Sky City reduces earnings expectations

Media release

Friday 13th May 2005

Based on trading performance since its half year result announcement in February, Sky City Entertainment Group today reduced its expectation for net surplus for the 2005 financial year to NZ$100m-$103m.

Managing Director Evan Davies attributed the reduction to three factors.

"The impact of non-smoking legislation in New Zealand is now assessed as potentially greater, primarily in terms of the anticipated recovery and abatement period, than was originally predicted," Davies said.

"In addition, further delays have been experienced in the completion of Stage I of the company's redevelopment of Sky City Adelaide and in the introduction of ticket technology at Sky City Auckland."

"These three factors are temporary in nature and will have their most significant impact in the second half of the current financial year and the first half of the next."

"The impact of the smoking bans on Sky City's New Zealand revenue streams can be expected to continue into the 2006 financial year, but a steady revenue recovery is anticipated with little, if any, residual impact carrying through into FY07."

Davies said while Sky City's New Zealand gaming revenues remained below the corresponding period last year, due to the impact of the smoking bans, week-on-week revenue growth was starting to be sustained, suggesting that the earnings recovery period had commenced.

Benefits from Stage I of the Sky City Adelaide redevelopment programme and from implementation of ticket technology in Auckland would generate a full-year advantage in the 2006 financial year.

As expected, the December 2004 introduction of smoking bans in New Zealand has had a significant revenue impact for hospitality and entertainment venues, Davies said.

"The impact of smoking bans on Sky City's New Zealand operations may prove to be greater than the company's previously advised estimates, with the recovery period potentially more extended than originally anticipated."

Sky City's original expectation was that the impact of smoking bans would largely abate over a 12-month period, with the first 3-4 months following implementation showing significant reduction in revenues, followed by a gradual recovery over the following 8-9 month period.

Davies said the Australian experience of smoking bans had been
"reasonably consistent" in indicating an 18-21 month abatement period.

"We remain of the view that the impact period should be of a shorter duration in New Zealand than in Australia, given that the 12 months advance notice of the smoking bans provided sufficient lead time for hospitality venues to have facilities in place for the convenience of customers prior to implementation in December last year."

"Five months after the introduction of the bans, it now seems apparent that the abatement period will be somewhat more extended than our original expectations. However, we remain confident that the recovery will occur - as has been shown to be the case in Australia - albeit, as now seems likely,
over a longer period than 12 months from implementation."

Stage I of the redevelopment of Sky City Adelaide, which includes a new bar fronting North Terrace, new gaming areas and a bistro-style restaurant, is now scheduled to open in the first week of June - approximately one month later than anticipated at the time of Sky City's interim result in February.

Davies said a continuing series of technical issues had restricted the implementation of ticket technology at Sky City Auckland. In February, Sky City advised that it expected that the ticket technology would be fully operational by mid-March.

"Following testing we now believe the technical issues have been resolved. The ticket facility will now be relaunched to customers during the late May-early July period."

Sky City also confirmed a continuing residual impact on its gaming machine revenues in New Zealand from the $20 note acceptor limit imposed in March last year under section 180 of the Gambling Act 2003.

Davies said the final outcome for the 2005 financial year remained subject to trading performance during the period between now and the end of the financial year in June.

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