Tourism Holdings MD, Dennis Pickup

Friday 23rd November 2001

Following is a ShareChat Investor Interview with Tourism Holdings Limited (NZSE: THL) MD, Dennis Pickup. This interview was conducted during November 2001 and posted on ShareChat on November 23, 2001.

SC Investor: What are THL's three critical success factors for achieving double-digit EPS growth next year?
Dennis Pickup: Assuming that next year is the 2002 calendar year then the unfortunate events of the week beginning 11 September 2001 will mean that double digit EPS growth will not be achieved.
The world events of that week were three distinct issues:
- USA terrorism war
- Ansett Australia collapse
- Air New Zealand viability issues
The terrorism war and domestic travel within Australia remain as major negative affects on tourism in the South Pacific.
On 14 September THL launched to its management and staff a project named 'Cash is King' which has the following two objectives:
- Conserve and enhance THL cash position over the next year.
- Position THL for strong growth on the recovery of tourism
The major initiatives of 'Cash is King' have been:
- Deferral of $9m capital expenditure.
- Advance planned fleet disposal programme as to number and timings.
- Reviewed all funding options to ensure adequate facilities to meet capital expenditure requirements and 'headroom'.
- Advance sales of non-core businesses and assets.
- Debtor management highest priority.
- Review all costs.
- Keeping close to customers.
Prior to the world events impact on tourism the three critical success factors for THL were:
- Turn around in our Australian operations.
- Delivering on the revenue gains and synergies of the Britz acquisition.
- Revenue gains above relevant tourism market growth.
SC Investor: I purchased my first THL shares in January 2000 for $3.35 per share. My subsequent purchases were at a lower price but today the market value of my THL investment is 50% of my cost. For one reason or another the market value has been eroded by negative influences of lack of performance and inability to meet forecasts. My investment is too substantial for me to write it off to experience and just walk away. I want to hold onto my investment in your company, see a change of performance and a return of public confidence. When do you think this is likely to start happening, and over what time frame do you expect a major reversal of today's below par performance?
Dennis Pickup: Unfortunately you are not alone in carrying a loss on your THL shares. THL currently has 8,100 shareholders which is 6,000 more than November 1998. It's great that THL has received such strong support particularly from New Zealand investors such as yourself. We want to enhance your investment and not have it depreciated further.
Whilst not sheltering behind USA terrorism and Ansett's collapse, it is currently impossible to determine when there will be a return to normality in South Pacific tourism. THL is closely monitoring the situation with the industry task forces in New Zealand and Australia whilst ensuring we are able to ride out the tourism crisis, but more importantly, capitalise on the recovery when it occurs.
SC Investor: Given Air NZ's problems, skinz.com must surely be for sale at the right price. Would THL be interested in such a purchase, with a view to (Commerce Commission permitting), folding Treble Cone into the package and improving winter earnings? Is improving the utilisation of rental fleets during winter down season a major goal of THL, and do you think such a purchase would allow you to direct all the Australian skiers coming over to other THL assets?
Dennis Pickup: THL is unable to comment on the future of Air New Zealand ski fields. Undoubtedly there would be Commerce Commission issues if Treble Cone were packaged for sale with the three Air New Zealand ski fields.
THL is currently negotiating with interested parties and if this fails to successfully sell Treble Cone then 'packaging' internationally with Air New Zealand and other New Zealand ski fields may be an option.
THL is committed to increasing winter asset utilisation and we have made some major advances on this front in recent years. For example our high profile Ski Express and Skiwi holidays programmes are strong users of THL plant, particularly cars and motor homes and are a prime example of our leverage marketing activity. Whilst we may have experienced a tough season on Treble Cone itself, for THL the ski market for other products have gone very well and is extremely important. We are also seeking to improve low season earnings through other winter products viz. golf, food and wine, gardening. We want to mirror with these products the success that skiing has been to THL via Ski Express and Skiwi.
In this respect Australia is a key market but we do not and will not confine ourselves to Australia and the domestic New Zealand market.
We are fortunate to have four Northern Hemisphere offices viz. Los Angeles, London, Antwerp and Munich as well as a vast distribution agency organisation.
SC Investor: Can you provide a demographic description (age group, region of origin, independent or group traveller) of your customers for each different business group (rentals, attractions and coaching), and discuss how these different groups have been effected by world events, what the long term prospects for each of these different groups are, and finally what are THL's plans with respect to capitalising on the potential of these different groups? Also, how profitable are each of these different demographic groups to THL, and which groups do you feel have the greatest potential for increased margins going into the future?
Dennis Pickup: We have detailed research on the demographics and origins of our tourists. These are analysed per individual business.
It would not only be impractical but 'commercially sensitive' to provide this information.
As mentioned in response to question one, a key objective for THL is to capitalise on the tourism growth when it occurs. Apart from using our existing research and database we have conducted research into the Gulf War of the early nineties and Australian airline industrial strikes of 1989. These both have relevance to the USA terrorism war and Ansett Australia collapse as to tourist behaviour and timings with the undoubted tourism rebound.
