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| Sky City Limited |
| 1998 Annual Report |
Managing Director's Report
 EVAN DAVIES Managing Director |
SKY CITY IS ALREADY NEW ZEALAND'S MOST POPULAR ENTERTAINMENT AND LEISURE VENUE. WE ARE CONTINUALLY COMMITTED TO REFINING, IMPROVING AND INNOVATING OUR PRODUCT AND SERVICE OFFERINGS IN ORDER TO MAXIMISE THE PROSPECT OF ACHIEVING OUR VISITOR AND REVENUE GROWTH OBJECTIVES.
Results to date demonstrate the capability of the business. However we will continue to enhance our offerings to customers and we see upside potential to the company's earnings in the years ahead.
Last year, when we announced our 1997 result, we foreshadowed 1998 as being flat with 1997 ie: a net surplus in the order of $36 million. When we announced our interim result in February of this year, we predicted that the Asian economic downturn would have an adverse impact on Sky City's business, in the order of 10%. Our actual experience has proven to be consistent with that estimate. Our result before non-recurring items is, in effect, the $36 million projected last August less the Asian economic impact.
Sky Tower was a new revenue contributor in the 1998 year. Otherwise, revenues across the business were essentially flat as against 1997. However, gross operating margin and EBITDA increased. Improvements in our margin results speak for themselves and compare more than favourably with those of listed casino companies in Australia.
The key features of the 1998 result were:
Fun, Entertainment, Innovation and Service Excellence
Over the next financial year we will continue to ensure that Sky City remains New Zealand's most popular entertainment and leisure destination.
We see our primary focus as providing a sought-after range of entertainment options for the growing Auckland population.
Our strategies for achieving this include implementing product and service enhancements across all business units and continuing to improve service delivery right across the complex.
In order to drive visitation and reinforce Sky City's entertainment positioning, we have introduced a wide-ranging, year-round programme of events and promotions, including New Year's Eve celebrations, the Sky Tower Vertical Challenge, the Sky Tower birthday and Chinese New Year celebrations.
In response to customers' preferences, we introduced a number of new gaming initiatives during 1998, including the popular Sky High jackpot. One hundred additional gaming machines will be introduced during the current year and significant changes will be made to our food and beverage offerings, including the opening of an Asian restaurant and a new restaurant/bar in the atrium.
During 1997/98 we had a particular focus on margin performance and the success of that focus is evidenced by the results achieved.
Casino operations contributed over 80% of the total Sky City result. Therefore, transitioning from Harrah's, it was essential that experienced and highly capable gaming personnel were recruited and that we had the systems and procedures in place to manage the operation efficiently and in full compliance with regulatory requirements.
We have recruited five experienced senior gaming personnel from Australia who will provide new impetus to the gaming operation at Sky City. Each has extensive casino operations experience in communities similar to New Zealand.
We have a comprehensive programme in place to address year 2000 compliance issues and are on target to achieve our self-imposed deadline of 31 May 1999.
We are in the process of selecting and installing the replacement information systems that we will require going forward. The upgrade process will take place over the next two years, but the core gaming system replacement project is underway and is programmed to be fully operational in the current financial period.
A commitment to service delivery is fundamental to continued improvements in operational performance. We have a comprehensive set of human resource programmes in place to train and develop our personnel to provide a high level of customer service. During the current year, service delivery processes will be re-evaluated and staff will be upskilled, with the intention of providing significantly increased levels of customer service and increased revenues in the current and subsequent years.
Despite a volatile and difficult domestic and international economic environment, the commitment and efforts of our people and the effectiveness of our marketing programmes and operating systems and procedures contri-buted to provide a financial result for 1998 in line with that predicted at the half-year.
Gaming
Gaming revenue held steady during 1998. It is difficult to be definitive about the impact of external circumstances on the Sky City business, but it seems, to date at least, that our gaming revenues may be relatively resilient to adverse economic trends.
While the number of visitors to the casino reduced 6% to an average of just over 12,000 per day, average daily gaming revenue held steady due to a 6% increase in average win per patron.
There are some signs in recent months that the downward trend in patronage numbers may have stabilised at or just above the 12,000 (per day) level and we are cautiously optimistic that some signs of growth in patronage may be starting to emerge.
In 1998 we achieved a significant increase in revenue from gaming machines, but revenue from tables was down. The drop in table revenue was primarily a result of the impact of the Asian economic downturn on our local Asian player community.
Despite flat revenues, casino expenses were cut back by 9%, creating a gain of $6 million.
Slot win per unit continued to increase throughout the year and the level of demand has started to put pressure on available machines at peak times. One hundred new machines will be added in response to this increasing level of demand.
Sky Tower
Sky Tower hosted over 700,000 visitors during its first twelve months and added $13.5 million to Sky City's revenue total for the 1998 year.
