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Tourism Holdings, Dennis Pickup

By Jenny Ruth

Wednesday 17th August 2005

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 Jenny Ruth
Tourism Holdings reported a 5% drop in net profit to $10.6 million for the year ended June. That was at the bottom of the $10.5 million to $11.5 million range it forecast in February but the company has allowed $2.5 million costs for the Oz Experience business it sold in May, up from the previous $2 million estimate. Without Oz Experience the result would have been up 4% on the previous year.

Sharechat: The Australian operations seem to have had a very good second half. Why?

Tourism Holdings managing director Dennis Pickup: There are three factors. The restructuring that just hasn't started in this financial year, it's been progressive, has certainly borne fruit in that we've lowered the cost structure quite considerably. We targeted $1 million and achieved well in excess of that. Second, it had an 11% revenue increase. That was predominantly volume driven. Two factors led to that. We've had a recovery of market share that we had lost previously out of Germany and the Netherlands. Secondly, inbound into Australia in our sector, particularly from Europe and the UK, was up. That situation has continued into this financial year. We're currently in the high season for the Northern Territory. It's carried on, this double-digit growth of volumes plus price increases, into 2006 and a continued lowering of the cost structure, so we've got a winning combo after six hard years of slogging it.

SC: Are the Australian operations now performing satisfactorily or does there need to be further improvement?

DP: What we've got in Australia is good but we're still not where we should be. We've got to lift it to $NZ10 million (from $8.4 million). Realistically, because the Australian business benefited from a $1.2 million refund, it's really got to lift from $7.2 million to $10 million. We're targeting to do that by June 2007. We should match this year's improvement because of that winning combo. We know more about Australia. Because of the benefits of the Northern Territory, we're not waiting, like in New Zealand, for November to March/April.

SC: Why did Oz Experience contribute a bigger than expected loss for the year?

DP: We're making sure that the liabilities associated with travel through to 31 March, 2006 - you can't determine that liability until effectively 31/3/06. We've gone on probably the ultra conservative side of ensuring any closure costs, whether it's that liability or the sale of the fleet, doesn't affect us in the current year. We believe we've erred on the conservative side in providing for that.

SC: What options are you looking at in the current review of the coaching division?

DP: We're engaged on that at the moment. The new general manager has presented his 90 days assessment of how he sees it. We would be looking forward to informing shareholders at the AGM in November on the progress of the review.

SC: Are you looking at further sales within the coaching division?

DP: We've got to lift the profitability of New Zealand coaching up by $3 million and even advancing it beyond that. We're not engaged in any form of sales process at this stage. We're focusing on fixing what is an unacceptably low return.

SC: Why did CI Munro's performance improve so much?

DP: These accountants force upon us certain things. Last year, we had to expense in inter-company costs of $800,000. It was an accounting, non-cash item. This year, it was the reverse, a $600,000 gain - the profitability we make out of our own fleet. The true profitability is $2.9 million. Without that non-cash item it's $2.3 million and well up on last year. We've now got three production lines generally going all year round. Two are oriented to motorhomes and not just for Mauie and Britz in New Zealand and Australia but for other rental operators and private sales. We've gone back reasonably big into caravans. We have one dedicated line for caravans producing all year round - people buy caravans all year round. We're producing 100 a year. That's been very successful. We've got staffing down to 110 people. We used to cut it down in the low season to something like 70 but we're now fully engaged all year round. It's a win/win for our employees and it's win/win for the company. We've put a lot of emphasis on training. She's really pumping at the moment. We're very, very pleased with the performance of Munro's, delivering on time, every time, a quality product with minimal, if any, warranties.

SC: Are Kelly Tarlton's visitor numbers recovering?

DP: It wasn't just the Stingray Bay. We had to replace the filtration plant. That cost $3 million. For the whole of calendar year 2004, Kelly Tarlton's has been like a construction war zone. It's been seen to be such, particularly by Aucklanders. Why would mum take the kids to Kelly Tarlton's until the Stingray Bay opened. The numbers have improved in the second six months. We've put in a new attraction and we've modernised the plant. We have 360,000 visitors a year now and we've got to get it to 400,000. When Kelly's opened, it was 600,000 but that was 20 years ago and because it was quite a unique thing. When we put in the penguins, it got up to 460,000. We've done nothing for 10 years. We now have two small interactive exhibits where you can feed the stingrays and you dive with the sharks. It generates revenue from people who put their hands up, but it creates interactivity between the exhibit and the viewing public. It generates stronger interest. Within Stingray Bay now there's a big area for educational purposes, for children in particular. Above 400,000 visitors, we start getting into super profitability. I think we will get most of that not from international but from domestic New Zealand. That's where our marketing thrust is going.

