Diversifying leisure: Experience Co

Today’s Daily CEO is with Anthony Ritter, the CEO and Co-founder of Experience Co, which used to be called Skydive the Beach and they changed their name last October to Experience Co to reflect the fact that they’re diversifying away from skydiving into other things such as ballooning and white water rafting and helicopter rides across the Daintree Forest and out to the reef.  A bunch of stuff, almost 50% of their revenue now is from other things than skydiving.

But by coincidence, about the same time as they changed the name in October from skydiving to experiencing, they had an accident at Mission Beach where three people died after a couple of skydivers collided in mid-air and their parachutes got tangled up and they died.  That was a real tragedy and the share price fell and it kind of showed investors in the business that they are to some extent, exposed to risk that is a different sort of risk with this which is similar to the risk that investors in Ardent Leisure were exposed to but didn’t really, I guess, understand to the same extent that investors in skydiving get it.

The tragedy at Dreamworld that really knocked Ardent Leisure around and led to the departure of the CEO, Deborah Thomas, was in a sense, I think a lesson for the Skydive the Beach guys, Anthony Ritter and co, and they apparently took some lessons from that and they did recover quite well from that and then they had another accident in New Zealand in January.  Since then, the share price has continued to fall mainly because I think the half-yearly results were not that great. 

But look, I spoke to Anthony last year almost a year ago now and thought it was a good idea to catch up with him.  

Here’s Anthony Ritter, the CEO, co-founder of Experience Co.

Anthony, about the same time as you changed the company’s name to Experience Co last October, you had the terrible tragedy at Mission Beach with three fatalities.  Has that had much of an impact on your business?

Alan, it was an absolute tragedy, the incident itself, and it was the first actual skydiving fatality that our company has endured in its 20 years of business.  In terms of the business itself, we did see a slight drop off in sales in the aftermath, but certainly all’s back in order now.  Our key metrics of the website hits and phone enquiries and booking numbers are back to where we would expect to see them.  We were fortunate with the business that obviously part of our expansion, we’ve moved into other facets of adventure tourism.  We were able to pick up business there and not lose the customer all in all. 

Just on the incident itself, obviously it was absolutely tragic.  The Australian Parachute Federation who govern Skydiving Australia actually allowed us to reopen earlier than what we did.  We chose to shut down for about eight weeks due to the sympathetic nature for the families involved.  But all appears back on track now.  

It seemed to me a similar incident in some ways to Ardent Leisure’s tragedy at Dreamworld where some people were killed and I can’t remember what the ride was but anyway, some people were killed there.  I wonder whether you learnt how not to handle such a thing by watching what they did because it certainly affected their business and led to the CEO getting the boot and a terrible result for the business.  Was that something you took notice of?

Yes, I absolutely take notice of all incidents such as those.  In terms of how they handled that is not for me to comment.  I can certainly say as CEO, I’m extremely proud of how we dealt with both incidents.  We had a subsequent incident in New Zealand in January as well.  Publicly we handled that extremely well I believe and certainly behind the scenes even better.  It just confirmed to me we’ve got a good support network within our team to handle such incidences. 

I will say, obviously different to the Dreamworld incident.  Skydiving is like other sporting activities and adventure activities where there are risks associated with it.  I mean I felt ill when I saw the news last week of that Victorian cricketer who got hit in the head with a bouncer, given the Phil Hughes scenario, so I’m glad to hear all is well there.  It certainly comes with some risks, our industry.  People are aware of that when they sign up to do the activity but we do everything in our powers to mitigate the risks.   

You mentioned the New Zealand that occurred in January.  Your share price actually fell about the same in January after that incident as it fell in October last year.  The difference is, after the October incident, mid-November, the share price recovered, went from 70 cents, up to nearly 90 cents in December.  But after the January incident it has not recovered and it’s continued to decline back to 70 cents.  What do you think is the reason for that? 

