Annual Report
Aristocrat Leisure Limited (ASX: ALL) is a leading global provider
of gaming solutions that consistently outperform the competition.
The Company is licensed by over 200 regulators and its products
and services are available in over 90 countries around the world.
Aristocrat offers a diverse range of products and services including
electronic gaming machines, interactive video terminal systems, electronic
tables and casino management systems. For further information visit
the Company's website at www.aristocratgaming.com.
The directors present their report together with the financial statements of Aristocrat Leisure Limited and its controlled entities (`Group') for
the 12 months ended 31 December 2007. The information in this report is current as at 26 February 2008 unless otherwise specified. The
directors of Aristocrat Leisure Limited (`Company') during the 12 months ended 31 December 2007 and up to the date of this report are:
The principal activities of the Group during
the 12 months under review were the
design, development, manufacture and
marketing of gaming machines, software,
systems and other related equipment and
services. The Company's objective is to
be the leading global provider of gaming
solutions. There were no significant changes
in the nature of those activities during the
12 months ended 31 December 2007.
The Dividend Reinvestment Plan (`DRP')
was in operation for the interim and
supplementary unfranked dividend for
shareholders resident in Australia and New
Zealand. Shares were acquired on-market
to satisfy those shares provided under the
DRP. Similarly, the DRP will also operate
in respect of the 2007 final dividend.
A review of the operations of the Group for
the 12 months ended 31 December 2007
is set out in the attached Management
Discussion and Analysis which forms part
of this Directors' Report. The operating
result of the Group attributable to
shareholders for the 12 months ended 31
December 2007 was a profit of $247.2
million after tax and minority interest.
Other than the refinancing of the Group's
debt facilities referred to in the Management
Discussion and Analysis, no material
matters requiring disclosure in this report
have arisen subsequent to 31 December
2007. To the best of their knowledge, the
directors are not aware of any other matter
or circumstance that has arisen since
31 December 2007 that has significantly
affected or may significantly affect:
The liabilities insured are legal costs that
may be incurred in defending civil or
criminal proceedings that may be brought
against the directors, secretaries or officers
in their capacity as officers of entities in
the Group, and any other payments arising
from liabilities incurred by the directors,
secretaries or officers in connection with
such proceedings, other than where such
liabilities arise out of conduct involving
a wilful breach of duty by the directors,
secretaries or officers or the improper use
by the directors, secretaries or officers
of their position or of information to gain
advantage for themselves or someone else
or to cause detriment to the Company.
In accordance with usual commercial
practice, the premium paid and the
terms of cover secured by that premium
are confidential under the terms of the
insurance contract. It is not possible to
apportion the premium between amounts
relating to the insurance against legal costs
and those relating to other liabilities. The
assets of the Group are adequately insured
for reasonably foreseeable contingencies,
in line with normal business practices. The
insurance does not provide cover for the
independent auditors of the Company.
The Group's operations have a limited
impact on the environment. The Group
is subject to a number of environmental
regulations in respect of its manufacturing
and integration activities. The Company
manufactures gaming machines, games
and systems at its Australian facilities
which are zoned Industrial (4) under
local Environmental Plan 114 and are
the subject of New South Wales and
Australian federal environmental legislation.
The Company integrates (assembles)
machines and systems in the USA, Macau
and Japan. Machines are also assembled
under contract in Japan. The Company
uses limited amounts of chemicals in its
manufacturing and assembly processes.
The directors are not aware of any breaches
of any environmental legislation or of any
significant environmental incidents during
the 12 months ended 31 December 2007.
The Company, with the prior approval of
the Chair of the Audit Committee, may
decide to employ PricewaterhouseCoopers,
the Company's auditor, on assignments
additional to their statutory audit duties
where the auditor's expertise and
experience with the Company and/or the
Group are important. The Company has
a charter of audit independence which
specifies those non-audit services which
cannot be performed by the Company
auditor. The charter also sets out the
procedures which are required to be
followed prior to the engagement of the
Company's auditor for any non-audit
related service.
