Based on forward revenues and returns over the next 3 years...

Based on forward revenues and returns over the next 3 years looks like good buying to me. Have done so today.

Below is the transcript of CEO's recent interview with Alan Kohler (Eureka Report) - interesting reading.

Published: 2nd December 2015, 10:30am
30 mins
Alan Kohler talks to the theme park and entertainment operator's CEO about the company's plans for redevelopment.
THIS IS AN UNEDITED TRANSCRIPT
AK: Today we’re just on the audio, not the video as we often usually are, but we’re delighted to have Deborah Thomas with us who’s the Managing Director of Ardent Leisure. G’day, Deborah. Thanks for joining us.
DT: Hallo, Alan. How are you?
AK: Very well, thanks.
DT: Good.
AK: Now, you were kind of, I suppose, controversially appointed the Managing Director in March this year. I say ‘controversially’ because the share price fell at that moment, I guess out of surprise. How did you feel? I mean what was your reaction to the market reaction, as it were, to your appointment?
DT: Look, I was probably taken by surprise. I understand that the markets don’t like surprises and they don’t like change, so I just had to deal with it. I just had to get out there and meet some of the investors and talk about the vision for the company. Fortunately, I’d been on the board, so I had a good understanding of the strategy and I had a good understanding of the various players involved. So you know what it’s like. If the media wants to have a bit of a go, you’ve just got to brush it off and face up to it.
AK: Yeah, and in fact the share price bottomed I think probably that day or the day after. I mean it wasn’t as if it kept falling and you obviously turned it around. Can you give us a sense of what you were telling the shareholders at that time? You know, what the sort of the vision that you were conveying to them about what you were going to do.
DT: Sure. I think that the most important part of it was the customer focus. I mean even coming in here to the head office at Ardent Leisure, we’ve got a fantastic team here. We’ve got a lot of great financial people, lawyers, governance, all sorts of various people making up the team, but we’d never had a customer focus at the head office, thinking about getting more people to visit our venues more often and spend more money with us and what’s going to drive that. So what I was really going out and talking to people about was that the strategy of the business hadn’t changed. We were still focussing on growing Main Event and we were also looking, at that time, to repair the health club business. Because the first shock to the market, of course, was when we went out with our half year results and the health clubs had really been challenged by the 24/7 operators and the market… that was a big surprise. So I was actually the second surprise. So concentrating on making sure that the 24/7 strategy that we were putting in place was working for the health clubs and then organically growing the other business and looking at the potential of each business and what we could do. You know, I think there was a certain from the market that I’ve come from a marketing background, a consumer background [and] I was going to go and spend a whole lot of money on, you know, upping the media spend and campaigns and so on, when in reality I was just looking at a more efficient way to get more people. And, as a result, we’re looking at theme parks for the first quarter and we’ve got revenue up 6.3 per cent and then our bowling division, we had revenue up 9.1 per cent.
AK: Yes, indeed. And I should have mentioned that on the day you were appointed, the share price had already fallen from $3.40 to $2.40.
DT: Yes. I took the hit for the whole lot in the media.
AK: Yeah, you kind of did.
DT: Yeah, I took it from $2.20 I think down to $1.95 and then we have since been up to about $2.85 and I think – I haven’t looked at it today, but we’re circling at the moment at around $2.00, $2.50 I think.
AK: But it’s interesting because it got up to $2.87 or $2.85 before your first quarter update and that was not very well received. Because you were just talking up your first quarter and talking about how you’re increasing…
DT: I thought we had a really good result.
AK: Yeah. Also the market didn’t like it. What was the problem, do you think?
DT: A couple of things and probably it goes to… We’ve always reported quarterly and a decision was made to pull back and go really to what other businesses of this type are doing and that is to report fulsomely twice a year. So we have cut back the amount of information that we put in to the market and I’d say that there were certain investors that were not quite… not really happy with that. Maybe there wasn’t enough explanation around it. We’ve since had those conversations with investors to say that this is what we’re doing and they agree that this is the way to go. I think that the health clubs are a difficult business to understand. We were really happy… Obviously the health clubs rely on membership and we were out there reporting that the membership sales across the 25 converted clubs, they’re up 32 per cent. That’s a really good result and every conversion has had a positive impact on membership growth. So our aim here is to grow membership and to decrease the attrition rate which is down 19.3 per cent. Perhaps the markets are still sort of putting that in to their models.
