MCK 2020 Interim Results

**Shareholder Update** Dear MCK Shareholders, It is hard to find the right words to describe the last six months for us all. Many people have used the words "unprecedented", "unbelievable", "like nothing ever seen before", and other such terms and phrases. All of these are right but they do not, in our opinion, capture the depth of feeling that we have experienced since early March when the extent of the COVID-19 pandemic became apparent. Before outlining our results and financial position to 30 June 2020, we would like to say thank you on behalf of all of the Board to all of our staff, past and present, who have gone through so much over the last few months. To those who we have had to let go, please know that the decisions we made were made with regret and because we have to act in the best interests of this company. We can say that our Senior Leadership team have done what they can to retain as many employees as possible but without the level of guests and with the borders to New Zealand closed to overseas travel since March and for the foreseeable future, we do not and will not have anywhere near the amount of business to sustain pre-COVID employment levels. There is no "normal" any more and predictions of a "new normal" seem premature. To our staff that remain and particularly our Hotel General Managers and Senior Leadership team, we thank you for your ongoing efforts and the extra yards to keep MCK a viable business. We know that the road ahead is challenging but with your dedication to the tasks ahead, we are sure that we can return to better days in the not-too-distant future. To our suppliers and business partners, thank you for your loyalty to MCK over these last few weeks and months. Over the last few months, we have reached out to you to ask for assistance in various forms and we are grateful for that support. Our strengths are built on long-standing relationships and we hope to continue and build on those relationships into the future. To our shareholders, we thank you also for your ongoing support of the company. To those of you in New Zealand in particular, we hope that you are able to make our hotels your first choice for accommodation as domestic travel starts to increase across the country. By booking direct through our website or by contacting the hotels directly, you will be assured of the best rates and you will also ensure that all of what you pay goes directly to the hotels and not to offshore agents. At a time where literally every cent and every dollar makes a difference, we look forward to welcoming you and your families and friends at our hotels. --Results summary -- MCK as a group made an unaudited profit before tax and non-controlling interests of $26.26 million for the six month period ended 30 June 2020 (2019: $41.00 million). The main contributor to these results were sales of residential sections from our majority-owned subsidiary CDL Investments New Zealand Limited which traded well in the last six months. In addition, one sale of a sub-penthouse at the Zenith Residences in Sydney which settled during this period has also helped our overall result. As a result of these property sales and a one-off non-cash tax credit of $20.06 million arising out of the Government's COVID-19 Business Continuity Package, MCK has recorded a profit after income tax and non-controlling interests of $34.09 million (2019: $23.81 million) The group revenue and other income for this period were $84.74 million (2019: $110.61 million). However, earnings per share for the period increased to 21.55 cents per share (2019: 15.05 cps) reflecting the impact of the tax credit from the COVID-19 Business Continuity Package. This has also impacted on MCK's Net Tangible Assets per share as at 30 June 2020 which was $4.44 per share (2019: $4.08 per share). --An update on our New Zealand Hotel Operations-- For the first six months of 2020, MCK's hotel operations made a pretax profit of $3.69 million (2019: $17.53 million). While this is better than what we expected in March, it does not indicate that a sustainable recovery is underway. These results show the combined effects of positive trading in the first two months of the year, the contribution to wages from the Government's Wage Subsidy and some small increases in revenue after lockdown. As stated above, MCK's hotel operations booked a one-off, non-cash, tax credit of $20.06 million as a result of the Government's COVID-19 Business Continuity Package which reintroduced the ability to depreciate non-residential buildings from the 2020/21 income year. Long term shareholders may recall the one-off, non-cash, tax expense of $24.61 million in 2010 when the previous Government removed the ability to depreciate non-residential buildings for the first time. It is worth reflecting on what has happened over the past six months, particularly in March through to May. Aside from the Alert Level 4 lockdown, the most significant issue we faced was when the Government announced that the borders would be closed to all international visitors on 14 March. The impact of that alone would have severely impacted on MCK's 2020 results in any event and was serious enough to request a trading halt from NZX. Even with favourable trading in January and February this year which was comparable to 2019 levels, there was a sharp reduction in revenue in Q1 2020 with revenue down by 16% and pre-tax profit down by 34%. Q2 saw the full effect of the lockdown with revenue falling by 86% and pre-tax profit down by 301%. Like every other business in New Zealand, the effects of the Alert Level 4 lockdown from 26 March through to 28 April was severe. Only two owned / operated hotels and two franchised hotels were open for essential business and workers with the remainder closed until Alert Level 3 allowed for back-of-house operations to resume. Only from the start of Alert Level 2 on 13 May could hotels actually receive guests for the first time since lockdown and then only once social distancing measures had been put in place. Even then, domestic travel was under restrictions. In short, nearly all of our hotels had no revenue at all during April and half of May. While all social distancing measures are no longer necessary and hotels can operate in a pre-COVID-like manner there is no way that business would resume at levels seen prior to March. Unlike retail, hotels and other tourism business are not able to recover straight away. As of today, Copthorne Hotel & Resort Bay of Islands, Copthorne Hotel Rotorua, Kingsgate Hotel Greymouth and Kingsgate Hotel Te Anau will remain closed until the fourth quarter of this year. All of our other hotels are open and accepting bookings. With MCK, the market