Benchmarks for Surviving

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Benchmarks for Surviving

• An Industry Experiencing Stress
• 50 Club Venues Closed or Amalgamated

Presented by Jim Hollington and Peter
HodgeWednesday, 16 May 2007
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Contents

• Introduction
• Background
• Key Performance Indicators
• Challenges Facing the Industry
• New Poker Machines Duty Rates
• Smoking Bans
• Daily Telegraph Article re Grant Regulation
• Case Study
• Gaming Return After Duty, GST and CDSE
• The Way Forward
• EBITDA
• Conclusion

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Introduction

• Thank you for giving PKF the opportunity to meet
  with you to discuss Benchmarks for Surviving.
• We have given some thought to what might be
  appropriate and now detail our thoughts for your
  consideration.

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Background
The NSW Club Industry has, in recent years,
undergone much change and it is our view that the
Government and market forces will continue to
significantly influence the way Clubs
operate. There has been, over the past four
years or so, changes in Legislation or enquiry
held in the following areas
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Background (continued)

• Productivity Enquiry into
• Mutuality.
• GST impact on small Clubs.
• 80 of expenditure from 10 of gamblers.
• 70 of Australians think gambling does more harm
  than good.

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Background (continued)

• Regulations The Liquor Administration Board
  proposes a review of gaming in certain areas
• Reduce maximum bet.
• Slow game.
• Eliminate 50 and 100 bill acceptors (recently
  introduced into the ACT).
• Raise minimum return to player.
• Harm minimisation messages on screen.
• Enforce player breaks.
• Amalgamations are currently limited to a maximum
  of ten per Club

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Key Performance Indicators

• In providing key performance criteria we detail
  as follows with comments where appropriate.

Source ABS Clubs 1997-1998
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Key Performance Indicators (continued)
Source ABS Clubs 1997-1998
Note Expenses are expressed as a percentage of
total income.
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Key Performance Indicators (continued)
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Key Performance Indicators (continued)

• The figures represent best practice in the key
  trading departments and reflect our view based on
  20 years experience in the Industry.
• The comparative income and expense summaries
  prior are reflecting a broad sample of the Club
  Industry for all Club types and is not best
  practice but rather what the broad Industry is
  achieving.

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Challenges Facing the Industry

• Mutuality
• Increasing gaming taxes
• Smoking bans
• Further Government regulations due to harm
  minimisation measures deemed a failure
• Six hour closure
• Capping of machine numbers
• Erosion of Cash Flow Ability to Raise Capital
• Solvency
• Governance Directors and Management

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New Poker Machine Duty Rates
Notes 1. Rates include GST and CDSE 2.
Factors in GST rebate paid on 0-200K
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Smoking Bans
Simply, smoking bans are to be introduced
progressively as follows

• 3 January 2005 Share the Air becomes law.
• 4 July 2005 Smoking is permitted inside one
  room/area only (either a bar or a gaming room)
  and that room must not be more than 50 of the
  combined area of bar/gambling/recreational rooms.
• 3 July 2006 The room/area where smoking is
  allowed, to be no more than 25 of the combined
  area of bar/gambling/recreational rooms.
• 2 July 2007 Smoking banned in all internal
  areas of Clubs.

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Smoking Bans (continued)
The impact on gaming revenue is difficult to
predict. The general consensus is on the basis
of there being no effect in years 1 and 2 and a
negative revenue impact of 8.0 in the third
year. The 8.0 is considered a reasonable
estimate in light of the Victorian experience
where on average the negative impact was 20. In
Victoria the ban was a one off ban introduced
overnight with no pre warning. In contract, the
phasing-in method adopted by the NSW Government
will enable NSW venues to plan and condition
patrons to the effect of the on-coming bans.
The NSW Government has budgeted for a decline of
7.7.
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(No Transcript)
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Case Study

• Can Clubs continue to rely on Gaming Revenues for
  on-going viability?
• Assumptions
• Gaming taxes applied as currently legislated
• Revenue

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Gaming Return After Duty, GST and CDSE
The following table highlights the negative
impact of new duty rates.
The above also illustrates the percentage
increase in duty materially exceeds the
percentage increase in revenue.
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The Way Forward

• Increase EBITDA
• Re-engineer the business
• Reduce excessive costs
• Diversify into alternate position income
  producing operations, eg.
• Gym / Fitness Centre (eg. Castle Hill RSL)
• Ice Cream Franchise (eg. Sutherland Tradies)
• Contract out Coffee Shop Operations to Coffee
  Club (eg. Mounties and Ryde Eastwood Leagues)

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EBITDA Refer Annexure 1

• Our experience suggests that Earnings before
  Interest and Tax and further Earnings before
  Interest, Tax, Depreciation and Amortisation are
  the real key numbers with regard to Club
  performance.
• We find that perhaps 70 of Clubs run EBITDA of
  3 to 8 or less. PKFs view is that an absolute
  minimum of 15 is required to provide ongoing
  capital for reinvestment and if this is not being
  achieved, then our view is simply that until they
  are at least at that level, they will struggle to
  repay any debt.
• As a matter of good practice we encourage PKF
  clients to adhere, indeed adopt, a policy of
• EBITDA 20 - 25.

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Annexure 1EBITDA - Example
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Conclusion

• In conclusion, we would suggest that the Club
  Industry is still a financially viable area in
  which to do business.
• Each Club should be assessed individually and
  treated on its merits.

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Conclusion (continued)
The key issues relevant to Club lending are

• Experience and business acumen of the Board
• Dependence on gaming revenue
• Track record of management
• Amortisation period
• Third party review
• Covenants (ie. limit of Football Grants, etc.)
• Ongoing monitoring
• Capital reserves
• Compliance with or capacity to achieve key
  indicator best practice levels

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Conclusion (Continued)

• It is clear there will be a rationalisation of
  the Club Industry and ultimately the Industry
  will again move forward.
• Gaming performance will be crucial to success and
  strong performers will include
• Dominant Clubs with diversified facilities and
  multiple sites with a streamlined administration
  function.