AK: Yeah. Well, while we’re talking about health clubs, I mean you’re converting them to 24/7 operation, right. How far through that process are you? 25, how many have you got to go?
DT: Well, we had 25 converted by June 30. There are 45 scheduled to be open by the end of the financial year. I’d say at a guess that we’re probably sitting at around 29 at the moment.
AK: Right.
DT: And they’re really showing positive results. I mean we said that we would disrupt the disrupters with our 24/7 model and that’s exactly what we’re doing. We’ve got a full service club with a comparable or competitive price and we’re seeing a lot more memberships coming in for long term memberships, 12 to 18 month memberships and, as far as we’re concerned, we couldn’t be happier with the results that we’re getting across those conversions. People want the full service clubs. They like the classes – the fact that 40 per cent of our members tell us that they join for the classes. So if it’s 24/7, you’ve got all of the facilities that come with a full service club and the classes, then the market is responding or consumers are responding to that. The other thing that I said, going back to what I was telling the market when I started, too was around the customer and our customer service. And one of the things that I questioned when I first went and sat down with our CEO of health clubs was our customer service. Were we cutting back the clubs to the extent that customers weren’t getting what they expected in terms of what they were paying for, for their membership? And he said straightaway, yeah, I think that’s the case. So I sort of said well, I think you need a customer SWAT team. And that’s exactly what Greg did and we’ve really gone out. We’ve improved the customer service. We make sure that the facilities are 100 per cent up to scratch. We employed a COO, so that our CEO can look more at the bigger vision of what do health clubs look like in bricks and mortar and what do they look like in the digital space. So there’s been a lot of work that’s gone on in there. So we now have a very personalised and localised website with some premium content that you can purchase as part of your membership upgrade. Our app went live yesterday. We asked people to preregister for the app which works with prettily well most of the fitness devices, wrist fitness devices and people, for that app, had already preregistered prior to it going live. I think we had about 2000 registrations in a couple of… in about five working days.
AK: So are you having to… when you say it’s a full service club, 24/7, are you having to staff them all night?
DT: No. What they are is it’s like the Anytime Fitness. You become a 24/7 member and you get a fob that lets you in to the club. So the clubs are open 24/7, so if you want to exercise at 4 o’clock or 5 o’clock in the morning, you can, but the staff doesn’t come in until around – well, depending on the club – probably around 6 o’clock or 7 o’clock in the morning and then they leave. And what this means is it’s not like there’s a whole lot of people exercising at 1 o’clock in the morning or 2 o’clock in the morning. Where it really works well is on public holidays where we used to have… we couldn’t open or we didn’t open until maybe 8 o’clock or 9 o’clock in the morning and a lot of people want to go and do their exercise earlier in the morning, so they can go in at 5 o’clock and then spend the time with their families. So they’re not staffed, but throughout the night we obviously have equipment in there that we need to have as part of the compliance, safety compliance and then training for each of the members that wants to be part of that 24/7 membership.
AK: So what does the conversion do to the margins of the business? Does it shrink them or grow them?
DT: Depending on the club, some it can grow them. It doesn’t really shrink them. There’s a cost of conversion at around $100,000 a club. Some clubs when they’re bigger clubs, we might have staff on because you just need to have that because of the facilities. Smaller clubs, you can have less staff. So it’s not a one size fits all.
AK: And are you satisfied that this business is going to provide a decent return on capital going forward? It’s going to be an okay business?
DT: I think it’s a great business. We’ve got a great CEO. We’ve got great people working there and we’ve got a great offering.
AK: Speaking of CEOs and that, have you changed any of the heads of any of the divisions?
DT: No. And that was, again, one of the things, you know, that I made clear to the market when I was appointed that I was one person out of 5000 full-time employees or about approximately 5000 and we have great CEOs that are each running those businesses and they are all still there and working well.
AK: So tell us about what you have done in the last, what is it, eight months or so? Obviously you’ve changed the focus to customer focus, away from cost focus.
DT: We’re still conscious of cost, don’t worry about that.
AK: Right. Right, so you’re sort of chewing gum and walking at the same time, as it were.
DT: Yeah. Yeah, you know, we want to have a customer focus, but we’re looking at more efficient ways of doing it, not necessarily throwing a whole lot more money at it.
AK: Well, can you take us through some of the changes you have made during the past six months or eight months?