SC: How is the slowdown in the backpackers, Japanese and Asian markets affecting the company?

DP: It's trending down at the moment. The impact of a reduced currency won't filter through for a while. I think the Japanese market will come back because Air New Zealand is now much, much more price competitive than they have been in the last three years. Plus Tourism New Zealand is very aware of how important Japan is and they've got some major marketing campaigns. It's very important because they're long stay, they're good spenders and they're very, very good during the winter when New Zealand tourism is very quiet. Outbound from Japan is up 14%. They've been going to Europe which is closer and they've also taken advantage of very cheap prices that have prevailed in Asia. It's mainly attractions (that are affected). The Japanese market has certainly affected our coaching operations. Kiwi and Airbus suffered as a consequence of competition and the drop in backpackers. This has probably been the worst year that the backpacker market has ever had. Of course, we've come off a very good high. We were running high with twice being number one in Lonely Planet. It's more of a fashion thing. South America's in at the moment. Fiji is in - we're going gang busters in Fiji. There's a bigger percentage of backpackers going to Fiji now than to New Zealand or Australia.

SC: Why have your German and Netherlands markets recovered?

DP: For us, it's regaining of market share. We've proved, particularly with our Australian business, that we're got a quality fleet. We've improved our marketing and price for them and, of course, we've got incredible coverage throughout the whole of Australia with 11 locations. The other thing is Germany and the Netherlands economies have been bordering on recession. Outbound has improved - I'm not saying they've improved economically, but they're travelling more than in the previous two years. They're very important because they have six weeks holiday. Their average stay here is about 21 days for us.

SC: Can you quantify how much the Lions rugby tour contributed to revenue?

DP: It's more in July because of the second and third tests. We got them in June. We have 1,000 motorhomes out but they were out more in July than June. Similarly with the coaches. We looked after both teams and the Lions had a huge contingent. Offsetting that, we normally do very, very well in Queenstown in particular with skiing. The ski season hasn't been at the same level as last year. Certainly, we benefited in June and July with the fleet that would normally have low utilisation.

SC: Is the decline in average spend per tourist all currency related?

DP: It's a phenomenon now that Australia represents 38% of inbound into New Zealand and 53% of that for the year ended June were business traveller or they're staying with friends and relatives. That's not depreciating the value of the benefit of trans-Tasman air fares. Even if you say the rest are tourists, that's a huge impact on New Zealand tourism. The Australians are seeing New Zealand as low cost. They see the contrast of scenery. A lot of Australians who've never been to New Zealand are going back very positive and spreading the word. We got through our motorhomes, the coaching business and attractions and increase in the number of Australians, particularly 55 and above. They've got the time and they've got a compulsory superannuation scheme so they've got higher incomes. It's not only a contrast to what they've got in Australia, it's a safe market. They're coming, but they're coming for much shorter stays. The emerging China and Korea markets are high volume, low yield. They're going away dissatisfied by poor quality packages from wholesalers. They're prostituting New Zealand tourism. We really don't want that happening to New Zealand. They go back and tell their friends they've had a bad experience. They don't come here for shopping but they get hijacked into shopping.

SC: Why is the company regaining the confidence of institutions?

DP: I spent all day on Wednesday in Wellington with seven of them. You had better ask them. We had 34 here in Auckland on Tuesday when we announced. The institutions in New Zealand have been topping up their shareholding in us. Whether it's the fact that tourism is seen to be a very long term strong performer or, alternatively, there's been high performance in the big cap stocks like Telecom and Fletcher Building and there's probably value in mid-cap stocks. Don't forget we won't have to write off $5.3 million in amortisation.

SC: That's because you've adopted International Financial Reporting Standards from July 1. Why has your company chosen to be an early adopter?

DP: We have to do it and because in Australia they had to adopt it a year early. We geared ourselves for 15 months to go from 1 July. It doesn't add to the valuation. It might give a superficial impression to the retail investor but the informed market won't be affected. We reported two weeks early because our systems are so much better. We haven't done it for any form of manipulation of the valuation.

SC: Is the company looking for new directors or is six enough?

DP: Six. It will always be under review but the board is comfortable with six at this stage.

SC: Why have you been buying shares?

DP: I bought 100,000 a few months ago. I still remain confident about the company. I bought them at $1.64 so it's OK. It's a bloody good dividend yield.

Bond Offer: Infratil Ltd, 7.2 year & 10.2 year unsecured unsubordinated bond


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