Just for starters, certainly we don’t sit there and look at the share price, Alan.  Obviously, it is there and other observers do and investors certainly do.  We’re not looking at that, day to day as a KPI.  We continue to monitor our KPIs and we’re comfortable with where everything sits at the moment.  I do note, part of our expansion, we made some announcements, we made some acquisitions on the 1^st of November, we acquired Great Barrier Reef Helicopters in Far North Queensland and then in the month of December we acquired two other businesses and did a $60 million capital raise. 

I think that may have had some uplift on the share price.  We haven’t made any announcements since January, it’s just been business as usual for us other than lodging the half-year report.  That’s had something to do with it.

I mean, obviously you’ve been working hard to diversify your business since you switched from being basically Skydive the Beach to Experience Company.  You’ve bought a ballooning business, water rafting, what else have you got apart from that?

I think I last spoke to you in March ’17, we’d just taken over Raging Thunder Adventures at that stage, which is white water rafting, hot-air ballooning and a canyoning product.  Since then we’ve acquired Reef Magic Cruises, which is a cruise on 200 or 300 passenger catamaran out to the pontoon on the Great Barrier Reef.  We found in North Queensland that on day one when people arrive in North Queensland they go to the Barrier Reef.  That is the jewel in the crown, hence we got into that product.  Since then, late last year we bought Great Barrier Reef helicopters, so we can do the helicopter tours over the Great Barrier Reef but also over the Daintree. 

We also acquired Big Cat Green Island Cruises, which is Green Island – 40 minutes off Cairns, part of the Barrier Reef.  Part of the rationale for that business was the clientele was dominated by Chinese.  More than 40% is actually Chinese, where our other facets of the business weren’t exposed so much to the Chinese, so we wanted to ride that current wave of economic growth there.  Then Tropical Journeys we acquired in December as well which is more catamarans out to the Barrier Reef, this time from Port Douglas and that business as well offers four-wheel drive personal tours to the Daintree.  So we’re weather-proofing the business, if you like, as part of diversification as well.  If, for example, it’s raining – it’s raining quite heavily now in Far North Queensland so we couldn’t do hot air ballooning this morning but we reallocated all our customers to the Daintree product and out to the Barrier Reef off Port Douglas, so that diversification is key for us. 

Can you jump from aeroplanes when it’s raining?

You can jump on aeroplanes, yeah.  It’s not a great customer experience to jump out of aeroplanes, unfortunately…

That’s what I mean, can you do skydiving in the rain?

Yeah, it’s subjected to the weather.  When it’s raining, no.  You might get the odd drop here or there but it’s not the preferred – we would put our business on hold while the rain is raining and when there’s an opportunity in the weather, we’d jump in the plane and off we go.  We’ve got some really high-tech aircrafts now.  We can climb to higher in about 12 to 14 minutes.   Historically, we were taking half an hour to climb to heights to then just jump out of the plane, we can do it a lot quicker now.  When those weather opportunities open we can still get the customers out the door.

I think I’d prefer the half hour to be honest, just saying.

[Laughs] It’s a beautiful flight on the way up.  The aircraft we’ve got now, it’s state of the art.  Cessna Caravans, they’re 21 seat aircraft, they can take 10 tandem passengers at a time with their instructors.  They’re in excess of $2 million dollars, they’re the aircraft that FedEx started their freight business on, so they’re very reliable machines and fuel efficient, environmentally friendly.  We’re happy with our choice of aircraft there. 

What proportion of your revenue now comes from other things than skydiving?

It’s a great question given that, as you said before, in October ’16 we were 100% skydiving, now in FY19 it’s going to be 52% skydiving, 48% other, given the current asset base we’ve got.

But I noticed from your presentation that the margin that you get from things other than skydiving is less.  It looks like your Australian skydiving cash flow margin is 35%, whereas for other experiences it’s 24.4%.  So is it the case that as you add these other things to your business it’s actually mucking up your margins?

