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Arena Leisure (ARE)

Sector:

Travel & Leisure

Index:

FTSE Small Cap

Market Cap

£91.96m

Change Today

0.000p ()

Share Price

25.25p

Interim Results

RNS Number : 2665A

Arena Leisure PLC

31 July 2008

ARENA LEISURE PLC

INTERIM RESULTS FOR SIX MONTHS ENDED 30 JUNE 2008

Arena Leisure Plc (‘Arena’), the operator of seven racecourses and one quarter of the UK’s annual horseracing fixtures, today announces its interim results for the six months ended 30 June 2008. The highlights of the statement are as follows:

Financial:

· Revenue increased by 23% to £31.2m (2007: £25.3m) due to the in-house catering business and the re-opened Doncaster Racecourse operating throughout the period (2007: three months only and closed throughout, respectively)

· Profit before interest and tax increased by 43% to £2.3m (2007: £1.6m)

· Profit before tax reduced by 41% to £1.4m (2007: £2.3m) following a £1.0m year-on-year, one-off, non-cash movement in net finance expense as a result of the IFRS treatment of interest free loans

Operational:

· Total attendances during the period increased to 305,000 (2007: 226,000). Fixtures staged increased to 205 (2007: 177)

· First full year for Doncaster Racecourse after its August 2007 re-opening, with attendances of 93,000 (2007: nil) from 17 fixtures (2007: nil)

· Southwell and Worcester Racecourses now fully operational following the 2007 flood damage

· The new in-house catering business is delivering clear operational benefits and, importantly, improvements in customer service and food quality

· Arena’s 47.5% shareholding in At The Races generated £0.1m profit after tax (2007: £0.3m loss). In June, ATR was named winner of the Best Sports Service category at the Broadcast Digital Channel Awards

Estate development:

· Franchise agreed with Marriott International enabling the new Lingfield Park hotel to operate under the Marriott Hotel & Country Club brand. Construction commenced on 116-bedroom hotel and leisure development in May 2008, with £23.0m of additional debt financing secured

· Parliament approved Wolverhampton City Council as the recipient of one ‘small’ casino licence, which Arena remains hopeful of obtaining in due course

Raymond Mould, Arena’s Chairman, said:

“The first six months of 2008 have proved a challenging trading environment for Arena, in common with most consumer facing leisure businesses in the UK. It is expected that Arena will continue to experience challenging trading conditions throughout the second half of the year, particularly in terms of attendances and spend per head. Based upon the current economic conditions, we anticipate trading in line with recently revised market expectations.

“Doncaster Racecourse is now in its first full year of operation following its re-opening in August 2007, as is the new catering business which is delivering clear operational benefits to the Group and, importantly, to its customers. Doncaster Racecourse’s four-day St. Leger festival in September is an important profit contributor and current booking patterns indicate a reasonable performance can be expected.

“Arena is well placed to operate through the current economic climate, with a business that is cash positive, has manageable gearing levels and sufficient debt headroom to support any further downturn.

“The strategy for the development of the Group’s real estate assets remains robust, with the Group positioning itself to benefit strongly from the economic recovery that is generally anticipated from 2010.”

For further information please contact:

Arena Leisure Plc Tel: 020 7632 2080

Mark Elliott, Chief Executive

Tony Harris, Finance Director

e-mail: contact@arenaleisureplc.com

Bell Pottinger Corporate & Financial Tel: 020 7861 3232

David Rydell

Olly Scott

www.arenaleisureplc.com

HALF YEAR REVIEW

Overview

The first six months of 2008 have proved a challenging trading environment for Arena, in common with most consumer facing leisure businesses in the UK. Attendances at Doncaster Racecourse, now in its first full year of operation following its re-opening in August 2007, are taking longer to rebuild than expected. Both private and corporate hospitality at all courses have been impacted, notably at Lingfield Park and Royal Windsor, but public attendances have proved more resilient.

The catering operation, which we recently brought in-house, has performed well, delivering clear operational benefits to the business and, importantly, its customers. However, income levels in the first half were lower than expected as a result of the reduced hospitality business and lower public spend per head. The in-house model is right for the Group in terms of delivering a customer focused service and growing a sustainable, profitable income stream.

Income from both the Horserace Betting Levy (‘Levy’) and BAGS is more resilient to economic downturns and we have seen an increase in funding from both sources in the period. The anticipated increase in BAGS income was, however, impacted by lower field sizes arising from a significant increase in new winter evening fixtures.