Sky Tower has become a powerful addition to the Auckland infrastructure. Not only has it given the Auckland cityscape an internationally recognised silhouette, it has also added impact to the power of the Sky City brand. Sky Tower has been floodlit to coincide with a number of major Auckland events, helping to make it an integral part of Auckland life.
Sky Tower has been awarded Tourism Auckland's Supreme Award and has been honoured with a New Zealand Institute of Architects' Award.
Sky City Hotel
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Despite a difficult year for Auckland hotels (downturn in tourism, increased room supply), Sky City Hotel performed well, achieving a 1998 occupancy of 71%. The hotel faces a difficult year in 1999 but with the onset of the millennium year, prospects then look more favourable. |
Food and Beverage
Our 1999 plans include the conversion of Compass Brasserie to an Asian restaurant and the addition of a new restaurant/bar facility in the atrium. Completion of these facilities will provide an excellent set of food and beverage choices for visitors to Sky City.
Management Team
We have added significant strength and capability to our senior executive group and to our first-line supervisory and management teams. The Sky City business depends on staff attitude and capability more than most and as we move into the 1999 year as a wholly New Zealand-managed operation, we can be satisfied that we have strengthened our skills and experience at all levels of the organisation.
Kevin Riley, formerly Managing Director of Telecom Directories Limited, joins Sky City on 27 October as Chief Operating Officer. Kevin will be responsible for the day-to-day management of all operational components (gaming and attractions) of Sky City's Auckland complex. Kevin's commitment to employee development and customer focus provides an ideal fit with the ongoing process of improvement in the company's operational performance and service delivery. Stephen Dey joined Sky City in March as General Manager Finance with operational responsibility for the finance and information systems functions.
Recruitment of a number of senior executives from Australia has provided Sky City with valuable new gaming expertise. Mick Caban, Peter Lawrence, Greg Hawkins, Bob Bales and Paul Kershaw all have extensive casino operational experience in an environment comparable to New Zealand.
Community Involvement and Corporate Leadership
Sky City is a major Auckland CBD employer. As at September 1998 we employed over 2,400 people. Since the complex opened, we have provided an even greater number of people with job opportunities and work skills and we will continue to do so in the future.
The company continues to support many organisations and events in the Auckland region. Through the Sky City Community Trust, we make a substantial contribution to problem gambling initiatives and provide grants to a wide range of community projects.
We are involved in a number of key sponsorships including Auckland rugby and netball, the World Cup of Golf, the New Zealand Special Olympics Foundation, the Starship Foundation and the Sky City Starlight Symphony.
Sky City has committed to a three year sponsorship of the professorial chair of Dr Pita Sharples in Maori and Indigenous Education at the University of Auckland.
We have developed a comprehensive Sky Tower education programme, offering children a challenging, interactive and informative learning experience.
Our theatre has hosted a series of productions staged by the Auckland Theatre Company and other local and international performers. Sky City Theatre is developing a reputation as a quality venue providing an exciting range of live entertainment options for Aucklanders.
New Zealand Tourism and Sky City
Sky City is a leader in the Auckland tourism sector. We are involved with a variety of local and national tourism initiatives and are well-positioned to benefit over the short and medium terms from the market stimulation provided by the series of high profile events planned for Auckland over the next two years.
New Zealand and Auckland in particular, will be the focus of global attention in the run-up to the millennium as the city plays host to a wide variety of international events such as the APEC meetings, the America's Cup defence, the World Cup of Golf and the Millennium First Light celebrations.
New Zealand should also benefit from the media and tourism focus on the 2000 Sydney Olympics.
Our challenge is to maximise the opportunities provided to Sky City by the millennium year events and then to maintain that momentum in the years to follow.
Prospects for 1999
Gaming operations comprise over 80% of Sky City's revenues. Being domestically-based, the gaming operation is less exposed to the international sector than the tourism-related components of our business. We are pleased to note that, to date, our gaming operations appear to have been relatively resilient to an otherwise sluggish domestic economic environment. We anticipate that resilience will prevail during the current financial year and beyond.
We expect a continuation of tight and difficult economic circumstances over the short to medium term, with international visitor arrivals continuing to be under pressure for some time yet. We believe we can achieve growth in the gaming operation but growth in our tourism-related operations will be difficult, at least until 2000 when the millennium year events will provide new impetus to the Auckland tourism and leisure sector.
For the 1999 financial year, we have targeted a 5% revenue growth to $250 million, based on increased levels of slot machine and table play and Sky Tower revenues for a full twelve month period. This is expected to be partly offset by lower hotel revenues, given the difficult year anticipated for the New Zealand tourism sector.
We have targeted to hold average gross margin at 63% but expect to improve EBITDA percentage from 42% to 45% following elimination of the Harrah's management fee.
As at September 1998 we are projecting an increased net tax-paid surplus for the 1998/99 financial year and expect, subject to prevailing economic circumstances, a further increase in the following year.
EVAN DAVIES
Managing Director and
Chief Executive Officer
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