No, I think it’s the other way and I think the presentation for the half-yearly report was skewed given that we made those acquisitions, it was only part year.  What you’ll find, if you get a full year of financial data from those other end businesses, you’ll see the higher margins in those businesses as well. 

Is ballooning and white-water rafting and helicoptering, they’re all higher margin businesses, are they?

Yeah, it’s interesting, ballooning for example is absolutely higher than skydiving.  The other two you mentioned, rafting is a little bit lower, marine vessel’s – some’s higher, some’s lower.  But it’s amazing how similar this adventure tourism industry is in terms of the margins.  Obviously, we bring these smaller to medium businesses in with our corporate structure.  There’s not only the cost synergies which we’re trying to realise and achieve, it’s more the revenue synergies able to offer more products to the one customer to increase that customer yield. 

Just take us through how the skydiving thing works.  How much do you charge for a jump and what do you make on it?  Because obviously there’s variable costs that you have to pay the guy who’s jumping – the instructor, and the fuel and the aircraft and so on.  How do the numbers work?

Yeah, the skydive itself ranges from anywhere from $260 to $400 dollars just for the actual skydive, including GST.  We then obviously can offer a video product.  75% of people throughout Australia and New Zealand take up that video product and that’s consistently grown over the years with today’s day and age with the Millennials and how Millennials want to experience all these activities and then show off that they’ve done the activity.  We’ve noticed since 2011 to now we’ve grown from 64% conversion to 75% conversion.  The cost of our videos ranges from about $149 to $169. 

That equates ultimately to an average sale of around $430 for a skydive and we’re making these sort of margins around that 30 to 34%.  Those margins obviously exclude the shared services cost and head office expenditure of course.

Right, $430 average revenue and the gross margin of 35%?

Correct.

And what about the pricing of the other experiences?  Take us through those numbers. 

As you can appreciate, there’s so many, we’ve got quite a few activities/experiences now, so they range.  For a half an hour flight on the Great Barrier Reef helicopters, you can do a 30 minute scenic flight and that’s going to cost you $399.  You could do a Cairns sunset boat cruise for $69, which goes for a couple of hours.  So that’s how they range.  White-water rafting is around that $240 mark for a full day, $120 for a half-day.  Then you’ve got trips out to the Barrier Reef on the pontoons, around that $220-250 mark. 

What we have introduced when we acquired these businesses, a lot of them didn’t have photography services or the video sales.  Part of our integration, if you like, for the next upcoming 6-18 months is to bring in photo services and the add-on opportunities that we can on-sell some photos or video products.  We’ve just created on the scuba diver’s snorkelling tours with a marine biologist, so there’s all these added opportunities for us to capture some more revenue, but more importantly for the customer to experience a greater experience.

I think you mentioned before about the Chinese side of things.  Are you saying that you weren’t getting many Chinese tourists using the skydiving, so part of the reason that you went for the helicopters and the pontoon out to the reef was because they’re much more Chinese tourist intensive, is that right?

Certainly, part of the rationale, not the deciding factor completely, but it was an interesting concept.  Reef Magic Cruises we acquired in May ’17 and when we did our due diligence for 3 years prior to that, they had between 4-8% of Chinese on their boat, that was all.  That particular boat out to the pontoon and the reef didn’t have the Chinese market.  With our skydiving products in New Zealand where around 20-24% of all jumpers in New Zealand are Chinese, whereas in Australia they’re 8-10%, so it really does vary, Alan.  What we noticed by picking up Big Cat Green Island Cruises was, as I said before, more than 40% of customers are Chinese so it opened us up to another market that we weren’t previously marketing to.  Now we’re going to see the cost synergies there and the benefits of having both products that we can sell from Chinese onto the reef magic cruises and we can sell some of the westerners over to the Green Island cruises.  They’re just balancing the mix I’d suggest. 

Do you think you’ve finished expanding now or you’ve still got some ambitions for adding experiences to what you’ve got?

