Leagues Clubs Australia Conference

May 2010

Managing budgets and the bottom line

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Topics

Why so important - now more than ever Recent earnings trends Some budgeting techniques What targets to set Using budgets to drive performance Turning budgets into an operating plan Driving a marketing budget Summary

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Thanks to CDOL

Financial flows – NSW

Gaming surplus$44 (64%)

Bar surplus$4 (27%)

Cater surplus<$1 (2%)

Other $1

Front of house GP$51 (51%)

EBITDARD$17 (17%)

Overheads$34 (34%)

Gaming $69

Bar $15

Catering $13

Other $1

Retail$2

Retail<$1(14%)

Community$3-$4

Capital/debt$8 - $15 (8%- 15%)

$100

Financial flows – Qld

Gaming surplus$37 (60%)

Bar surplus$5 (33%)

Cater surplus$1.70 (10%)

Other $3

Front of house GP$47 (47%)

EBITDARD$18 (18%)

Overheads$29 (29%)

Gaming $61

Bar $15

Catering $17

Other $3

Retail$4

Retail<$1(5%)

Community$3 (3%)

Capital/debt$8 - $15 (8%- 15%)

$100

Financial flows – ACT

Gaming surplus$43 (65%)

Bar surplus$5 (27%)

Cater surplus$0 (0%)

Other $2

Front of house GP$51 (51%)

EBITDARD$20 (20%)

Overheads$31 (31%)

Gaming $66

Bar $19

Catering $12

Other $2

Retail$?

Retail$?(?%)

Community$3

Capital/debt$8 - $15 (8%- 15%)

$100

Financial flows – NT

Gaming surplus$26 (51%)

Bar surplus$4 (26%)

Cater surplus$0 (1%)

Other $1

Front of house GP$34 (34%)

EBITDARD$11 (11%)

Overheads$23 (23%)

$100Gaming

$50Bar $15

Catering $12

Other $1

Retail$22

Retail$3 (14%)

Community

Capital/debt

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Why so important

Gaming and beverage shows little growth Operating cost are growing by 4% to 6%

annually Capex has grown at over 6% per annum

in the last 5 years The margins are declining

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EBITDA trend in NSW

Longer term trend is stable

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EBITDA trend in Qld

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EBITDA trend in ACT

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Expenditure per person

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Leisure (3mnths)80%

0%

40%

60%

20%

68.4%

60.6%

54.2%49.1%45.3%

34.8%

23.9%

75.1%

66.9%

52.9%

43.1%

40.1%

29.7%

20.9%

Jan 02 Mar 099 years

Use computer at home

Entertainment

Novel

Saw a movie

Day trip

HobbyHobby

Played sportPlayed sport

Source: Roy Morgan

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Went to a club

Went to a casino

Went to a racetrack

30.8%

11.6%

5.4%

Jan 02 Mar 099 years

28.4%

9.4%

4.6%

Source: Roy Morgan

Leisure (3mnths)

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Spare time We are awake 112 hours each week Comprised of:

– 16 hrs on the Internet– 12 hrs watching TV (declining)– 8 hrs listening to radio– 8 hrs using the PC off line– 5 hrs playing video games– 3 hrs reading newspapers– 2 hrs reading magazines

That’s 54 hrs without work, study or house work

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Competition for leisure wallet

We now spend $32-$35b on mobile phones each year

32% of kids under 15 years have a mobile Pay TV $3.2b

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So... Clubs must achieve at least 15% EBITDARD for

“survival” 12% and below is concerning Over 20% allows a club to progress and grow with

the market Over 24+% EBITDARD is superior and will

advance a club far beyond competitors These parameters set the basis for targets and

budgets

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Budgeting technique

Top-down and bottom -up and top-down

Senior management

Operational management

Staff

Operational management

Senior management

Senior management

Board

Operational management

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Budgets to Op Plan

Budgets are often the numbers that actual results are compared with in the middle of the next month

A budget is only effective if it drives operations - the whole management team and staff

Best results are achieved from converting budgets to goals, initiatives, targets, responsibilities, timeframes etc

The whole team must be engaged and “own” the budget

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Budgeting technique Use of base budget and stretch budget

– Base budget is the most likely outcome given strong management input and reasonable diligence