The Lingfield Park hotel development has commenced, with financing secured and a franchise agreement with Marriott International signed. A review of the timing of the Doncaster hotel and residential development is underway in light of the current economic environment. The Wolverhampton ‘racino’ scheme has taken another step forward with the Government awarding Wolverhampton City Council one of the ‘small’ casino licences and we remain hopeful of obtaining this licence in due course.

Financial Review

Revenue in the period increased by 23% to £31.2m (2007: £25.3m). Profit before interest and tax increased by 43% to £2.3m (2007: £1.6m), although profit before tax reduced by 41% to £1.4m (2007: £2.3m). Earnings per share decreased by 38% to 0.40p (2007: 0.65p).

The £5.9m increase in revenue arose principally as a result of the in-house catering business and the re-opened Doncaster Racecourse operating throughout the period (2007: three months only and closed throughout, respectively). In the first three months of 2007 catering was out-sourced and, as a consequence, catering revenue over that period represented only commission related income. Principally as a result of Doncaster Racecourse having staged 17 fixtures in the period (2007: nil), total attendances for the period increased to 305,000 (2007: 226,000).

Profit before interest and tax increased by 43% to £2.3m (2007: £1.6m). Within this, profit from the racecourse operation increased by 9% to £3.5m (2007: £3.2m). This increased racecourse profit includes a £0.5m contribution from the business interruption insurance proceeds received in 2007 following the extensive flooding at Southwell Racecourse and reflects the fact that the racecourse was not fully operational until July 2008. Last year the Group incurred start-up costs of £0.8m (2008: £nil) relating to the catering operation and the re-opening of Doncaster Racecourse. Excluding these start-up costs, the adjusted profit before interest and tax from the racecourse operation declined 12% to £3.5m (2007: £4.0m), reflecting the tough economic environment of the first half and, in particular, the impact on both private hospitality and catering spend. The total number of hospitality customers reduced by 7% to 20,000 (2007: 21,500), despite an additional 3,500 hospitality customers (2007: nil) at Doncaster Racecourse. This net drop in our high value business, which particularly affected Royal Windsor and Lingfield Park Racecourses, together with the underlying lower average attendances, had a negative impact on Arena’s overall profitability of approximately £0.4m. Central costs remained largely constant at £1.3m (2007: £1.2m).

Profit before tax reduced by 41% to £1.4m (2007: £2.3m) largely as a result of a £1.0m year-on-year, non-cash movement in the net finance expense resulting from the IFRS treatment of interest free loans (2008: £0.2m expense; 2007: £0.8m income). Excluding these non-cash accounting adjustments, profit before tax would have increased by 7% to £1.6m (2007: £1.5m). Within this, the actual interest charge for the period increased by £0.6m to £0.7m (2007: £0.1m) as, following completion of the Doncaster Racecourse development, interest on the associated loan is no longer being capitalised.

At The Races (‘ATR’), in which Arena had a 47.5% share in the first half of the year, continued to progress and recorded its first profit after tax. Total revenue for the period increased by 8% to £7.9m (2007: £7.3m). Arena’s share of ATR’s operating profit and profit after tax in the period was £0.3m (2007: £0.1m loss) and £0.1m (2007: £0.3m loss), respectively.

Operating Review

Arena staged 205 fixtures during the period (2007: 177 fixtures), an increase of 16%. Total attendances increased by 35% to 305,000 (2007: 226,000), with the average attendance rising 17% to 1,488 (2007: 1,274). For the UK racing industry as a whole, total attendances for the period increased by 4% to 2.8 million, from 728 fixtures staged (2007: 640), an increase of 14%. The corresponding average attendance per fixture fell by 9%.

The increases in Arena’s total and average attendances were predominantly as a result of Doncaster Racecourse being in operation for the full period. Doncaster attendances were 93,000 (2007: nil) from 17 fixtures (2007: nil). Attendances at Arena’s six other racecourses were 212,000 (2007: 226,000) from 188 fixtures (2007: 177). The additional fixtures in the period were staged at our all-weather courses; of these, 34 (2007: 2) were new winter evening fixtures, largely staged to provide additional live racing to UK betting shops. Attendances at these fixtures tended to be low and, as a consequence, Arena’s average attendance, excluding Doncaster, reduced by 12% to 1,128 (2007: 1,274).

