Strong Interim Result For Sky City Entertainment

Strong Interim Result For Sky City Entertainment Group And On-Market Share Buyback Confirmed

Australasian gaming and entertainment company Sky City continues its robust growth record, reporting today an after-tax profit of $52.8 million for the six months ended 31 December 2002.

The result is a 39% increase over the corresponding period last year, when Sky City reported an interim profit of $37.9 million (before non-recurring items). A dividend of 21 cents per share has also been declared for the half year, substantially up on the 15.5 cents per share declared for the corresponding period last year. The dividend is in addition to the 20 cents per share special dividend paid by the company in 2002.

Sky City Managing Director Mr Evan Davies said the period had been a very positive one for the group, with all operations showing solid performances.

"It is certainly pleasing to deliver such a strong result and, in particular, to continue the trend of positive profit performance we have delivered consistently since commencing operations in 1996,” he said.

Group operating revenues increased 12%, from $249 million to $280 million, and all operations were ahead of the previous corresponding period.

Both key operations, Sky City Auckland and Sky City Adelaide, were up by 13%, with other New Zealand Operations (Sky City Leisure, Sky Riverside Hamilton and Sky Alpine Queenstown) up 22% at $31 million.

Group EBITDA (operating profit before interest, tax, depreciation and amortisation) was up 21% on the corresponding period last year, with Sky City Auckland ahead by 18% and Sky City Adelaide by 53%. Earnings were enhanced with the key performance ratios all up on the corresponding period last year: gross margin up from 53% to 56%, EBITDA up from 41% to 45% and the EBIT ratio up from 32% to 35%.

“Solid revenue growth at our flagship property, Sky City Auckland, was converted into strong earnings performance,” said Mr Davies. “Operating revenues were up by 13% overall, with gaming revenues up by 14%, food and beverage revenues up by 18%, hotel and conference

revenues up by 9% - on the back of an increase in hotel occupancy from 86% to 89% - and Sky Tower revenues were up 11% as a consequence of a substantial increase in the number of Tower visitors,” he said.

Sky City Adelaide operating revenues were up by 13%, with gaming and food and beverage operations, up by 15% and 7% respectively.

"This time last year we were looking for improvement at Sky City Adelaide. Much better results began to show in the second half of FY02 and that trend has continued. It’s pleasing to see this operation tracking in line with pre-acquisition expectations,” said Mr Davies.

Sky City Adelaide’s gross margin ratio increased from 30% to 35%, the EBITDA ratio increased from 18% to 24% and the EBIT ratio was lifted from 8% to 14%.

“The first half performance in Adelaide has continued the growth achieved during previous periods with effective cost management ensuring that the growth in revenues is being converted into significant percentage improvements in profit performance,” said Mr Davies.

The company’s newest gaming and entertainment facility, Sky Riverside Hamilton, opened on time and to budget on 19 September 2002, to very favourable response.

“Customers like the entertainment experience offered at Sky Riverside. Although initial post-opening results are not necessarily a reliable basis for estimating future revenue streams, it is clear that Sky Riverside has begun well and, at this early stage, is on track to meet performance expectations for this important addition to the Sky City portfolio of properties,” said Mr Davies.

Mr Davies said that the group’s small operation in Queenstown is demonstrating improved performance but that an appropriate return on that investment is yet to be achieved.

“Despite our continuing efforts, we are not yet able to report a satisfactory financial result in Queenstown but the breakeven target is coming within range, with a reduced EBIT loss of $298k reported for the half year, he said.

“The Sky Alpine operation is structured to optimise returns within the constraints of the revenue potential of the Queenstown market. Inevitably, the decision of the Casino Control Authority to award two casino licences in Queenstown will continue to make it difficult for

either operator to achieve a satisfactory financial return. However, it is important to keep in perspective that Sky Alpine is a boutique-sized operation in relation to the overall context of the Sky City group,” said Mr Davies.

Sky City Entertainment’s Group’s other investments are performing soundly.

“Earlier this month Sky City Leisure reported a surplus of $1.02 million for the interim period - a major turnaround from the loss of $5.5 million for the corresponding period,” said Mr Davies.

“The first half of last financial year was a particularly strong period for the cinema exhibition sector and those levels were always going to be difficult to repeat. However, despite a 5% drop in attendances, a lift in average ticket prices has meant that New Zealand cinema revenues were maintained at last year’s levels,” he said. “Effective cost management also meant that Sky City Leisure’s EBITDA result for the first half year was up 11% over the corresponding period last year, at $5.6 million.”

On-line bookmaking company Canbet Limited, in which Sky City Entertainment Group has a 33% shareholding, reported a profit for the first half of 2002/03 of A$399k, up from a profit of A$303k for the full year ended June 2002. Canbet’s operations are currently relocating to the United Kingdom with operations there scheduled to commence in mid-April.

Sky City will continue a number of capital developments throughout the second half of the 2003 financial year and into FY04.

“Construction of our new $60 million convention and exhibition centre is now well-advanced, with subsoil, piling and foundation works completed,” said Mr Davies. “Progress to date has been to plan and the opening of the convention centre is expected in the first quarter of calendar 2004.”

In November, Sky City also announced the development of a $75 million, 320-room hotel project above the new convention centre. Mr Davies said the Qualmark 5-star rated hotel will be “an excellent complement to the existing Sky City Auckland facilities and the convention centre currently under construction.” Completion of the hotel is scheduled for December 2004.

Further development of Sky City Auckland’s main gaming floor will commence in April and is expected to be completed by the end of this calendar year. The project involves an extension of existing facilities onto level three of the main Auckland complex and the introduction of new entertainment and product offerings.

“At all Sky City properties, our objective is to create fun and entertainment by offering customers a range of compelling experiences. The success of this approach continues to be confirmed by the strong financial results consistently achieved by the company,” said Mr Davies.

Sky City continues to expand its industry-leading host responsibility programme across all operations. The implementation and ongoing development of the programme, which focuses on responsible gambling behaviour and alcohol management, is coordinated through a dedicated Host Responsibility department.

“We welcome the emphasis both the New Zealand and South Australian governments are currently placing upon the pursuit of legislative changes in respect of problem gambling management and host responsibility guidelines and look forward to the introduction of clearly defined, industry-wide, operating parameters in this regard,” said Mr Davies.

Also extended across the group during the first half year were Sky City’s remuneration incentive programmes for staff. The company employs more than 3,500 staff across New Zealand and Australia, and all full time and permanent part time staff at Sky City properties are now eligible to participate in bonus schemes linked to financial results, customer service targets and individual performance.

“We recognise the significant role staff play in the success of the business – especially with regard to the delivery of excellent customer service,” said Mr Davies. “Our incentive programmes ensure staff have the opportunity to share in the company’s success and we are delighted to have extended the successful Sky City Auckland model across our all of our sites.” Sky City Adelaide and Sky Riverside Hamilton complete their first incentive period this half-year, with Sky Alpine completing its first period at the year end.

In November 2002 Sky City announced that, subject to market conditions at the time of this result announcement, it would commence an on market share buyback programme aimed at buying back up to $60 million of the company’s shares over a 12-month period.

The share buyback was advised as being one of two components of a $100 million capital management strategy, with the first $40 million of this strategy being a 20 cents per share special dividend which was paid to shareholders last November. The company has announced today that it will commence the buyback programme on 3 March.

The buyback is anticipated to continue for the subsequent 12 months but will remain subject to the board’s assessment of market conditions during this time.

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