Sky City Entertainment MD, Evan Davies

Wednesday 1st May 2002

Following is a ShareChat Investor Interview with Evan Davies, MD of Sky City Entertainment (NZSE: SKC). This interview was conducted during April 2002 and published on ShareChat on May 1, 2002.

SC Investor: I have recently bought 3200 SKC shares @ 6.50 + 6.42. Every time I put money into shares they go downwards fast. I know it is a difficult question to answer, but can you see the share price getting to those heights again in the next 12 months?
Evan Davies: The Sky City share price has traded in a range between $5.40 and $6.50 during the period since last October. The market price of shares depends on a range of factors including the company's financial performance and perceived prospects and other market factors which are external to the company. The market will give different weightings to different factors at different times. The company released its most recent results in February of this year and will release its result for the financial year ending 30 June 2002 on 27 August. At that time the market will have new information on the company's performance and the share price can be expected to react in accordance with the result.
SC Investor: What medium term growth capabilities does Sky City have, considering Force Corp's Argentinian investment crisis?
Evan Davies: Sky City is interested in Force Corporation as an investment strategy because we perceive significant potential customer leverage opportunities between Sky City and Force in Auckland, both being significant entertainment venues. The Argentinian operations came as part of the Force package and do not feature in our investment strategy per se. Our focus has been quarantining and restricting Force's exposure to the Argentinian business and we have achieved this via new banking arrangements which have been negotiated with the ANZ Bank in Australia.
We see medium term growth opportunities in all of our existing (and proposed) business operations - in Auckland, Adelaide, Hamilton, Canbet and Force. We will continue to explore new opportunities on an ongoing basis.
SC Investor: What EBITDA margins are you aiming for in Adelaide in the medium and long term?
Evan Davies: Our intention in Adelaide is to improve the EBITDA margin by generating revenue growth and restricting costs. We believe there is significant potential for leveraging the EBITDA margin, but we prefer to comment on the results we have achieved once we have achieved them rather than to speculate about what we might be able to achieve in the future.
SC Investor: What are your plans for Sky City's share holding in Force Corp. Are you going to increase it or hold?
Evan Davies: Sky City has no current intention to change its shareholder position in Force Corporation, which is 50.2%. As you will be aware Sky City holds a substantial number of mandatory convertible notes which will convert into shares in five years time. At that time, all other things being equal, i.e. on a fully diluted basis, Sky City's shareholding in Force would then be just under 75%.
SC Investor: In the recent half-year report it was stated that SKC is under review from the IRD for claims made in previous years. I also noted that the pre-paid tax took a huge jump. Can you please elaborate on SKC tax position and what it is that the IRD is investigating?
Evan Davies: In 1998, Sky City paid out the Harrah's Management Contract and at that time took over as owner and operator of the Sky City Auckland complex. Inland Revenue is disputing the company's claim that the contract termination fee is deductible. Until this matter is further determined, it would be inappropriate for the company to comment on the likely outcome other than as stated in the 2002 Interim Report at page 18 and in the 2001 Annual Report at page 66.
SC Investor: I believe Sky City is a strong NZ company and as a current shareholder I'd rather not see the company listed on ASX. What advantages do you see in being listed there?
Evan Davies: We estimate that approximately 30% of Sky City shares are held by Australian institutional investors. It is a requirement for many Australian institutions that a company is listed on the ASX before they can acquire shares in that company. If Sky City was not listed on the ASX, there would be a reduced level of demand for the shares. Therefore we see ASX listing as important.
SC Investor: Regarding Canbet, what "difficult to duplicate" advantage do they have over current or potential competitors? What do you believe are the barriers of entry, if any, to somebody wishing to compete with Canbet?
Evan Davies: Canbet is a well-established and credible internet sports wagering company. Canbet relies on a sophisticated software system which is a prerequisite to profitable performance in this sector. Canbet's internal bookmaking procedures are well developed which is fundamental to managing the risks of this potentially volatile business sector. Canbet is licensed in the Australian Capital Territory, being a recognised and reliable gaming jurisdiction by customers and potential customers. These are key critical factors which are not quickly or easily established by potential competitors.