Yeah, certainly we’ll continue to expand.  We set the bar as wanting to achieve to become the largest and most respected adventure tourism company in the world.  At the moment we’re just in Australia and New Zealand.  To achieve that vision we need to expand beyond just Australia and New Zealand.  We get emails and enquiries all the time about potential acquisitions.  We’ve knocked back certainly many of those.  We certainly will be looking to continue to acquire.  When we started we listed our four main priorities as to drive the future growth, to remain acquisitions, diversifications, start-ups and efficiencies and acquisitions is certainly still part of that for the future.

Where are you looking for acquisitions now?

At the moment we had a heavy end to the calendar year in December.  We had three acquisitions in close proximity.  We’ve certainly got some NDAs signed at the moment and are exploring many opportunities.  I can say everywhere, it’s America, it’s Europe, it’s Southeast Asia and indeed, Australia and New Zealand as well.  There’s plenty of opportunities out there.  The industry is quite fragmented.  Very much a mum and dad industry.  Mum and dad are very smart and hardworking people, they’ve set up a small business that becomes a nice medium, good long term, sustainable business.  What we find is those mum and dads that come in at retirement age, which we’re able to acquire the business and join them in.  Many opportunities in many different places.

Are you saying that you’re looking to expand in Asia, Europe and America all at once?

Oh, not at once.  Certainly, we consider all the opportunities in all the regions, but no, not at once.  We’ve been quite pleased with how we’ve gone about it so far, we’ve picked the low hanging fruit.  Obviously, there’s been quite a focus in Far North Queensland in recent times, there’s a lot of opportunity up there and the rationale there is that it really is the adventure capital of Australia up there.  It’s got the climate, it’s got the reef, it’s got the rainforest and the temperature, the warmer climate, and tourism has flocked to it.

Remembering, when we started this journey through skydiving, 82% of our skydiver customers are aged 18 to 35, and all those backpackers and that age group, predominantly tourists, I should say, predominantly visit North Queensland.  That’s where we started the expansion to non-skydiving activities.  We’re trying to create what’s called the Experience Co Adventure Hub, and it’s an adventure hub where you can come and get all your experiences in one place.  Cairns, we’ve set up there.  We’ve just commenced a smaller version in Byron Bay.  We’ve got a hot air ballooning company that operates out of the same location as our skydiving company, just to give the company as many options as they can to experience these really awesome adventures that we’ve got in place. 

I’m just interested in exploring to you how you propose to become the best and largest in the world.  You say you’ve signed some NDAs, are they in America or Europe or Asia or so far only in Australia?

No, no, certainly we’ve been exploring for quite some time.  This isn’t just an overnight success.  We’ve been doing some due diligence on international markets for quite some time now.  We’ve approached some certain locations we feel is the best next steps for us, whether they eventuate tomorrow or whether they eventuate in two or three years or whether they don’t eventuate at all, we’ll make sure we do our due diligence before we step into that.  There are some NDAs signed and it’s not just Australia, it’s further abroad, but obviously we can’t go into too much detail on that.  But yeah, it’s quite exciting, the possibilities that could arise.

When you say you are rejecting a lot of acquisition opportunities, what makes you reject them?  Why do you do that?

It’s interesting, it’s not just financial.  Culture’s a big part of what we’re trying to achieve here.  The financials are certainly one aspect.  When we’re acquiring these businesses now, we’ve really acquired some really good people and that’s key to our future success.  What we find if we want to make an acquisition, when we make an acquisition we want the key people to hang around and maintain the running of the day to day operations.  Some of those ones we’ve rejected already for example, were the owners just wanted to get out and they didn’t have a management structure in place.  We just felt at the time, yes, the margins might have been great, however if we took over that business it would have been a lot of work for our management team and indeed our directors.  It just wasn’t the right timing for us. 

