying to get to the look-through feel that we have for the business when you try and get past all the noise of the accounting entries and the strategic things that have happened.

We've sold Darwin and the Auckland car parks. We've closed our existing convention center. And we've had some accounting changes coming through IFRS, all that in addition to the fire.

Looking beyond all of that, we think -- well, we think we -- our analysis indicates that Auckland EBITDA was up around 4% on a like-for-like basis in the half. We were tracking, in our gaming business, about 6% up year-on-year, up to the 21st of October, the day of the fire -- day before the fire, and we finished the half about 4% up.

The other property in Hamilton and Queenstown is, I think, I'm honestly doing up double digit. There is a good growth there. Adelaide is okay. Putting it all together, our feel on group normalized EBITDA is that we're down about 8% on a like-for-like basis, and that this is largely reflecting weak performance in IB.

Now this is the performance in IB up to December. So nothing to do with corona. IB has been weak and weaker-than-expected and weaker than we thought at the investor update in November. We've had an appalling November, very, very low November. And December was also weak. So we finished the half below our expectation, and that's the impact on our group performance, which is leading to EBITDA being down.

If we exclude IB, we would have been up -- be above 2%. The underlying properties were growing higher than that, but we've had some additional preopening costs in both NZICC and Adelaide. And we've got higher ICT costs on the flow-through as we sort of get through the heavy lifting on the implementation of our ICT projects. And as we get into the licensing costs associated with those. So extra costs in our corporate costs coming through ICT. The net effect of that excluding IB, we think the group would have been up about 2%.

In terms of dollars, again, trying to key something to hang our heads on. At the beginning of the year, we provided some guidance because FY '19 had a lot of strategic stuff and that we provided some guidance in terms of benchmarks for the year, and we pointed to an EBITDA benchmark of $303 million with an expectation of some growth, and we pointed to NPAT of $151 million and an expectation of being flat against that. And I think that guidance is what's in full market consensus.

Trying to sort of circle back to that guidance. We think our EBITDA without the fire would have been around $155 million, and our NPAT $81 million. Now we haven't calculated or gave half year guidance, but you could look at those numbers in the context of the full year guidance that we did give. And we're in the ballpark of that guidance, we're probably a little below both guidance and consensus, and that would come again as a consequence of the weaker performance in IB, offset to some extent by the stronger performance than we might have expected out of Auckland and the other properties. But that hopefully gives a little bit of a link, if you like, back to the beginning of the year and trying to cut through all the noise around fires and everything else.

I think I'm going to leave Michael shortly to cover more of the granular detail in our operating performance, and I'm going to take us through some commentary around dividends and capital management.

I mentioned earlier the dividend will stay at $0.10, and we have every expectation that it will be $0.10 again at the full year, $0.20 for the total period. And we can't see any reason to change that. We consider it will be good. And as I said, I think the expectation will be the same again. So it's emphasizing the yield nature of the stock, and there is a slide in the deck, which -- so the highlights where we think we fit in relation to other investments, and we remain of the view that in the relative sense, we're a downside protected stock. Keeping the yield nature of the stock going has been important.

And then maybe just some commentary around the share buyback. The share buyback plan was approved up to 31 December. And in that period, we purchased around $60 million of stock at an average price of $3.85. We had a long conversation with the board around resurrecting it and keep it going. And fair to say that at current share prices, we would absolutely be buyers.

But we sort of moderated the view on resurrecting it in light of some of the uncertainties we're still trying to understand right now. So erring on the side of being prudent and perhaps a little conservative, we've said, let's just get through the next month or 2, let's understand exactly where the business is. It's easy to resurrect that program at any time. So we put it on hold with $60 million under the belt. We remain very focused on capital allocation and returns and the need to give back to shareholders any capital we don't have any good homes for.

And we don't have any good homes for that capital that would justify holding back on the share buyback at this point. And it's really just a pause while we just wait for a little more clarity on what the future looks like.

And if I turn to the future and the outlook statement, we remain of the view that domestic and international economies are challenging. I think it'd be naive even to say domestically in New Zealand is something we might have liked, but I'd say the overall take of economies being challenging probably remains valid.

That being said, that's not a new statement or sentiment. And within that environment, we have been achieving growth in our business, including this most recent half. And if nothing else, I think we've demonstrated the point we've made a few times. It's a resilient business, ignoring the fire. We've had lot of disruption, in particular, in Auckland and Adelaide, in our precincts, we've disrupted ourselves a lot.