DT: Sure. I think that I’ve tried to do is look at each business and then the potential of each business and really work with the CEOs to refine the strategies for each of the businesses moving forward. So if we look at Main Event, that’s a pretty straightforward one and I’ve spent a lot of time over there working with Charlie Keegan. And we did say to the market that we promised seven new centres in the next financial year and then eight centres in FY 2017, but we are also looking to see if there are opportunities to deliver more centres. And certainly working with Charlie and looking at ways… You know, as you go from 14 to 20 to 35 centres, there are sort of staffing requirements and all sorts of things that come in to play, so working very closely with Charlie on that. The health clubs division was to sit down with Greg and say look, this is really like a retail business. And, as I said earlier, what did it look like in terms of bricks and mortar and then what does it look like online? Because a lot of the competitors are coming to us via the internet with unique content, classes and so on. So working with the health clubs has very much been on the online space and, as I mentioned earlier, looking at what we do with websites. We were pretty behind in terms of technology and a big part of what I’ve done over the last couple of months since I’ve been here was launching this new Goodlife Health Club, the app, and also the same in bowling. We didn’t have a website, a transactional website. We now have that in bowling working with a centralised call centre here at head office. Now, what that means ultimately is that the calls used to go to all of our bowling divisions and I’m not quite sure exactly what it is but if I remember correctly, it can be anything up to about – I won’t even say, but it’s over probably a couple of hundred hours of calls per week. Now, that means that those people in those centres can now concentrate on working with the customer, rather than answering the phone. We’ve got an AMF website. We book birthday parties. What we’re seeing with birthday parties is we’re getting a better… we’re getting an uplift in sales on the birthday parties through the AMF website. So a lot of work done in the divisions in terms of the digital expansion. Also in terms of media, we’ve become a lot savvier in terms of maximising our media budget. We changed the media agency. It’s a lot more localised and a lot more direct. There’s a lot more digital as well. In terms of the theme parks, what we’ve started doing – in fact I’ve just got it on my desk – is I thought, you know, the main thing for me is what could these businesses be? So we’ve been working on a master plan for Dreamworld. We spend at Dreamworld around anywhere between $8 million to $9 million a year on rides, exhibits and so on, but we never sort of had a plan of exactly where we were going. We’ve got the Coomera Town Centre coming up beside us, adjacent to Dreamworld and it’s a billion dollar investment with QIC and Westfield and what I’ve been looking at is what the plans for the park should be, how we’re going to inform our spend and what advantage we can take with the number of people that should be coming to the area. So we have a master plan, not only for what’s happening inside the park but what would be happening outside the park in terms of development of retail, whether or not we should have a hotel, whether we have another ticket item. I’ve also done a review of the retail strategy at Dreamworld and we’ve got some announcements that we might be making soon that I think are pretty exciting. So really, my overall start this year was tying up some loose ends and also looking at the potential of each business and what we would want to do and understanding what our business could be and then making decisions within that framework. So if I look at the marinas, for example, I mean if you, we’ve got Rushcutters Bay Marina down here on Sydney Harbour, probably one of the prime Harbour real estate positions. I can’t really think of a better place other than underneath the Bridge to be having a marina. What we need to look at is what does the land component look like? What could we do with that space? Whether we do it or somebody else does it, the fact is that we have waterfront land that is currently being used by mechanics. So, again, what could that be? We’ve put in… We’ve gone out and we’ve done a plan around that and then we’ll make some decisions around the strategy and what we feel is going to give us the best return on our investment.
AK: Well, that actually gives a neat lead in to a question about whether you’ve got any strategic ambitions. I mean obviously what you’ve been doing so far is very operational, looking at the operations of each of the divisions and focussing on them.
DT: Yes.
AK: Do you think that there are any strategic either opportunities or imperatives, such as… I mean there have been lots of questions over the years about whether the marina division is core and whether it should be sold. Is what you’re saying about that that you might be looking at selling it?
DT: I couldn’t say that. Obviously these are the sorts of discussions that we have at board level and they’re certainly the discussions that we’re having at the moment, so there’s a lot of… not a lot of, but there’s a lot of discussion around the marinas. Yes, there’s been a lot of talk around that. It goes backwards and forwards with the board and we’ll probably… I guess when we’re ready to announce something, Alan, we’ll be announcing that, but I can’t really talk much about that at this stage.