The Board of Directors has considered
the position and, in accordance with the
advice received from the Audit Committee is
satisfied that the provision of the non-audit
services is compatible with the general
standard of independence for auditors
imposed by the Corporations Act 2001. The
directors are satisfied that the provision of
non-audit services by the auditor, as set out
in Note 34 to the financial statements did
not compromise the auditor independence
requirements of the Corporations Act 2001
for the following reasons:
The Company is of a kind referred to
in Class Order 98/0100 issued by the
Australian Securities Investments
Commission relating to the `rounding off'
of amounts in the Directors' Report and
Financial Statements. Amounts in the
Directors' Report and Financial Statements
have been rounded off to the nearest
thousand dollars in accordance with that
Class Order.
The Australian market was impacted by
the introduction of non-smoking legislation
coupled with delays in the approval and
take up of Ticket-in Ticket-out technology.
In North America, the replacement cycle
remained depressed with demand skewed
towards stepper product and limited new
market opportunities. While the Japanese
market fully transitioned to Regulation 5
in October, the overall size of the pachislot
installed base has declined. Despite an
improvement in sentiment to Regulation 5
towards the end of the year, overall sales
for the year remained modest.
Reported results were significantly impacted
by the strengthening of the Australian
Dollar over the period with the currency
appreciating 11.3% against the US Dollar
and 12.4% against the Japanese Yen
compared with the prior year. This had the
effect of reducing the translated value of
foreign denominated earnings (`translational
impact'). The translational impact for the
year reduced reported Revenue by $81.2
million and Profit after Tax by $18.4 million.
The net transactional foreign exchange
impact (`transactional impact') on underlying
local currency denominated transactions
over the year was insignificant. In overall
terms, when adjusting for the translational
impact of foreign exchange, Revenue
would have been $1,203.2 million and
Profit after Tax $266.3 million. Further
discussion on foreign exchange translational
and transactional impacts and their
management is included later in this Report.
At 31 December, debt exceeded cash
on hand by $111.8 million, a $71.0 million
increase from the net debt position at the
end of the prior year. This increase reflects
the net impact of $253.0 million returned
to shareholders through dividends and other
capital management initiatives together with
capital expenditure for the period offset by
operating cash flow.
Despite the substantial strengthening of
the Australian dollar and ongoing difficult
market conditions in the Group's three
largest regions, the strong performance
of businesses in emerging markets has
enabled the Group to report a record full
year result. This profit increase together with
a lower weighted average number of shares
on issue resulting from the Group's ongoing
share buy-back program, have delivered
fully diluted earnings per share of 52.8 cents
per share, a 3.7% increase on 2006. At like-
for-like exchange rates, earnings per share
improved 11.4%.
Reported revenue results of individual
businesses varied significantly with the
Australian performance marginally ahead
of the prior year, North and South America,
New Zealand and ACE Interactive (`ACE')
reporting revenue declines while Japan,
Other International (comprising Asia Pacific,
Europe and South Africa) and Elektron cek
posted double digit revenue growth. The
revenue declines in North and South
America in particular were exacerbated by
the strong Australian dollar which reduced
the reported value of revenues compared
with the prior year.
In other regions, revenue in New Zealand
continues to be impacted by adverse
regulatory requirements with the market
expected to pick up over 2008, while in South
America reported revenue declined as a result
of the timing of cash receipts which impacted
revenue recognition and the particularly
favourable comparative result which included
cash collections on prior period sales.
Elsewhere, revenue performance was positive
with Asia Pacific reporting strong growth
(up approximately 100%) as the Group
continued to capture a significant share
of this rapidly expanding region.
Corporate/Other Income improved by
almost 88% ($7.1 million) reflecting
improved supply chain efficiency offset
in part by $6.0 million of relocation,
redundancy and other non-recurring
costs associated with the closure and
relocation of the Group's Australian
manufacturing operations. This change has
further progressed the Group's strategy
to transition from a traditional vertically
integrated manufacturer to one of a regional
integrator focused on the local assembly of
modules purchased from strategic suppliers.
The effective tax rate for the year of 24.4%
is lower than the 28.6% full year 2006 rate
and marginally lower than the 2007 half
year rate of 24.8%. This reduction in the
current year has been driven by a number of
factors including research and development
concessions, the benefits of more
favourable overseas tax regimes, the non-
taxable profit on the disposal of property
and the recognition of deferred tax losses
on land and buildings held for sale.
The dividend franking outlook continues to
remain positive and the 2007 final dividend
payable on 31 March 2008 will be fully
franked. Subject to maintenance of current
earnings mix and agreed positions with
various taxation authorities around the
world, the Group anticipates it will continue
to fully frank dividends in the order of 60%-
70% of annual earnings going forward.