And we shouldn't overlook at the fact that in Auckland we dealt with a 4-month strike. The fire occurred about in the middle of the strike, it was 4 months of it, and the team was able to step up and continue operating through all of that and achieve growth. So having achieved it in the last half, we reasonably expect to achieve it in the -- for the remainder of the year in our core local business. Against that, we reasonably expect IB to be weaker-than-expected at the beginning of the year.

We had a weak first half. We've now got corona in -- impacting IB definitely to date and perhaps for some time to come. So when we look at the IB component, we predict it will remain weak. We scaled back our target of $14 billion to $10 billion as a turnover target for the full year.

The implications of that scale back at an EBITDA level, probably getting close to $15 million of EBITDA impact. And against that background, we are lowering our guidance to EBITDA expectation of slightly under $300 million. If you go back to the beginning of the year, we said $303 million, expecting some growth. And we are going to expect to receive some growth out of the underlying business. So [growing] that a little bit and then knocking off the weaker IB performance, let's call it $15 million, is guiding us to under $300 million. And at an NPAT level, we're guiding to $130 million.

That's not, again, to sort of try and get you to like-for-like. That is after deducting $16 million

of interest costs that are no longer being capitalized, that $16 million is an after-tax number and a pretax number is $22 million of costs that would have been capitalized are now coming through the income statement. It's obviously an accounting entry. It's not a cash flow thing.

That capitalized costs with regard to assets and being depreciated over time and come back to the income statement. With the accounting requirements of the fire, it's going straight (inaudible) income statement now. If you add back the $16 million to the $130 million, you get to $146 million, and that's probably the sort of number to have in mind in relation to the $151 million that we guided to at the beginning of the year.

And again, the reduction at this stage is as a consequence of the weaker IB performance offset by growth that we're still achieving in the underlying core business.

Now we've got to call out coronavirus again. Just

we don't know what we don't know. We've analyzed everything to date. In the last few weeks, it would -- it's been pretty intense focus for the media in the world. Looking at it, there is no significant impact. That doesn't mean that won't change. It's too early to tell. So I'm trying to give some guidance for the full year.

We've assumed that coronavirus does not create any worse impact for us. And hopefully, that turns out to be the case, but that is -- yes, the guidance is made on that assumption. Obviously, by the time we meet again in May at the investor update that we give there, we should have a lot more insight into the impact if any from coronavirus. But I think take it with that perspective, our guidance.

I think at this stage, I'm going to ask Michael to talk you through some of the underlying businesses, the initiatives that he and the team have taken and his perspective on the next few months.

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Michael Ahearne, SKYCITY Entertainment Group Limited - Group COO [3]

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Thank you, Graeme. I'm just going to refer you to Slide 35 and talk through each property in a little bit of detail. So firstly starting with the Auckland property. The underlying performance in Auckland, EBITDA growth of 4% on a like-for-like basis, was a solid result for the business.

And as Graeme indicated, up to 21 October, we really have solid momentum in the business with gaming revenue growth of approximately 6%. Obviously the fire happened, we shut the business for a period of approximately 3 days. And I have to say the team did an excellent job in the work of reopening the business dealing with what was a major cleanup, not only on our own precinct, but around the site, around the city.

And we had -- post fire, we had significant traffic [law] restrictions in Auckland, which has now sort of subdued, but we continue to have car park capacity restrictions. So we're down about

600 car parks as we speak. So I think it's fair to say it took some time to get the momentum back in the business, but we've managed to do that. In terms of the components of the performance,

record local gaming performance, which is obviously positive.

Gaming machine performance continues to be solid, 3.5% growth in the half, which is pleasing. We are benefiting from ongoing investment in new product, a refinement of the product mix that we have on the floor. We currently have about 100 machines less than we are licensed for on our floors, but we're seeing actually an improved performance with that less product as we give a much better experience to customers. We will get those machines back on our floors as we open the new VIP gaming area on Level 9. So in May, we'll be back to our full complement of machines on property.

Table games performance, a little bit faster than game machines, but we saw growth there. And what we're actually seeing there is we're seeing the automated table games, particularly the semi-automated products, which is using the live dealer, performing very strongly, and we're seeing customers moving to that product and cannibalizing the traditional property, the traditional table games product.

And that's something that we are -- that's one of our strategies where we're actually driving that, so as we gain more space on the gaming floors, we will introduce more ATG product. Customers are enjoying that, demanding that, and it has the significant benefit to us of being a much higher margin product, which helps us on labor.

Probably also worth highlighting as part of the upgrade of our VIP facilities, the local EIGHT room significantly being disrupted over the last several months, and we'll be back to a more normal environment in March for our local VIP table customers.