AK: And what about adding businesses? You know, obviously you’ve got a pretty interesting portfolio of stuff, health clubs, theme parks, bowling and, in particular, the Main Event in the US. Is there anything else you would like to do in the US? Are you thinking about branching out of Main Event in to something else or just building Main Events?
DT: Look, whenever I’m in the US, I’m looking at everything that’s over in the US and what could potentially be something that we may be interested in. As you said, most of the start has been, or as I said, loose ends and it has been operational and now we’re working on the strategy and what does our portfolio look like. So, again, many discussions happening at board level. We’re working in here to put forward some ideas, but nothing that I can share at this stage. But lots of exciting things on the table.
AK: Okay. So we can take it from that that you are looking at potential changes to the portfolio of businesses and possible additions to the portfolio.
DT: Absolutely. Absolutely.
AK: We are getting some questions from the audience. I might just go to them, some of them now. Brent says, the Main Event entertainment complexes seem to be your major focus moving forward. Would you say that’s correct? Are there areas of that business that you’re looking to downsize? Oh, I see. Well, that kind of follows up what I was asking. Are there areas of your business overall that you’re looking to downsize as Main Event becomes more of the central focus?
DT: Well, Main Event has moved from… I think it’s become 35 per cent of our business as of full year in terms of EBITDA. Sorry, I’m just going to have a look at where we’ve come from there. So specifically, FY 2014, Main Event was 21 per cent of the business [and] it’s now 35 per cent of the business. It’s our growth business and it’s doing very well. That doesn’t mean that we’re going to take our eye off the ball in terms of what we’re doing in Australia. There’s a lot of opportunity there with Main Event, as I said, just with 15 new centres over the next two years. And I was over there with Charlie recently. We were in Orlando for the IAAPA Conference and we’ve got some… we’re looking now at what Main Event should be moving in to the future and what it could be if we were going to be able to do it, not only as a big box operation but perhaps looking at it in a smaller space as well. So a lot of potential there. In terms of the rest of the business, at this stage, as I said earlier, it’s looking at the portfolio and where we want to spend our capital and get the best returns. Right now, it’s Main Event.
AK: Yeah. Okay. Another question from the audience, what are you forecasting for the summer period? Is January the peak time for attendance in most of your facilities? And what percentage of yearly revenue do you expect to get from this period?
DT: Summertime is certainly a big time for the theme parks and obviously it’s school holidays, so we see the Christmas, January period as critical to the success of the theme park business. Last year we had some weather issues which were not great. Hopefully… I was actually going to have a look at the long term weather forecast today. In terms of our business, the theme park business is 25 per cent of our business, so it’s a substantial amount and, as I said earlier, we’re tracking pretty well so far and we’ve got some great plans for Christmas. We’re actually keeping the park open from Boxing Day for three weeks through to January, so that you could attend the park right up till 9 o’clock. Now, the idea there is that we’ve got the Vivid team from Sydney doing a sound and light spectacular up at Dreamworld for those three weeks. We want to get people that perhaps don’t want to come to a theme park during the day because it’s too hot, leaving the beach in the afternoon and coming to us for dinner and an evening ticket. So there’s a number of things. We had a tiger cub. I know that probably doesn’t sound like it’s a great driver, but it certainly got a lot of publicity for us and the tiger cub experience is well booked up. So we think we’re heading for a really good Christmas and the summer is particularly important to that business. Also marinas, obviously that’s where… that’s a time where people are thinking about buying boats and looking for somewhere to put them and that’s an opportunity for us as well.
AK: An interesting question here, what levels of research do you do in to the way family leisure time is changing? Are entertainment complexes really going to stay relevant in 15 years’ to 20 years’ time given everyone has screens all over their homes?