The increase in fixtures staged was not matched by a corresponding increase in the number of horses running, resulting in an increased incidence of races featuring fewer than eight horses and, as a consequence, a lower than anticipated level of BAGS revenue. Nevertheless, the revenue generated by Arena’s BAGS contract increased by 13% to £6.0m (2007: £5.3m). The Levy – which largely funds prize-money and is generated from UK bookmakers’ domestic horseracing profits – has been settled at £116m for 2007/08, significantly above the expected level, resulting in increased prize-money levels from July 2008. The amount available for the winter evening fixtures will increase from £20,000 to £30,000 which should help to increase the number of runners at these fixtures later this year and avoid further impact on BAGS revenue. The additional Levy generated in 2007/8 will be distributed over the next three years, with the aim of providing a sustainable funding level in the medium term. For the first half of this year the Levy’s contribution to Arena’s income increased by 4% to £10.4m (2007: £10.0m).

Attendances at Doncaster Racecourse, which re-opened in August 2007 following a 19-month closure for redevelopment, were noticeably impacted by the economic downturn and have yet to return to pre-closure levels. Poor weather resulted in one fixture being lost and lower than expected attendance at the Lincoln meeting over the early Easter weekend in March, which was also subject to snow fall. Trading at Doncaster Racecourse tends to be weighted towards the second half, which includes the important four-day St. Leger meeting in September, and results in nearly two-thirds of its revenues being generated in the second half of the year. Following the successful staging of a Madness concert after racing on 28 June 2008, which attracted 15,000 people, we anticipate staging further such concerts in 2009.

Following flood damage in 2007, the refurbishment work at Southwell Racecourse completed in July and it is now fully operational. Racing has also recommenced at Worcester Racecourse.

The new in-house catering business is delivering clear operational benefits and, importantly, improvements in customer service and food quality. Whilst we are mindful of the need to keep focused on the additional cost base that Arena has taken on in this regard, particularly in the much quieter first and fourth quarters of the year, the in-house model is expected to provide significant additional benefits to the Group. The profit contribution of the business this year, although weighted to the second half, is expected to exceed the amount generated in any year under the original outsourced arrangement, primarily as a result of the re-opening of Doncaster Racecourse. It is, however, more exposed to seasonality than the previous commission-based, out-sourced model and we have seen this effect in the first half of the year due to the weighting of our business towards the second half of the year.

ATR has continued to develop and build upon its audience base. Of particular note was a growth in advertising revenue from the number of TV channel viewers and the naming of ATR as winner of the Best Sports Service category at the Broadcast Digital Channel Awards. ATR remains the UK and Ireland’s most watched, dedicated horseracing channel, with over 1.5 million individual viewers per month. attheraces.com also remains the UK’s largest horseracing website with over 490,000 unique users, making it one of the UK’s most visited sports betting websites. Advertising revenues in the second half of the year are expected to be impacted as a result of the reduced advertising rates currently being paid. On 24 July 2008, ATR issued new shares to a number of racecourse partners in accordance with long standing commitments. As a result, from that date, Arena’s holding in the ordinary shares of ATR is 45.85%.

Estate development

Clearance work on the site of the 116-bedroom hotel and leisure development at Lingfield Park Racecourse commenced in May 2008 and construction of the new hotel, golf clubhouse, restaurant, bar, hospitality boxes, staff offices and ticketing entrance building has now commenced. Arena has entered into a franchise agreement with Marriott International to operate the hotel under the Marriott Hotel & Country Club brand. The Lingfield Park development has an anticipated opening date of spring 2010. In order to reduce the risk associated with this development, the Board has taken the decision to sell the site of the former leisure club adjacent to the Racecourse and on which residential planning permission has been obtained. As a consequence, the net cost of the project will be £27.0m.

Financing for the development is in the form of a £23.0m five-year term loan at a margin of 250bps over LIBOR. The Group’s total committed debt facilities now stand at £62.5m. Due to the current economic climate and the inflated costs of development debt financing, we are reviewing the timing of our capital development projects, in particular the hotel and residential development at Doncaster Racecourse. The Board remains confident that this is a commercially exciting opportunity and will commence the project when market conditions improve.

During the period, Parliament granted a ‘small’ casino licence to Wolverhampton City Council. This is an important step forward for our proposed integrated hotel, racecourse and casino (‘racino’) scheme at Wolverhampton Racecourse. We remain hopeful that our site will be the chosen location for the subsequent grant of a licence; however, current indications are that the process for awarding the ‘small’ casino licence will not conclude until the end of 2009.