From a non-gaming point of view, you can see revenue decline. That's largely driven by the change in car parking arrangements and the hotel, which is in line with our expectations. Revenue is down based on the increased competition in the market in Auckland with significantly increased supply.

From a cost perspective, pretty pleased with how costs have shaped up in the half. Probably the labor costs are the one that we -- the most cost to be -- the largest operating cost and one we can manage most effectively. Labor costs in the half were in line with the prior year. So we managed to absorb the minimum wage increases that we've pushed through with continued efficiency work that we've been undertaking over the past 12 and 18 months.

And also highlighted in Slide 41, where we now disclose the hotel operating performance, detailing the key operating metrics and the profitability of our hotel business separately.

Looking forward in Auckland, some of the key projects underway in the property. As I've mentioned, the VIP areas. We have opened the new -- I would say, the upgraded international salons. We expect to open the full VIP local EIGHT room in March and the new area, which is Level 9, which is a new space for us, which will be a VIP, a black -- a new VIP black area, which will open in May. So really looking forward to that.

We've also commenced work on our main gaming floor, enhancing the experience and the proposition there for our customers, work on a new food court is underway, and we expect that to open later in this half. And once that's finished, we will start work on the bar facility and the main gaming floor. We're going to expand that and enhance that facility on the gaming floor, and that will be in the start of the new financial year we'll see that opening. As Graeme mentioned also, where the All Blacks Experience will open in the second half of the calendar year as well.

Moving onto Hamilton then. And as you can see, Hamilton has had a strong result, 8% revenue growth is very satisfactory and particularly looking at the EGM performance, very pleased with that.

We've taken a group perspective on product management, and our team that previously would have just been focused on Auckland are now focused on our New Zealand properties.

And we're seeing the benefit of that in terms of some of the changes that we've commenced to it. We've also enhanced our smoking balconies in Hamilton. And as of December, our new facility opened and has announced 19 game machines on the smoking balconies.

The cost side on Hamilton, I should touch on. So we did incur an additional one-off cost of approximately $700,000 in relation to legal costs associated with the gambling commission hearing where we've applied to convert 3 blackjack tables to gaming machines. So that's a one-off cost. And if you back that out, you can see the performance is even better up with double-digit growth.

Moving on to Queenstown, a strong performance in the Queenstown property, albeit I would highlight that we had a very strong table games win rate, which did assist, but the game machine performance there, very pleasing as well.

From an Adelaide perspective, a tale of 2 quarters, I would describe it. The first quarter was softer than we would have liked, but we've seen a much better improvement -- a better performance in the second quarter, and we're expecting that to

continue. I would highlight the work that we have ongoing in the existing building in Adelaide as we upgrade the facility, simple things like recarpeting, painting the existing building, and we've recently opened The Guardsman, a new venue in the railway precinct.

So a lot of work going there. And obviously, a key focus of us -- of the team there and myself is the operational readiness plan for the opening of the new property in October.

We've also included a slide on our online business. And firstly, it's fantastic that we're up and running, and we launched skycitycasino.com site through our Malta based subsidiary in August. That's a partnership with GiG. We've seen good activity, which is progressing over time. And we are certainly ensuring that we are compliant with the advertising regulation as it exists in New Zealand. So early days, but our progress to date has been encouraging.

Hand back to you, Graeme.

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

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Thank you, Michael. We'll move quite rapidly, I guess, through the various strategic initiatives that are part of the deck and probably some time for Q&A at the end. I won't comment much on the first pillar that we look at how do we improve our operating performance. I think Michael has covered most of the ground there. If I turn to what are we doing to optimize our existing portfolio. We have now realized $450 million of net proceeds through asset disposal as part of our capital license strategy. We've given some hope through the share buyback. We've reduced some debt, and we'll see what more we can do in the next couple of months. I think

as regards the Auckland master plan, we absolutely continued to evolve that to a point of, at the conclusion we'll be sending it up in April to the Board, our view of all that is possible in Auckland, and we've got a lot of space, 2,500 square meters of land available and lots of space within the existing buildings

where we think there is opportunity to do more.

I think it's years in the making, the master plan. And it offers upside incrementally to Auckland for a long time to come. We are within the context of the master plan going to try and prioritize more of what can be done in the next 12 to 18 months. We've really kicked off some of the obvious stuff level 8, level 9, food court, [acers] bar.