for domestic tourism has always been smaller than the international one and what we have seen post-lockdown is intense discounting and price competition as hotels and motels try to attract as many people as they can. Put bluntly, hotels in New Zealand are all in survival mode and will remain that way for an extended period of time. Understandably, our customers both in New Zealand and overseas have cancelled nearly all of their bookings for the remainder of 2020. Thus, we are faced with the prospect of having to rebuild our business more or less from scratch. As the pandemic continues to severely impact our key overseas markets such as Australia, the United States, the United Kingdom, China and Europe, we are not confident that we will see even a trans-Tasman travel bubble this year. Until we know when our borders reopen and which countries will qualify, people will not be rebooking their stays. Coupled with a difficult economic environment, we know that people worldwide will be reluctant to travel internationally. It will take several years to recover to the levels of business over the past five years. But we know this and we are planning accordingly the financial runway at each hotel and corporate levels. As we said at the Annual Meeting in May, MCK will survive this crisis. The effect on our staff has been dramatic and this is something we have tried to keep front of mind in terms of our operational decisions over the last few months. Regrettably, we have had to make difficult decisions affecting hundreds of our staff who have had to take redundancy, reductions of salary or reduced hours. Like the Government's response to the pandemic, we also adopted an "act early" strategy as we believed that the likely effect of the loss of visitors and revenue would be close to catastrophic. As painful as those decisions were for all of us, we strongly maintain they were the right decisions to ensure our business survived. We also applied for and received $6.70 million in the first round of the Government's Wage subsidy programme which allowed us to keep paying our employees all of their contracted hours or salaries through to June while we undertook the right-sizing of our business. We applied for the Wage Subsidy Extension and have now received a further $1.82 million and we have used the funds in the way the Government has intended to ensure that as many people as possible have been able to keep their jobs. As has been widely reported, two of MCK's hotels have been undertaking managed isolation facility business in the first half of 2020, being the Grand Millennium (managed by a wholly owned subsidiary of MCK) and M Social Auckland. The decision to do so was made after carefully assessing the risks to staff and our future business. We believed that this was the right decision, not only to help New Zealanders returning home from overseas, but to keep these hotels in operation and to retain our staff as well. Strict health and safety protocols including deep cleaning procedures have been followed at both properties. Both hotels will continue with managed isolation business during the second half of 2020. Refurbishment work is nearly complete at the Copthorne Hotel & Resort Queenstown Lakefront and we expect that the hotel will reopen for business in Q4 2020. Demolition work on part of the Kingsgate Hotel Greymouth will also commence shortly ahead of a refurbishment of the tower block of that hotel with the aim to rebrand as a Copthorne Hotel once all works are completed in 2021. --CDL Investments New Zealand Limited ('CDL') performance-- Pleasingly, CDL announced an unaudited operating profit after tax for the six months ended 30 June 2020 of $13.74 million (2019: $15.10 million). The result reflected positive sales activity from its new Auckland subdivision at Kewa Road and Prestons Park in Christchurch. CDL's forecast sales for the remainder of the year are positive and their results will deliver a welcome boost to MCK's overall results this year. --Australia update-- We are also pleased to report that a sub-penthouse floor at the Zenith Residences, Sydney was sold in the first half of the year and an agreement for the penthouse level has been signed and is due to settle before the end of the financial year. This is in line with our forecasts and will also strengthen our end of year results. These sales will also reduce our operating expenses in Australia. --The outlook for the remainder of 2020-- No-one should be in any doubt that the outlook ahead for MCK's New Zealand hotel operations will continue to be grim. The reality for the foreseeable future is lower occupancy, lower margins and minimal profit. We also believe that we have not yet seen the full extent of the economic effects of COVID-19. As economic conditions globally get worse, we expect still further falls in demand for travel and accommodation as people tighten their belts once again. The announcement that the APEC 2021 Leaders Meetings and associated events are to shift to virtual meetings is one indication as to where things are likely to head for our traditional conferencing and meetings business in the immediate term. While we are aiming to reopen all of our hotels by the end of the year, this should not be taken as a certainty given that we do not know when our borders will be reopened to the rest of the world. Even when New Zealand is able to welcome visitors from overseas, we will be taking a cautious approach to ensure that we do not compromise the health, safety and wellbeing of our staff and guests. On a positive note, MCK is not just a hotel company. As a "property company with hotel assets" any growth and indeed any profit, for the time being, will come from our property divisions in New Zealand and Australia. While they have not been as badly affected by COVID-19 as our hotel operations, we remain optimistic but cautious that sales will continue as forecast. Should market conditions change, both divisions are agile enough to adjust their operations as needed. As well as ensuring that our hotel operations survive this difficult period, as a group, MCK is aiming to deliver an overall result that will see a profit, but we caution shareholders to moderate their expectations. To achieve an overall profit in this environment remains a challenge and is also dependent on many factors, several of which are outside our control. We are well aware of the enormity of the task ahead and we are committed to achieving our goal. Again, to our staff and shareholders, thank you. We look forward to your continued support over the coming months and beyond. Colin Sim / BK Chiu Chairman / Managing Director 29 July 2020 End CA:00357053 For:MCK Type:HALFYR Time:2020-07-29 10:01:18