Sky City Limited

Managing Director’s review

To achieve compelling customer experiences we have to listen to our customers and deliver to their expectations…to keep them coming back.

It is this focus on customers and more particularly a continuous enhancement of experiences for our customers which is driving the ongoing improvements in our financial results.

The 1999 result in summary

Last year when we announced our result, we estimated 5% revenue growth and a potential net surplus in the order of $40-$41 million for the 1999 financial year.

Trends within the first six months of the 1999 financial year gave us the confidence, in February, to increase our net surplus estimate to $43 million.

These trends continued through the second half of the year and we were delighted to confirm actual revenue growth for the year at 8% and net after-tax earnings at $45.6 million, up 42% from the 1998 result.

Essentially, revenue growth came from our focus on making Sky City the most popular entertainment and events destination in Auckland. The increase in net surplus was a consequence of the increased revenues coupled with our continuing focus on cost management and margin enhancement across all sectors of the business.

The strong cash-based earnings performance underpins our (fully-imputed) 90% dividend payout policy, with 43 cents per share (and per instalment receipt) being paid to shareholders in respect of the 1999 year.

Prospects for 1999-2001

The 1999/2000 year provides significant opportunities for Sky City, with a sequence of key events throughout the next 12 months. We are confident we can again achieve or better a 5% revenue growth target for the current year, but see the 2000/2001 financial year as one of consolidation following what we expect to be a strong millennium year for Sky City.

New Zealand’s most popular entertainment and leisure destination

Sky City is New Zealand’s most visited attraction. More than 15,000 people come to Sky City’s casinos, restaurants and entertainment spaces on average every day. Approximately 5.5 million people visited Sky City in the past year. Our busiest days see up to 25,000 customers on site.

Significantly, Sky City is the single most visited attraction for tourists to New Zealand, with around 650,000 international tourists making up 10% of all gaming customers, 50% of all hotel guests and 30% of all Sky Tower visitors.

People and experiences

Our people are one of our key strengths. We employ some 2,500 people, all of whom contribute to delivering a customer service experience that is professional, friendly and engaging.

We have strong standards of performance, design, quality and service. This year’s business success is testament to the hard work, dedication and loyalty of our staff. They are committed to our aim of delivering enjoyable and memorable experiences to customers every time they visit Sky City.

Details of the 1999 result

The 1998/99 year was one of recovery from economic recession in New Zealand with partial recovery in tourist numbers after the negative impact of the Asian financial crisis. The highlights of our 1999 financial year included:

• Revenues and visitation
  
  Total Sky City revenues grew 8% to $257 million.
  
  Gaming revenues contributed 80% of Sky City’s total 1999 revenues. Average gaming revenue per day rose by 9% during the 1998/99 year, to $650,000 (incl GST). Casino visitors, at just over 12,000 average a day, were steady compared to the previous year.
  
  Revenues from Sky City Hotel and Sky Tower declined, which was not unexpected given domestic and international economic trends related to the Asian financial crisis - including reduced tourism numbers - but overall we were very pleased with the resilience of these business units.
  
  Hotel occupancy was down marginally at 69% but this was a satisfactory result in a very competitive Auckland market, which has seen total room supply double in the last 24 months.
  
  Sky Tower had 650,000 visitors during the 1999 financial year, in line with expectations.
  
  

• Margin performance and cost management
  
  Margins were up, with gross margin on gaming operations increasing from 68% to 70%, mainly reflecting a higher proportion of revenues coming from gaming machines. Sky City’s overall gross margin from all sectors improved one percentage point to 65%.
  
  Total expenses were reduced from 80% of total revenues to 74%.

• Australasian comparisons
  
  To put our performance in an Australasian context, we can compare Sky City’s EBITDA (earnings before interest, tax and depreciation) ratio with those of the big four casino operators in Australia. Sky City’s EBITDA ratio for 1999 was 47%, up from 42% last year. The Australian operators range currently from a low of 11% to an expected top performer in 1999 of 25%. We can therefore fairly claim to be a leading performer in the Australasian casino sector.

• Net earnings and distributions
  
  Earnings per share increased 46% to 47.1 cents, due to both the increased profit performance and the company’s 1998 share buyback programme.

Strategies for moving forward

We view the future performance of Sky City with considerable confidence, based on opportunities that exist for gaming and entertainment in New Zealand and on the management and marketing strategies we have in place.

We have five principal strategies for moving forward:

• Grow the brand
  
  Our aim is to drive growth across the business. We have succeeded in positioning Sky City as New Zealand’s leading gaming and entertainment brand, built on engaging experiences, excellent customer service and quality products that are enjoyed by a broad range of New Zealanders and overseas visitors. We have an excellent base from which to build.
  
  We see strong potential for attracting the interest and the leisure dollars of Aucklanders. Auckland is one of the fastest growing centres in the Asia-Pacific region. Almost a third of New Zealand’s 3.8 million people live in greater Auckland and many more visit frequently for business or pleasure.
  