And there's other stuff that we will get going within the next 12 to 18 months in the context of that master plan. None of it is significant in terms of CapEx. And I think from the beginning, we've said when we get to the heavy lifting of hotels or apartments, and we've got opportunities for a number of high rise buildings, the likelihood, almost certainty is we're going to be looking to external investors to help us make that become reality. That's not the stuff we're going to move ahead with right now, but we'll continue to advance our thoughts on those bigger things.

I think in Hamilton and Queenstown, progress in both. Hamilton, as Michael flagged, we've been through the hearing of the Gambling Commission on trying to substitute tables with EGMs. We anticipate that we will get a response from the Gambling Commission in the near term, weeks or months from now. And that will be informative in relation to the work we've been doing to get a hotel development going in Hamilton. Part of the feasibility for that requires extra gaming product in our view, strictly extra gaming product really helps the feasibility to deliver decent returns. So we expect to hear back from the Gambling Commission.

We have [iterated 2] designs and costs that seem to make sense for Hamilton. So hopefully, that's a project we can bring over the line. For those of you long-term investors on the call, I think it's certainly been about 8 years that we've been talking about a hotel in Hamilton and it sort of feels like we're near to a conclusion at this juncture.

This has -- because I think a hotel down there would really complement the gaming and really develop that precinct to deliver on its full potential. You've seen the results in Hamilton that's consistently growing, we constrained by capacity. The Waikato region, we think, is a great region and is very close to Auckland. We just think it's going to continue to benefit from the general growth in this precinct, in this area.

In Queenstown, we've gone through a couple of iterations of what we might do on the land that we purchased in Queenstown on the Lakefront. I think where we are right now is a chunk of that feasibility relies on IB, no doubt about that. And where IB is at the moment in terms of the weaker performance experienced quite recently and the weaker outlook. We're probably not likely to forge ahead with Queenstown until we've got a bit more certainty on how that business unit looks.

So it's there. It's work in progress. We're sort of iterating towards something where it looks like we can get a return, subject to some decent IB or reasonable IB, and we'll just -- we'll continue to monitor that. Probably unlikely we'll be pushing the buttons in Queenstown in the near term.

I think if I look to the NZICC for a bit more color on this call. Let's talk about things other than the program and the rebuild. We thought it worthwhile flagging for you that we remain comfortable with our contractual position. Insurance is going to apply, and the insurance cover looks more than adequate. So therein lies an opportunity for Fletchers to hopefully not only build it quite efficiently, get it open quite soon or certainly not (inaudible) than early 2022, but they should have an opportunity to make some money along the way.

Where we sit is, we're comfortable with our contractual position. And if we look at our overall investment into the project, we don't think there is any need to change guidelines given historically in pre-fire. If you -- just to remind the

audience, we had a bunch worth $703 million. We've been trading for some time that the items that might need to get settled, and we've been flagging that's -- those are known items that we were in conversation around, and we anticipated some kind of discussions to come as a project neared completion. In all of it, we were flagging that up to $750 million would have been a reasonable outcome pre-fire.

We didn't see any prospect of going north of that, given the original budget plus some settlements to come. We don't think we need to change that guidance based on the post-fire situation. And we're comfortable with our contracts. So at this stage, no material change to previous guidance.

On Adelaide, [as I said] earlier, on track as regards the expansion and well within budget. So that's all good news. The components that are beyond our control and flagged were the Walker Corporation car park as one of those. That car park was mean to open at the same time of our expansion.

And we're anticipating a 6-month delay based on what we see happening. It's not that they're not building. They're actually going pretty flat up. That has started probably later than it should have. So there is a lot of activity on site.

But if you look at where they are and where they need to get, we're anticipating a 6-month delay. There will be some other stuff out of our control and precincts, whether it's the flaws of works themselves or some aspects of the upgrades to Northern territory payments and that sort of thing. Stuff that we are not responsible for looks like that might also lag by a few months, but you can characterize that stuff as relatively minor in the context of the overall expansion. And I think we're talking months there before everything comes together.

So as regards to peak time of our control, very happy with that. And the master planning for the existing precinct completed and the various projects coming out of that well underway now. The Guardsman was an early delivered project that opened a few weeks ago and has been well received by Adelaide.

We're probably halfway through refurbs and renovations of the main gaming floor. And the last piece of the puzzle is something we're calling The District, which is up at the top of the building. It will be a live entertainment venue and an opportunity, not only for me, but for the rest of you to have some locally brewed crafts. We'll have a craft brewery out there. So that's the last piece of the puzzle.