Some of the other activities, we found a fantastic horse riding business, which is obviously very mild compared to the wild extreme of skydiving and white-water rafting, certainly something we’d consider in the future but the timing wasn’t quite right.  Again, very labour intensive for our existing management team.  So it’s not just numbers, it’s a combination of how it would slot in and join our corporate structure.

Are you thinking about franchising?

No, franchising hasn’t come up in discussions at board level at this stage.  We’re extremely comfortable with the management team we’ve got in place around Australia and New Zealand, we’ve got general managers of respective industries.  We’ve got a General Manager of Marine, we’ve got a General Manager of Skydiving in Australia and in New Zealand.  We’ve got general managers and chief operating officers overseeing the key areas of Far North Queensland, New Zealand and indeed Australia.  We’re comfortable with our structure and the way that it’s working at the moment, so no to franchising. 

The reason I ask is because clearly the way you’re going about it is quite capital hungry.  You’re having to pay a fair bit of goodwill I guess and I see at the end of December you had $14.5 million in cash in the bank.  Your cash flow, at the end of the day, isn’t that great and you’re paying a dividend as well.  You paid out $4.3 million in dividends, so obviously the way you’re going about it, you’re going to have to go and raise more capital probably fairly soon if you’re going to make any significant acquisitions overseas. 

Yeah, for the significant acquisitions, you’re correct.  We’ve also got a banking facility which we’ve only really scratched the surface.  Our bankers have offered us a banking cash flow lend of from 1 to 2 times our EBITDA level, which as a board level we’re not comfortable about at the moment, we’ve just got a $20 million facility in place which we used to acquire Reef Magic back in May ’17.  That’s the first time the company’s been exposed to a banking facility.  We can certainly explore that option further.  But yeah, coming back to the market, we don’t shy away from that. 

We’ve received some fantastic support from our institutional investors since day one.  They liked the story, they liked that we’ve delivered on what we said we would from day one and they’ve continued to support us through all these acquisitions.  We’re confident if we can come back to the market we’d be able to raise the capital.  I think we might have mentioned last time we spoke, Anthony and myself, the other Anthony, we haven’t sold any shares since day one, we’re in this for the long haul.  We’ve only been diluted purely because of the additional capital raisings, but that’s where we’re comfortable.  The holdings, originally, they were 60% when we listed the company, they’re now down to just under 40%.  We’re happy for that to continue to go down if it’s for the greater good of the company.

I suppose just finally to circle back to where we began the interview, I imagine a lot of investors are thinking, oh gee, you are exposed to accidents.  I mean, as you say it’s a risky thing and you just never know what’s going to happen.  Accidents like Mission Beach and New Zealand could happen at any time.  Take us through or perhaps reassure investors of why that isn’t something to worry too much about, referring perhaps to the experience you had in Mission Beach and what that did to you?  Because at the end of the day, as you point out, it had a bit of an effect but not a long term one.

You’re right, as we touched on before, there’s definitely risks associated with it.  We’re extremely confident with our approach to this, our systems and procedures, our equipment, our man-power to mitigate all those risks as much as we can.  These two particular incidents in Mission Beach and New Zealand, we have been concerned that they were just accidents.  Further details will come as coroners prepare their report.  However, we’re extremely comfortable and confident where we sit.  The Civil Aviation Authority in New Zealand and CASA over here in Australia, again allowed us to reopen immediately because they had the confidence in our systems.

It’s a fear that the perception could be that we shortcut on safety just to increase shareholder wealth, which couldn’t be further from the truth.  I sit there in front of institutional investors and I say our capital expenditure this year was high but we spent $2.5 million on the last 12 months on new parachute systems.  We spent more than $12 million on the state of the art aircraft to ensure safety is the number one priority and we’ll continue to do that.  Unfortunately, accidents do happen, but as I said, we do everything we can to mitigate those risks. 

Great to talk to you, Anthony.  Thanks.

Thanks, Alan.  Thanks for your time, cheers.