SC Investor: Declining sales of Lotto products have made headlines recently. Do you believe casino gambling (gaming machines in particular) is part of the reason behind this? If yes, why do you think this is the case?
Evan Davies: It is probably not appropriate for us to comment on business operations other than our own. However, a key to sustained profitability over time, and particularly in the entertainment business, is that your product offering is continually refreshed and renewed. We believe we have maintained an exciting and an interesting experience for our customers during the six and a half years since we opened the Auckland complex in February 1996.
SC Investor: What do you consider are the key reasons behind the performance difference when you compare Auckland vs Adelaide? What are you doing to improve the performance of Adelaide?
Evan Davies: Sky City Auckland has always been positioned as an entertainment as well as a gaming experience for customers. Since opening we have continued to invest in the business by way of new product offerings and new experiences for customers.
Prior to acquisition by Sky City in June 2000, the Adelaide Casino had been managed on a minimum investment basis and as a consequence had not been kept up to date and customer numbers had declined. Our strategy in Adelaide is to reinvigorate the business through appropriate capital expenditure and service enhancement and the creation of an entertainment environment. Revenue recovery and moving the business onto a new level is expected to take some 2-3 years to achieve. We are currently focused on driving revenue growth and managing costs in line with revenues which will enhance the historical performance of Sky City Adelaide.
SC Investor: Your core business is profitable as a result of an enviable market position (read segment monopoly) and apparently well run operations. Both are fundamental determinants of profitability, i.e. inherent business profit potential supported by good management. In respect to your diversification-growth strategy:
10a. How well skilled and resourced is management of each new business group (i.e. other than Auckland Casino) to achieve optimum operations & market share?
Evan Davies: We are satisfied that we have well skilled and resourced management at each of our locations, but as you would expect, the quantum and quality of our resources are under continual assessment. We are selling an entertainment experience rather than a product per se, so the management skills we require are particular to our business and we maintain a continual focus on this requirement.
10b. How well does Sky City's senior management understand the operations-market share-profitability dynamics of these new business groups?
Evan Davies: New investments are carefully assessed prior to committing capital and resources. As regards new investments, we take care to ensure they are appropriately resourced whilst maintaining a focus on our core existing operations. By the time we enter a new investment, we have a good understanding of the operational market characteristics of that investment and we ensure that we enhance and retain that knowledge on an ongoing basis.
10c. How well is Sky City's senior management structured to effectively implement these improvements? (given increasing attention to many different ventures)
Evan Davies: This question is largely answered by my answers to a) and b) above. As Chief Executive it is my responsibility to ensure that senior management is well structured to capitalise on our existing and new investments.
Our management team has proven its ability over a period of time, especially with respect to our Auckland operation. Our newer investments are in their earlier stages under Sky City management but you could assume that we are proud of our record to date and would not want that compromised in any way at any of our locations. Please be assured that the existing core business will continue to get the attention it deserves and we will not be distracted from that focus.
10d. What is your considered outlook for each groups' profitability in say 3 years?
Evan Davies: As I mentioned earlier, Sky City does not provide forecasts or predictions as to financial performance, but rather we prefer to let our results speak for themselves. Suffice to say we will be making every effort to maximise shareholder value in all of our operational and investment initiatives.
10e. Does Sky City risk over extending leading to classic return to focus on core business?
Evan Davies: This question is largely answered by my answers as above. As I referred earlier it is my responsibility as Chief Executive to ensure that the business is appropriately resourced. Our results to date confirm that we have achieved this important balance between existing and new initiatives.