And all of that's on track to complete at the same time as the expansion. We want to hit the ground running with everything done on our precinct, even if we've got a little bit of disruption from Walker still remaining. We want to have ourselves completed in time for that T20. And as looked at the status, if we can.

The next strategic pillar around diversified earnings. Mike has made some reference to the online casino. And so far, so good on that front. We are being extremely conservative in it. But it's looking positive. And it will be interesting to see

how our customers react actually literally in the next couple of weeks or months if coronavirus does have an impact in that people don't want to come to land-based casinos, well, it's a logical option to go online with us and one that's absolutely available to New Zealand is I think they have an increasing awareness of that.

So we'll watch with some interest to see whether sign ups increase, if people would prefer to gamble online rather than frequent land based. It's good to have both options. And obviously, the longer-term future in the regulated New Zealand is that we still remain of the view, we can expect a license. We're working hard to make sure that we're entitled to one in that world of regulated New Zealand. We'll have an omni-channel offering, where you can cross our land base to online and market equally to both and support our minimization with the databases of both, we'll have a common database. So that's the strategy unchanged.

And moving ahead, Michael touched on hotels. We're going to be disclosing it separately, and it's still quite smaller hotel portfolio, but it will have near-term additions in the form of Adelaide, and we expect to get, within the convention center complex, we expect to get the hotel component early. I don't think I've mentioned that yet on the call. So as best as Fletchers are driving to an overall conclusion of everything by early 2022, hopefully, we want the hotel component significantly earlier than that.

And it seems reasonable to expect that it looks largely unscathed. They need to figure out how to get out from services, like power, water and air con. But the building itself looks largely on schedule. So we'd like to think we're going to get that hotel earlier and ideally in time for the America's Cup. It will be a busy time for Auckland at the end of this year, end of calendar 2020.

So that's another hotel coming into the portfolio. We can see a pathway, in particular if something happens in Hamilton to having a portfolio we separately disclosed, it starts to have a reasonable number attached to it and enables investors in SKYCITY to value that aspect of the business more accurately.

Hotels typically attract a lower yield, therefore higher valuation. We're pretty certain no one is giving us that valuation as we stand, and we're going to try and make it a little more transparent so that, that valuation can be attributed to us. In a similar way, we haven't called out in the presentation, but SKYCITY has got a lot of properties backing. And we're working towards better disclosure on our property assets.

We're not in a [margin] of propco opco, as other companies have gone like spreading up the business, but I think disclosing our business in a way which enables people to understand the propco opco components might again assist in a better valuation of what SKYCITY represents. Because again, property businesses typically attract lower yields, higher valuations. We've got lot of property in our business. So that's just really an attempt to try and make it a little easier to value us.

Last, but definitely not least, under the culture and character side of the business, we've got a number of goals. I'm not going to go through all of them, but I thought I should call out under the offering a great and safe place to work. We have absolutely upped our game in health and safety over the last year or 2.

It was most obvious in our reaction to the fire, but it's across our business in many, many aspects with a proper focus on this area. We can find and are finding ways to improve. So that's definitely good progress. And the last pillar of focus from our customers. Again, maybe just to call out, we've not implemented facial recognition across all our sites as part of enhancing our host responsibility program. That's all our sites in New Zealand and equally, we'll be implementing in Adelaide. And in Adelaide, it's become even more pertinent because the regulatory reform there requires facial recognition.

And we're obviously ahead of the game in that. I think we touched on reform in Adelaide when I was talking about it earlier, but our expectation is that we should have the regulatory reforms that have gone through parliament in place in time for the expansion to open. And we're working closely with the regulator to achieve that. It seems to be a reasonable expectation now. So it will be really great at things like [full exceptions] are in place by then. And we're trying what we can and have an expectation that that would be the case.

With only host and home responsibility space, we have most upgrade algorithm, which enables us to detect problem gambling, that's a mathematical algorithm that looks at patterns of play and highlights the [parties for more]. And I think we need to pack on that and will equip the provider of that software to continue to try and improve it. So we've managed to do some more there. As regards to our communities, again, I've just called out, I think our strategy to reduce waste to landfill is taking some good positive steps forward.

We've got technology identified and are going to be implementing a strategy to take ways from here through a process to mean it doesn't have to go to landfill. It's probably New Zealand's (inaudible). It's interesting in that New Zealand hasn't really got a solution for waste to landfill in a way that Australia does. Yes, so not often we have to sit here and acknowledge that Australia is better than New Zealand, but this would be certainly one of those cases. So New Zealand has got to figure it out. But within that context, I think we've got some good technology that we can bring to bear.