Board of Directors

Tony Harris joined the Board as Finance Director on 1 May 2008 having previously been Chief Financial Officer of The UNITE Group plc. Prior to this he spent 13 years working in the hotel industry with Inter-Continental Hotels Group and, more recently, Hilton International. Tony’s appointment is a key part of the Group’s focus on the successful delivery of its important development projects.

Employees

The Board is extremely grateful to the hard work and dedication of Arena’s staff and looks forward to their ongoing commitment as the business continues to progress.

Dividend

In accordance with its stated dividend policy, the Board has declared an interim dividend of 0.25 pence per share (2007: 0.25 pence per share) that will be paid on 30 September 2007 to shareholders on the register at the close of business on 22 August 2007.

Outlook and Risk Assessment

The Board expects that Arena will continue to experience challenging trading conditions in the second half of the year with pressure remaining on both attendances and spend per head. Doncaster Racecourse’s four-day St. Leger festival in September is an important profit contributor and current booking patterns indicate a reasonable performance can be expected.

As highlighted above, the Levy and bookmaker related media income streams (BAGS) are more resilient in nature. The Board considers that attendances, particularly from the corporate sector, have been impacted by the current economic climate. The nature of Arena’s portfolio of seven racecourses, encompassing flat, jump and all-weather racing, gives a degree of diversification to trading risk. Similarly the increasing focus on non-raceday activities adds an element of diversification, although this is currently a relatively small part of total revenue. The Group’s cost base is largely fixed in nature. These costs, together with the variable costs incurred in particular on race days, are very carefully monitored to ensure that they remain appropriate to the level of revenue generated.

The Lingfield Park project has undergone rigorous market assessment before commencement, has suitably competent project management, a fixed price construction contract with an experienced main contractor and a franchise contract with Marriott International. The Board is comfortable that from a financial and development risk perspective the Group’s short and medium term gearing levels and operational leverage will remain at acceptable levels.

Arena is well placed to operate through this difficult phase of the economic cycle, with an operating model that is cash positive, with manageable gearing levels and sufficient debt headroom to support any further downturn. Based upon the current economic conditions, we anticipate trading in line with recently revised market expectations.

The strategy for the development of the Group’s real estate assets remains robust, with the Group positioning itself to benefit strongly from the economic recovery that is generally anticipated from 2010.

Raymond Mould Mark Elliott

Chairman Chief Executive

30 July 2008

Condensed Consolidated Interim Income Statement
		Six months	Six months	Year
		ended	ended	ended
		30 June 2008	30 June 2007	31 December 2007
		Unaudited	Unaudited	Audited
	Note	£'000	£'000	£'000

Revenue	6	31,189	25,320	57,920
Cost of sales		(23,044)	(18,092)	(42,024)
Gross profit		8,145	7,228	15,896
Other operating income	7	529	-	1,352
Administrative costs excluding impairment losses		(6,486)	(5,275)	(11,351)
Impairment losses	11	-	-	(1,050)
Profit from operations	6	2,188	1,953	4,847
Non-operating income and expense Share of post-tax profit/(loss) of joint venture		- 116	- (338)	1,370 (215)
Profit before interest and taxation		2,304	1,615	6,002
Finance expense	8	(1,095)	(399)	(2,053)
Finance income	8	152	1,081	1,895
Net finance (expense)/income	8	(943)	682	(158)
Profit before taxation		1,361	2,297	5,844
Income tax expense	9	-	-	-
Profit for the period		1,361	2,297	5,844
Attributable to:
Equity shareholders of the parent company		1,440	2,349	5,935
Minority interest		(79)	(52)	(91)
Profit for the period		1,361	2,297	5,844

		Pence	Pence	Pence
Earnings per share	10
Basic earnings per share		0.40	0.65	1.63
Diluted earnings per share		0.40	0.64	1.63


Condensed Consolidated Interim Statement of Changes in Shareholders' Equity
		Six months	Six months	Year
		ended	ended	ended
		30 June 2008	30 June 2007	31 December 2007
		Unaudited	Unaudited	Audited
	Note	£'000	£'000	£'000

Profit for the period		1,361	2,297	5,844
Share-based payment expense	16	172	48	153
Minority interest equity contribution	13	-	-	2,000
Dividends paid	14	(1,093)	(947)	(1,858)
		440	1,398	6,139
Total equity at the beginning of the period		70,411	64,272	64,272
Total equity at the end of the period		70,851	65,670	70,411
Attributable to:
Equity shareholders of the parent company		69,054	65,755	68,535
Minority interest	13	1,797	(85)	1,876
		70,851	65,670	70,411