SC Investor: I am interested to hear your thoughts regarding the feasibility of a hotel near the airport. I understand how hotels, in all major hub city airports maintain high occupancy, but how could Auckland do the same given its location?
Evan Davies: Sky City and Auckland International Airport Limited have advised the market that we will undertake a joint feasibility assessment for a hotel at the Airport. Sky City is an established hotel and food and beverage operator and would be interested in any opportunity to extend our involvement in these sectors in Auckland subject to an assessment of the commercial returns that could be achieved.
SC Investor: As a Travel Agent, my staff and I often encounter long delays on hold and particularly difficulties after normal business hours when the call centre staff are not operating. The call centre reservation staff are very efficient, however there does not seem to be a system in place (such as diverting to reception) to handle a delay on hold. After hours, (i.e. 12am-6am NZ time) for same day reservation, staff do not seem to be fully aware of room availability. This is not unique to NZ hotels however there is plenty of room for improvement (no pun intended). Therefore in order to aid the occupancy rate of the Sky City Hotel, what is being done to improve phone reservations?
Evan Davies: Reservation requests during after hours have been tracked at an average of 3-4 per night and it is due to this low level of demand that Call Centre reservation lines are diverted to the Sky City Hotel night auditor. Current customer demand does not justify full resource during these hours, however this is not intended as an excuse for unsatisfactory service levels. We are actively advising customers to access the online booking facility at www.skycity.co.nz particularly during after hours, and continue to monitor Call Centre and reservations efficiencies.
SC Investor: I know the Sky Jump is not operated by SKC, but have you jumped? And is this attraction encouraging more people to the Sky Tower?
Evan Davies: Sky Jump is one of the country's most exciting new tourism adventure attractions and, accordingly, is attracting a pleasing number of new customers of both Sky Tower and Sky City.
While our objective with Sky Jump, which is a joint venture with Waitomo Adventures Limited, is to drive revenue and visitation we are also pleased to acknowledge that Sky Jump, as a new tourist activity, is giving visitors to Auckland another reason to stay longer in the city. It is a valuable contributor to Auckland's tourism industry as well as a further addition to the range of entertainment experiences Sky City offers.
Sky Jump has been designed as less of an extreme adventure activity so that it will appeal to a wider customer base. I am told the experience of jumping from the tallest tower in the Southern Hemisphere is well worth the effort.
Our newest Sky Tower adventure activity, Vertigo, opened during April and we expect it to also attract new customers. Vertigo, which is a joint venture with To The Top Limited, is a unique climb up the internal mast of Sky Tower to emerge onto a crow's nest 300m above sea level. I can confirm that the view is truly spectacular.
SC Investor: After your experience with Canbet and Force Corp. are you continuing to look for acquisitions in gambling and entertainment (e.g. companies such as FVR) or will the focus for the time being consolidating existing business investments? (e.g. Adelaide and Hamilton casinos)
Evan Davies: We are currently focused on developing our existing investments in Auckland, Adelaide, Queenstown, Canbet and Force and in establishing the Riverside casino in Hamilton. This portfolio represents significant opportunity for the company, but it remains our intention to consider other opportunities as they arise. Any new investment opportunity must meet a strict set of internal criteria in terms of strategic rationale and shareholder value.
SC Investor: Reading Cinemas have just opened a 10-screen multiplex in Wellington, which will be in direct competition to existing operators. Do you know if Reading are planning to open screens in areas where Force operates, and if so what effect might this have on Force admissions and profitability? Does Force have any competitive advantage over new operators?
Evan Davies: We are not aware of any intentions by Reading in Auckland. Village Force has well-established cinema operations in Auckland and has a programme for upgrading these facilities over the next 3-5 years. As in all businesses, it is essential to maintain the quality of the product offer so that the customer base remains enthusiastic, thereby maintaining a competitive advantage over potential new operators. It is generally understood by the cinema exhibition business that direct competition by competing operators in the same geographic area is potentially harmful to both. As the established operator, we have an established competitive advantage over a new entrant.

ShareChat thanks Evan Davies for taking part in this Investor Interview.

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