And then maybe also just to call out, we've been doing a lot of work to employ youth. We're wrapping our strategies there to focus on employing locals

generally, both here in New Zealand and in Australia, reducing reliance on immigrant visas, creating jobs for locals wherever possible, linking that to additional training. The minimum wage is starting to get to levels where it looks like a more attractive career option for locals. So putting -- or putting all of that together, I think pieces of the strategy are coming together to make sure we employ local.

I think at that juncture, enough from us formally, we should leave a bit of time for Q&A. So should we go there next?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Anthony Longo from CLSA.

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Anthony Longo, CLSA Limited, Research Division - Research Analyst [2]

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Look, just had a couple questions from me. So firstly, on Adelaide, can you -- just as a reminder, can you just remind us what the regulatory changes have been passed are? So I appreciate you're likely to implement them, but just a bit more clarity on that would be great.

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

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Look, (inaudible) a lot of them, which will help us operate as opposed to translate into numbers that you're going to see. Probably the most

noticeable numbers wise is we'll accept coming in, and we anticipate some degree of upside from that. It's been a long time since casino went from coin to [bills]. The different precedent would have indicated a 10% uplift. It's not clear what today's precedent -- what today's switch will translate into. But (inaudible) activity is probably the thing we're pointing to most.

It seems probable, but not guaranteed that [TITA] will also come in. We've got TITA in some aspects of our business, but TITA is something that we would expect to come through in regulation. What's happened is they've put the reforms through legislation and then they're leaving it to the regulator to translate some of that into action, and that's the process we're in now. But I think if you cut through all (inaudible) is the one thing that we're pointing to and should make a reasonable difference to our performance.

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Anthony Longo, CLSA Limited, Research Division - Research Analyst [4]

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And then secondly, obviously, Adelaide, let's do on Adelaide. First quarter was obviously, as you mentioned, pretty tough. You did mention comps are obviously getting better to the back end of that half. Are you able to give a bit more color as to what that uplift was and then how we should be thinking about that property into the balance of the year?

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Michael Ahearne, SKYCITY Entertainment Group Limited - Group COO [5]

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Michael here. In terms of revenue, we saw a 4% uplift in revenue in the second quarter. And from an EBITDA point of view, it's significantly more than that. So we've seen the EGM part of the businesses is the business, the component has been unsatisfactory for quite some time. So we've seen some momentum there that is encouraging. And look, we'll be looking forward over this going forward in second half.

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Graeme Edward Stephens, SKYCITY Entertainment Group Limited - CEO [6]

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Yes. So just I'm going to go to add a bit of color to Adelaide, we changed the management team, feels like about a year ago now, about April last year. David Christian came down from Darwin to run the team. The team has absolutely welcomed that change, he's made some changes within it, but not that significant. So we probably needed a month or 2 things for him to get into the seat and get some traction going. Our strong sense is that traction is part of the reason we've seen some uplift as well as all the sort of stuff Michael alluded to earlier in terms of floor mixes and product and everything else. I do think they are going to have the most challenging few months ahead of them. As much as they've got some momentum going as a team, they are absolutely going into the most disruptive phase of this project. And they will obviously be managing as hard as they can and as cleverly as they can, but there is no denying that deliver the disruption into the -- because we're into the master plan for the existing building is going to escalate.

So perhaps to understand our mindset. Yes, we expect them to show some growth and in part, at least, because the comp is not that challenging. We are probably more focused at our level on being operationally ready for the expansion, getting all the projects implemented in time for it. Yes, doing what we can in the year ahead and expecting some growth, but our absolute focus is on being operationally ready. We shouldn't underestimate the challenge that we've got to employ hundreds and hundreds of people and train them and bring them in on time, and it's great that our contractor looks like there might be overtime. That means we've got to bring them in early. There's a lot of focus on that for Adelaide. If you're trying to understand where our heads are and then expectation of a step change once everything is open as opposed to sort of all are trying to drive the existing business, perhaps at the expense of being operationally ready. So yes, some growth, but I think in all of it, we're looking to the day that the whole thing is open and trading.

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Anthony Longo, CLSA Limited, Research Division - Research Analyst [7]

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Yes, great. I'm sorry, last one for me. Looking at VIP and particularly the receivables to sales ratio, looks like it's voluntarily up year-on-year. But did note you comment on low bad debt ratios in the presentation. Are you able to give a bit more color as to what's going on on that front?

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Michael Ahearne, SKYCITY Entertainment Group Limited - Group COO [8]

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What numbers are you looking at specifically, Anthony?