DT: Yes and that’s a really good question. One of the things that I’ve felt since I came here is we don’t do research and we are doing more. We’re trying to understand the customer better and a lot of what we’ve done has been, you know, pretty well informed by I guess just opinion. So research is certainly on the radar, understanding not only what people want to do now but what they want to do in to the future. My thought around the screens is that at the moment people and I think most families want to get their kids off the couch and out. They want to do things together. I don’t know if your house is like mine where everybody has got their own screen, sitting around the room staring at their mobile or their computer. We’re all in the same room, but we’re not really together. So the idea of entertainment and family entertainment which is what we offer is an opportunity for the family to come together to get out. And the success of Main Event I think is a really good example of this. The whole what we sort of almost call the ‘secret sauce’ of Main Event is that it’s a no veto family entertainment centre. There is something there for everybody of every age. Now, I think that more and more – and I’m hoping more and more – as screens, you know, become part of our everyday life that people want to actually go out and get physical and do things together. I don’t think that’s going to change. What it looks like will certainly change and we’re seeing, for example, and, you know, whether this is right or wrong, a lot of kids getting off the screen at home and coming in and wanting to play the amusement games. There’s big growth happening for us in the bowling and also in Main Event in terms of amusement games. It gives us an opportunity to refresh content and people and particularly the kids are very excited about playing those games. Family is still together and that is the sort of… it’s that kind of product that’s working. Again, if you look at the theme parks and you look at the future of the theme parks, funnily enough… I’ve got a 13 year old. He likes the old-fashioned roller coaster, the wooden roller coasters which are doing really well. The kids are actually going for the retro, it rattles your bones kind of roller coaster, as opposed to putting on a pair of goggles and getting on a roller coaster and having a scream, taking them somewhere else. So these are the sorts of things that we have to monitor. We need to do more research. We need to all have our eyes and ears open to be looking at what’s happening, not only here in Australia but what’s happening in the States, what’s happening in China because there are a lot of theme parks going in to China, and then the unique opportunities that we know people love. You know, a tiger cub brings a lot of people in. When it comes to it, you can have a lot of screams in the world, but there’s nothing quite like picking up a two month old tiger cub and hugging him and having your photo taken.
AK: Oh, you pick it up, do you?
DT: You can pick him up and you can cuddle him and you can have your photo taken or you can pat him. And every photo session was booked out in the last school holidays and I think we’ll be struggling to fit everybody in in these school holidays as well. You know, sometimes it’s the simple things in life and I think that, you know, the technology can change and absolutely we’ve got to be changing and making sure that we’ve got the right attractions that appeal to all ages as technology changes, but sometimes human beings don’t change. We want to eat good food. We want to spend time with our family. We want to get a little bit physical. And, you know, there are things that move us like a tiger cub or a scary ride and I don’t think that’s necessarily going to change.
AK: Another question from the audience here, do you see an impact to earnings from Main Event at Main Event venues in Texas and other southern states from unemployment due to the oil downturn? I mean maybe they’re going to have more time to go bowing. I don’t know.
DT: Well, we get asked this question all the time and Charlie gets asked it most of the time and his answer, and certainly when I’ve asked him, is what we find with the oil price dropping, okay, there are some parts of Texas like Houston where you do have some companies affected by that and some unemployment, but what sort of bolsters that is that Texas is the fastest growing state in the US. You’ve got a lot of companies moving to Texas because they have attractive employment laws. They have attractive tax laws. So when I go to Texas, all I see on the horizon are cranes and buildings. You’ve got JCPenny moving down there. You’ve got Hewlett Packard. You’ve got the headquarters of Toyota. You’ve got a whole lot of non-oil related businesses going in to Texas, so it’s a real opportunity for us as that population grows. And Charlie would say to you that in fact as the oil prices come down, most people have more money in their pockets to spend on discretionary items such as leisure.
AK: CJ says, how do you think the US market and the Australian market differ and what opportunities are there for you to capitalise on both?
DT: The biggest difference of course is the population. The American market, you know, it’s huge. There are just so many people, so many cities. You know, when you fly over the US… If I’m flying from one city to another and you look down and you just see town after town after town, so obviously the population and the opportunities are huge in America because of that.
AK: Paul says, would you expand beyond the United States?
DT: Absolutely. Looking at, you know… I think the Chairman said looking at opportunities. Well, we’re already expanding beyond the United States if we include New Zealand, but certainly having a look at other opportunities and, you know, including like everybody has to have a look at what’s happening over in China and Southeast Asia.
AK: So you’re looking at… Can I pin you down on that? Are you looking at China in a particular way?
DT: I’m looking. I would imagine if you lined up every CEO in Australia, they would all say, I’m looking at China.
AK: Well, indeed because what’s going on…
DT: And China’s looking at us, as we know.
AK: Well look, Deborah, we’ll leave it there. You’ve been very generous with your time, so thanks very much.
DT: My pleasure, Alan. Thank you very much for having me on your programme. I really enjoyed it.
END