THL believes that New Zealand and Australia will be long term benefactors of the terrorism war as internationally travellers will seek safe, secure and friendly destinations as they did after the Gulf War.
The markets that we focus on are Europe, UK, USA, Japan and Asia whilst Australia is proving to be very attractive because of proximity and longer stays.
SC Investor: How does THL intend to bridge the credibility gap that exists between it and the market? (Please do not suggest that no such gap exists, as this very question provides evidence it does.)
Dennis Pickup: THL is very aware of a credibility gap. Not only did we downgrade our profit forecasts twice last year but there is a large valuation gap between analyst's' share valuations and current market prices. This is due to uncertainty in the current economic and terrorism environment and THL's ability to deliver the results
Unfortunately tourism is a commodity product that depends on economic confidence and factors such as airline capacity and pricing. THL when it published its 1999 Investment Statement made assumptions viz. Olympics would be positive to the region, Australian GST implementation would be neutral, that proved to be incorrect. Whilst it is no comfort to shareholders we were not alone for similar Australian tourist operations experienced their worst year in history.
THL is very active with analysts, institutions and relevant media to keep the investment market informed consistent with NZSE requirements and our obligations as a publicly listed entity.
We intend to continue to be open and transparent to the investor and tell it as it is irrespective of how palatable that may be.
SC Investor: From what I understand the tourism industry is characterised by many small 'mom and pop' operations. How does THL rank in terms of size within the NZ tourism industry? (I realise that what may be judged a tourism company is subjective, but an approximate ranking would suffice.) Does THL have a monopoly capital situation in the tourism industry in NZ? Are there large profitable developments waiting to be done and limited companies that have the financial ability to carry out projects?
Dennis Pickup: There are approximately 16,000 tourism operators in New Zealand and Australia also has proportionately a high number.
The very nature of the tourism industry attracts small businesses, the majority of whom are owner operators and do generally an outstanding job in representing tourism whether it be in the retail or service sectors.
There is no THL lookalike in New Zealand or Australia. THL's mission is to be New Zealand's leading tourism transport provider leveraging its unique attractions whilst increasing shareholder value. Tourism size and ranking is secondary to generating economic returns to shareholders.
THL does not have a monopoly position in any of its businesses.
THL has growth strategies for both New Zealand and Australia but over the next year these are on hold pending the outcome of the negative impact of world events plus the need to turnaround our Australian operations and generate the benefits of the Britz acquisition.
SC Investor: To what extent are your vehicle fleets in serious need of operational maintenance?
Dennis Pickup:
- Coaching viz. Johnston's, Great Sights and Airbus
THL's coaching fleet is being downsized to a modern and relatively young aged fleet viz. average age in 2003 will be six years whereas historically it's been ten years with coaches having a useful life generally of fifteen years. The fleet upgrade is funded out of depreciation, disposal of surplus vehicles and in some cases conversion to owner operators. Fleet repairs and maintenance is being managed down through this investment plus improved fleet maintenance management.
- Motor Home Rentals
THL has experienced excessive high fleet maintenance through unique problems associated with the 1997 purchases of Ford Transits which were predominantly in the Maui Australia fleet.
Maintenance expenditure is also high in Australia due to the extreme road and weather conditions of the Australian outback, particularly the Northern Territories.
THL made a decision in 2000/01 to replace an aging and tired fleet with 900 new Mercedes. Whilst the disposal of the old fleet and introduction of the Mercedes is still taking place the economic impact is positive. THL now presents a superior and reliable product with reducing repairs and maintenance and ultimately improved disposal value at the end of its THL economic life.
We intend to maintain this high and young fleet standard which will be funded by depreciation and disposal of used fleet. This will be supported by improved procurement and maintenance systems currently being implemented.
- Conclusion
There should be no serious ongoing fleet maintenance issues beyond this current financial year.
SC Investor: In what part of your business - rentals, experiences or coaching - does THL see the most potential and why? What part of your business do you expect make the greatest investment over the next few years?
Dennis Pickup: THL has over the past three years rationalised its businesses into three main divisions:
- Rentals being Britz / Maui / Backpacker motor homes and cars operating throughout Australia (ten branches) and New Zealand (three locations) with franchise operations in Southern Africa.
- Experiences which is coaching operations and attractions in New Zealand.
- Kiwi and Oz Experiences which we assumed 100% ownership of in November 2000 and which specialise in backpacker transport in New Zealand and Australia.
All three divisions have major growth opportunities. With the Britz rentals purchase in November 1999 THL's largest investment and thus generating the highest economic return is our Rentals business.
SC Investor: Does THL have any figures on figures on: Average spend per customer for each of the different divisions? Average number of products sold to each customer? Average operating margin per customer in each of the different divisions? Also, what are the trends in these statistics over say the past five years?