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Anthony Longo, CLSA Limited, Research Division - Research Analyst [9]

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Just looking at total receivables.

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Michael Ahearne, SKYCITY Entertainment Group Limited - Group COO [10]

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Yes. Let's have Rob Hamilton respond as the IB business reports to Rob.

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Rob Hamilton, SKYCITY Entertainment Group Limited - CFO [11]

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Yes. Look, as noted, we don't have any new debt provisions during the year recorded in the interims. There are a few slow payers.

Hence, the increase in receivables that you would have noticed. And -- but we remain confident that those debts will be fully settled. All are being paid gradually, and we expect to have them all fully settled by the end of the financial year.

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Operator [12]

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Your next question comes from Desmond Tsao from Goldman Sachs.

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Desmond Tsao, Goldman Sachs Group Inc., Research Division - Associate [13]

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I've just got a couple, if I may. Just firstly, just focusing on the Auckland performance in the half, which was, I think pretty solid in the context of a challenging environment. Just want to really unpack that a little. You guys saw a good momentum in gaming revenues, up 6% to late October before the fires occurred. And you ended the half at, I think a little bit above 2% on pcp. So a pretty big drop in the final 2 months. Are you able to just provide a bit more color around whether the big drop largely occurred in November, and we saw some stabilization in December and whether that momentum has continued to improve into the second half?

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

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So to just look at a high level, I'll let Michael give you the detail, the Auckland business ended up 4% for the year. The 2% is a reference to group. So there is some group costs and the preopening costs and IT costs that are producing the overall growth, excluding IB to 2%. The Auckland business finished at 4%, but I'll let Michael take it from there.

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Michael Ahearne, SKYCITY Entertainment Group Limited - Group COO [15]

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Yes. So I think it's fair to say, it took a little bit of time to get momentum back in the business. So it did -- we didn't just open, and we're back to the same position as we had been pre. So that's built through over time. So I'd say, EGMs is largely back to where we'd expect as a flow-through, I would say, November, December, January, we've actually built the curve, the curve is up. But I would highlight, as I highlighted earlier, we do have constraints on capacity and car parking, which is a challenge for us. So we're largely in line with our internal forecast and budgets in terms of the performance over, let's say, that December, January period.

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Graeme Edward Stephens, SKYCITY Entertainment Group Limited - CEO [16]

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Yes, I'm going to add to this. I think there's been some confusion. So just looking at 1 or 2 of those slides that Michael was talking, I'm on Slide 35, which talks to SKYCITY Auckland in a bit more granular detail. And if that's the slide you're looking at, I'm not sure of that, the revenue number in that slide has not been adjusted at all for the fire. So there is no adjustment for the fact that the property was closed. In other -- the adjustment to try and normalize for the fire has occurred at a profit level, gross profit level. The revenue numbers that have been granularly disclosed for Auckland don't include that. So that would probably go a long way to helping you understand movement. It's a tiny little note to that slide. So it might just be confusion that's causing your question.

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Desmond Tsao, Goldman Sachs Group Inc., Research Division - Associate [17]

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No, that makes sense. And just while we're on Auckland, just a bit of commentary around automated table games. Obviously, it's been a couple of halves of pretty positive momentum there. Can you just talk to the underlying trends for tables ex ATGs and whether that was negative in the half?

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Graeme Edward Stephens, SKYCITY Entertainment Group Limited - CEO [18]

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Yes. So firstly, on the ATG, it's the semi-automated product that's linked to the live tables where we're seeing the real growth. So the category received that ATG growth are of 20%-ish is sort of maybe the more in that. So we're seeing that growth. And you're correct in terms of the underlying table games performance is just slightly negative, so as we see customers transition from one to the other. So we're not too concerned about that. We're introduced -- it's location based, so you won't see more product around our property. But what we've done is we've introduced those units into VIP rooms, into the [back of room] and into new locations, and we see them perform very strongly.

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Rob Hamilton, SKYCITY Entertainment Group Limited - CFO [19]

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And maybe as an observation on labor cost here, you've got one dealer, but streaming to different locations in the property. So it's highly efficient.

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Desmond Tsao, Goldman Sachs Group Inc., Research Division - Associate [20]

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Perfect. Makes sense. And just third and final question just around the guidance. I appreciate it's -- the IB business is very volatile and lumpy. But can you give us any indication or just put any numbers around the performance in Jan and February to date? And how you guys came to that $10 billion turnover target for the full year?