– Stretch budget is normally based on best case outcomes eg 10% improvement in revenues and 2% reduction in some costs

Also use maximum reasonable adversity (MRA) to assess the budget risk and financial sensitivity of the business

Profit and loss budgets PLUS cash flow

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Debt coverage Debt coverage measures how susceptible the

business is to its debt burden - from movements in earnings, interest rates and unforeseen expenditure

Interest rate cover – number of times the earnings of the club can cover interest commitments – 2 times is a min benchmark

Principal and interest cover - number of times the earnings of the club can cover principal and interest commitments – 1.5 times is a min benchmark

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Key business drivers

EBITDARD <12% 25%Total wages >24% 18%Total AEMP >12% 6%Net/EGM/Day <$120 >$180Gaming Promo >6% 4%Gaming wages ?6% 4%Bar GP <55% >64%Bar wages >24% <20%Catering GP <55% >62%Catering wages >50% <42%Overheads >35% <25%

Needs improvement Excellent

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Marketing - AEMP AEMP – Advertising, Entertainment, Marketing

and Promotions Measured as a percentage of total revenue

+ =

3%-4% of gaming

2.5% total revenue

6.5% total revenue 9%

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How do we spend 9%

Gaming promotions 2.5%

General marketing and promotions 4.0%

Entertainment 1.5%

General advertising 1.0%

Total 9.0%

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Marketing - AEMP

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Marketing - AEMP

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Why 9%?

We need high member penetration within the 2 – 5 km area – The average NSW clubs needs 17% of every adult within 5km to be a member

Average Qld club needs 12% penetration Larger clubs with over 250 machines needs a 30%

penetration rate in 5km On average, each member must visit around 11

times each year and spend $55 Clubs survive on localised repeat visitation and

this requires regular communication and engagement

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Why 9%?

High level of competition Members benefits form a large part of AEMP and

this is like a running “dividend” A large part of our benefits are provided as goods

in the venue, such as meals, which are recorded at the full sales level but actually cost less (cost of goods)

But we suspect that clubs have historically layered additional marketing initiatives rather than rationalise, refine, rotate and modify

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Where is it going? Web-based and SMS platforms are obviously

more cost effective compared with the traditional forms of communications

But clubs still cater by and large to an aged demographic and they don’t respond well to this technology

Fighting against a very crowded array of messages

Response rates very low (20% open rate and 4% click-through rate are considered good)

The real costs are in the database and technology

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Where is it going?

Social media marketing – Twitter, Facebook 350 million users worldwide 7.6 million users in Australia But it’s hard to get a clear message on social

media Greatest benefit is gained when it is used as a

referral base from users (the social media community)

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Where is it going?

More tiered loyalty This is particularly the case in Qld with four

casinos Competition of the “wallet” Most wallets carry 12 cards We carry on average 3-4 credit cards each Add to that Medicare, MBF, licence, debit cards,

senior card and it’s a crowded space So your card has to be relevant Rebates of between 0.25% and 0.50% turnover

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Measuring ROI

If we spend 9% of every dollar that comes through the door on AEMP, then we must understand the return

Every material marketing activity would benefit from:– A business case assessment – A post completion short term and longer term

impact and return assessment

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How to measure ROI

Door counters Average spend analysis (revenue/door count) Hourly revenue tracking and comparison Player loyalty expenditure analysis Focus group research Survey research Compare business activity with and without the

marketing event (do nothing v outcome case)

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Some common issues

Marketing activity that generates enormous crowds but no-one enjoys themselves

Marketing activity that simply moves existing visitation or expenditure to a different time or a lower margin product

Marketing activity that drives low value customers in preference to high value customers

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Some common issues

Poorly executed marketing activities that no-one understands including staff

Broad media marketing eg radio and TV when most clubs cater for a localised catchment (65% within 2km)

Showcases v cash v product rewards Small v medium v large cash rewards Members’ draws? Gaming promotions that annoy premium players Entertainment that annoys players

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Summary

In the current market there is a need to drive EBITDA

EBITDA below 15% needs to be improved upon We advocate all management understanding

EBITDA All staff should understand the budget and be

provided with business results At 9%, AEMP can be a big black hole or used to

drive the business Marketing is an investment

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Jim HollingtonPartner PKF Chartered Accountants and

Business Advisors

Geoff WohlsenPrincipal DWS