Dennis Pickup: THL manages its businesses on relevant Key Performance Indicators (KPIs) such as you mention.
A great deal of time is committed to using these KPIs to improve our earnings by better asset utilisation as well as targeting new business opportunities. Disclosure of KPIs and trends would be inappropriate as they are 'commercially sensitive' and would be of great advantage to external parties.
It is worth noting however that our customers come to us in many ways both pre-booked and as walk up traffic. We may host a family at Kelly Tarlton's for example and then have them turn up for a cruise on our Red Boats in Milford Sound. This makes it hard to be precise in tracking each client as they travel around, particularly those taking a flexible, unbooked holiday.
All of this drives much of our on the ground marketing activity within New Zealand as we seek to ensure that clients use us repeatedly as they travel around New Zealand. For example everyone hiring a motor home or car from THL are offered the chance to benefit when they visit our range of differing attractions around the country.
SC Investor: What is the load factor for the different parts of your rental fleet during the different parts of the year (say summer, winter, spring and autumn)?
Dennis Pickup: The rental fleet utilisation or load factors vary markedly during the year and are predominantly dictated by the travelling behaviour of international tourists viz. their holidays, weather, airline capacity and pricing.
Utilisation varies between New Zealand - exceptionally high November to April and low in winter. Refer question 3 of how we intend to lift winter utilisation and earnings.
In Australia there is better twelve month utilisation as the southern/eastern areas have peaks similar to New Zealand (November to April) but Queensland, Northern Territories, central and Western Australia peak May to October due to the high temperatures and wet seasons over summer. This enables us to relocate the fleet to give optimum utilisation. We are also building through our C I Munro business fleet for the Northern Territories but will utilise them in New Zealand's high season and transport them to Australia in April thus achieving high utilisation of a trans Tasman fleet.
To reveal individual utilisation figures for motor homes and cars would be inappropriate as it would be deemed 'commercially sensitive'.
SC Investor: Managing the costs associated with provision of your rental fleet is obviously a huge issue for THL, how do you plan to reduce these costs going forward?
Dennis Pickup: Prior to worldwide events of the week beginning 11 September there was already high priority being given to cost reductions.
Apart from normal management practices and controls THL has had major initiatives on:
- Delivering the cost synergies of the Britz / Maui integration in Australia and New Zealand.
- Integration of Coaching with Experiences division.
- Integration of Kiwi / Oz Experiences within THL group.
- Major procurement project, which reports to the Managing Director and is reviewing all supplier arrangements.
- Appointment of a Group Fleet Maintenance Manager to review and implement improved maintenance practices and procedures.
These projects are reported on monthly.
SC Investor: Do you foresee a huge tourism bulge in the future when all the wealthy baby boomers in the Northern Hemisphere retire (possibly early) and decide to take that long haul vacation they never previously had the time for?
Dennis Pickup: The affluent baby boomers are a big growth opportunity and are not confined to the Northern Hemisphere. Japan and Asia are creating the 'new generation' (i.e. 55+) of travellers whilst the strong savings regime prevailing in Australia is generating good business both within Australia and to New Zealand.
SC Investor: Given the challenges the company has had in Australia, do you consider the expansion move there was the wrong decision?
Dennis Pickup: The acquisitions of Britz Rentals which was the number one motor home rental business in Australia and subsequently Oz Experience are strategically appropriate and acknowledged as such by the investment market although returns have fallen short of expectations to date.
Oz Experience has 'turned the corner' with good trading and operational performance. Our Australian rentals business is bigger and more complex. With a new Melbourne based management, major new investment in fleet, operational, financial and IT systems we believe that it will produce a good financial return once there is resolution to the Ansett Australia and terrorism issues.
SC Investor: Could you outline any documented strategies you have for returning your Australian operations to profitability?
Dennis Pickup: We have the two Australian operations under individual recovery plans.
THL Rentals has specific revenue growth strategies (linked to New Zealand) as well as major cost reduction programmes. As mentioned in question 13, the new Melbourne based management team is ready to capitalise on the significant new investment in fleet replacement, information technology, operational systems and properties.
Oz Experience (refer question 13) has turned around its unsatisfactory trading performance and has new management and upgraded fleet and systems.
SC Investor: How good a job do you think the Government funded tourism promotion agencies in New Zealand and Australia are doing? Are the tourists markets they are focusing on of benefit to THL?
Dennis Pickup: We work closely with tourism agencies (national and local) in New Zealand and Australia. Generally they do a good job considering the resources they have. We need to remember that promoting a country as a tourism destination is a very difficult task, particularly with limited resources. Nevertheless the activity and support of the likes of Tourism New Zealand, the Australian Tourism Commission and regional tourism organisations is absolutely critical to the success of New Zealand and Australia's tourism sectors and all of the benefits it delivers to our economies at large.

ShareChat thanks Dennis Pickup for taking part in this Investor Interview.

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