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Rob Hamilton, SKYCITY Entertainment Group Limited - CFO [21]

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Rob here again. We've obviously done 4.6% in the first half. You look back at what we've achieved in prior periods, take out the last 2 halves. It's not inconsistent with what we've done then for a number of sort of half year periods. We think we can do slightly better than 5% in the second half based on bookings. Chinese New Year, as we flagged, was obviously impacted by coronavirus, has been a weaker start to the year. But we do have some optimism around future bookings. The sales team is working hard to deliver that. As we have flagged a number of times, we are uncertain about the coronavirus impacts in terms of how long -- whether there will be -- how significant the impact will be on IB and how long that will be for. But at this stage, we're targeting $10 billion [and so] for the full year. The team is focused on delivering that.

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Operator [22]

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Your next question comes from David Fabris from Macquarie Group.

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David Fabris, Macquarie Research - Research Analyst [23]

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Just a couple of questions. I guess the first one is just on the capital management for spending or cutting the buyback program. If we think about catalysts to resume that program, is it really just getting a read-through on the coronavirus? Or is there more moving parts in there? And how much of a read through do you need on corona to resume the program?

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Graeme Edward Stephens, SKYCITY Entertainment Group Limited - CEO [24]

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Look, I'd say there's nothing more to it than that, we're pretty transparent in our disclosure. And in terms of us being concerned about our future, there's no other concerns other than trying to understand that better. In the near term, if we were to get the right approvals out of the Gambling Commission, Hamilton may get a green light for a hotel. So that might trigger a commitment to a capital investment. So I guess that's -- and that's a positive thing. So knowing that, that might be coming -- being a little uncertain and also being where you would be you seem to be conservative because that's the character of that stock, I think. Those factors sort of come together. So look, we can always resurrect it. And I'm sure we'll be reviewing it again at the April Board meeting. And I'm sure over the next couple of weeks as we engage with investors, we'll get perspectives on that. So nothing beyond this. A little uncertain, perhaps Hamilton going ahead, no downside really to putting it off for a couple of months, getting some views and then making a decision.

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David Fabris, Macquarie Research - Research Analyst [25]

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Okay, great. And then the second question, I mean it's a bit further out, but just thinking about the tax rate at SKYCITY. I mean that was a great, I think, back in November 2015 for 7 years. At what point do you start discussions with the government to get a principal agreement? I mean it's a very low rate relative to the Australian casinos. So how do we think about the timing around getting more information on that?

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Rob Hamilton, SKYCITY Entertainment Group Limited - CFO [26]

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David, Rob here. Tax rates were agreed in the early 1990s, so not 2015. There is no process

for reviewing tax rates in New Zealand. So come November 2022, there will be no change unless the government makes an unexpected change.

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Michael Ahearne, SKYCITY Entertainment Group Limited - Group COO [27]

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Yes. And look, it's a risk you should consider responsibly, I guess because it's not locked in. But practically, it's not getting a lot of airtime here in the sense of there's certainly no indications that there will be change. [It is the] government nearing end of its first term where you would have thought that alarm bells might ring. We're not sure what the government will be in the period ahead of us. But obviously, we will be engaging -- the decision will be made, if there is one in the next term of whatever government's in here. And we will be engaging, but equally, we don't want to raise the profile of the thing significantly because status quo, it needs a proactive effort to change it. If nothing happens, it stays the same.

And again, I'll come back to you. I think as long as we are absolutely doing the right thing in how we operate our business. We're showing commitment to invest wherever it makes sense. So take Hamilton, take Auckland, we're doing a lot of stuff. We've got the convention center getting resurrected and rebuilt all over again. My sense of it is as long as we are being good citizens, operating our businesses well, employing the thousands that we employ, wherever possible, employing local, maintaining our properties to high standards, you close off the risk, you mitigate that risk. It never goes away entirely. So that's why, I guess responsibly, you've got to consider it, but we absolutely mitigate it by being good corporate citizens.

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Operator [28]

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Unfortunately, we have to end this session of the call, but can pick up any subsequent questions during the next session. I'll now hand back to Mr. Stephens for closing remarks, which will be followed by a 2-minute intermission before we begin the second half of the call. This will be led by CFO, Rob Hamilton. Please go ahead, Mr. Stephens.

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Graeme Edward Stephens, SKYCITY Entertainment Group Limited - CEO [29]

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Thank you. I want to thank you again for attending. I will be hovering quietly in the background of the next call. Don't expect to hear me. And I expect to learn, as I do with every interaction with Rob, so we'll be dialing back in a couple of minutes. But thanks for attending and look forward to seeing a lot of you in the next few weeks.