  Sky City has the ability to attract larger numbers of people through its events, entertainment and dining choices, and from new gaming opportunities.
  
  Over the past 12 months we have refined our mix of restaurants to meet customer preferences for variety and choice. This included the addition of Ming Court, a new Asian-themed restaurant, and Rebo, an informal restaurant, café and bar situated in the main atrium of the complex.
  
  Sky City has developed its venue management and hosting relationships with a wide range of event organisers including Rally New Zealand, the World Cup of Golf and the New Zealand Tourism Industry Association. Sky City Theatre has hosted music concerts and high quality performances of comedy and drama. The possibilities for continuing to build the Sky City profile as a leading centre for entertainment and business events are many and varied.

• Grow the gaming business
  
  Our second strategy is to develop growth in gaming. This will continue to be the core component of our profitability. We believe growth will be concentrated mainly in the New Zealand domestic market with a continuing focus on New Zealand customers who enjoy an entertaining day or night out.
  
  Gaming machines produce strong margin performance and a further 100 machines will be added later this calendar year, bringing Sky City’s total to 1,320 machines. Growth in the number of gaming machines to date (100 new machines in December 1998) has not diminished the level of win per machine, which averaged $346 per day during the 1999 year.
  
  Most important of all for growth is our ongoing commitment to continuously improving and refreshing the Sky City experience for our customers. In 1999, this means refurbishing the main gaming floor and enhancing our customer loyalty programme. Other developments and events are planned. It is a matter of continuously building our profile and sustaining the "buzz" about what is happening at Sky City.

• Capitalise on event opportunities
  
  Strategy three is to capitalise on upcoming Auckland events and the millennium celebrations. We have been very successful in positioning Sky City as a key facility for a number of the mega- events being hosted in Auckland. These include Rally New Zealand held in July this year, the APEC Summit, FIFA Under-17 World Football Championships, America’s Cup and, of course, millennium night itself.
  
  Most importantly, the events of 1999-2000 should be a launch pad for an even bigger future for Sky City. Our challenge is to keep the momentum going. And, as mentioned earlier, we have targeted revenue growth of at least 5% for the current financial year through to June 2000.

• Control costs and maintain performance efficiencies
  
  Our fourth strategy is about controlling costs - obviously critical in maintaining and building margins. Constraint on operating costs is all the more important in a business with a significant level of asset-related costs.
  
  Sky City will continue to pursue efficiencies in operating and fixed costs across the complex and in each sector of the business.

• Invest in new gaming opportunities
  
  Our fifth strategy is to grow through involvement in new casinos.
  
  Sky City is investing in a boutique casino in Queenstown, with a 60% shareholding and the role of operator for a casino of 12 tables and 70 gaming machines.
  
  Sky City is the owner of up to 55% in Riverside Casino Limited, the applicant for a casino premises licence for Hamilton. Hearings have been completed and we hope for a decision from the CCA shortly.

Economic development, employment and tourism

Along with the five broad strategies outlined above, we also maintain a focus on an issue outside our direct revenue and earnings growth objectives, but no less important. Casino licences are granted in the expectation that operators will contribute to economic development, employment and tourism in their locality. We take this role seriously.

In 1999, the Sky City operation contributed more than $37 million to central and local body revenues. $23 million was paid in company income tax; $9 million in gaming tax; $3 million to Auckland City for local body rates; and $2 million to the CCA to cover the costs of casino regulation and supervision.

Corporate citizenship and community role

We seek to make our values of positive corporate performance and citizenship both visible and widely understood.

Sky City has a good working relationship with the CCA. We have built a reputation as an exemplary casino operator. We provide gaming and entertainment of a quality appreciated by customers and the Authority alike. This has proved to be entirely compatible with creating superior value for our shareholders.

Over $1 million from the 1999 result has been distributed by the Sky City Community Trust to assist a variety of community and charitable organisations, mainly in the greater Auckland region. Included was a $500,000 payment to the Government-endorsed Committee on Problem Gambling Management.

Sky City itself is extensively involved in marketing partnerships and community sponsorship programmes, from high-participation sports such as Auckland rugby, rugby league and netball, arts events such as the Sky City Starlight Symphony, to the New Zealand Special Olympics Foundation and many other community and fund-raising projects.

Continuing success

Sky City has now been open to the public for a little over twelve hundred days. We have re-invented ourselves once already in this time by taking over the operator contract from Harrah’s and creating in the process a strong and visible brand in the New Zealand market. We have also established an energetic and capable organisation which has a detailed understanding of the gaming entertainment business in this country.

We anticipate continuation of strong performance trends into the current year and beyond, and continuing the enhancement of the value of the Sky City investment for our shareholders.

EVAN DAVIES
Managing Director

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