The improvement in Profit after Tax,
together with the reduction in the weighted
average number of shares as a result of the
Group's capital management initiatives, has
resulted in fully diluted earnings per share
increasing by 1.9 cents (up 3.7%) to 52.8
cents. Basic earnings per share increased
by 1.8 cents to 53.0 cents (up 3.5%).
Fully diluted Operating Cash Flow Per
Share also strengthened, increasing
3.8 cents to 47.4 cents (up 8.7%).
Net Working Capital increased from $83.9
million at 31 December 2006 to $135.5
million. The main driver of this increase was
higher receivables in emerging markets
where trading terms are generally more
competitive than in more established
markets. Timing of Australian sales and the
increased momentum in Japan towards
the end of the year also had an influence
on the increase in Working Capital.
A reduction in North American inventories
and trade receivables partially offset
these impacts. Net Working Capital as a
The 40.1% decline in Other Assets to $45.5
million primarily results from lower non-
current receivables in Australia relating to
Value Added Service Agreements (`VASA')
and the offsetting of deferred revenue on
legacy contracts with the underlying asset
following the resolution of disputed amounts.
Property, Plant and Equipment increased
$8.0 million reflecting capital expenditure
of $52.2 million offset by disposals and
depreciation. Total capital spend on
participation units was $31.8 million as
a result of the net increase in the installed
base. A further $4.0 million was spent on
the opening of the Group's new Australian
integration centre with ongoing "stay-in-
business" capital expenditure amounting
to $16.4 million.
At 31 December 2007, $40.5 million
was provided in respect of the inaugural
supplementary unfranked dividend of
10 cents per share which was paid on
7 January 2008. This dividend forms part
of the initiation of the next phase of the
Group's capital management strategy
announced in August 2007.
In overall terms, Shareholders' Funds
decreased from $365.0 million at 31
December 2006 to $320.8 million.
This change reflects the $247.2 million
profit after tax for the period offset by
$222.1 million of dividend payments, a
$52.4 million reduction in equity arising
from shares bought back and a $14.6
million movement in the foreign currency
translation reserve as a result of the
strengthening of the Australian Dollar.
Operating cash flow improved $17.4
million (8.5%) to $222.2 million mainly
as a result of a combination of higher
EBITDA and lower tax payments. Taxes
paid reduced $18.6 million as a result of
lower tax payments in America and Japan
compared to the prior year. Movements
in operating assets and liabilities primarily
result from the increase in net working
capital associated with expanding business
in emerging markets partially offset by a
reduction in VASA balances.
The net cash outflow from acquisitions
fell $150.4 million to $3.1 million as the
prior period result was largely driven by
the acquisition of interests in Elektron cek,
ACE and PokerTek, Inc. which collectively
amounted to $141.4 million. The payment
in the current period reflects the final
earn out payment on the Elektron cek
acquisition.
The net cash outflow on other investing
activities represents capital expenditure
undertaken across the Group's operations.
Expenditure this period increased
$16.1 million to $52.2 million primarily
representing increased investment in
participation units and the opening of the
Australian integration centre.
A final dividend in respect of the year
ended 31 December 2007 of 25 cents
per share fully franked ($116.1 million)
has been declared and will be paid on
31 March 2008. The Dividend Reinvestment
Plan (`DRP') will operate in respect of this
dividend (for shareholders resident in
Australia and New Zealand), with shares
acquired on-market to satisfy those shares
to be provided under the DRP. No discount
will apply in determining the DRP issue price.
Total dividends declared in respect of
the 2007 year amount to 49.0 cents per
share, with average franking of 79.6%.
This represents a 36.1% increase on the
total dividend payout of 36 cents per
share in respect of 2006. Excluding the
supplementary unfranked dividend, the
payout ratio was 73.6%.
On 23 August 2007, the Group announced
the next stage of its capital management
program. This next phase follows initiatives
which have collectively distributed almost
$400 million back to shareholders since
October 2004, with a total of 24.7 million
shares (5.2% of opening share capital)
acquired over that time.
Given the Group's strong underlying
cash flows and financial position, with
limited demands for capital to support
its projected organic growth combined
with tight controls over working capital
and a continued focus on cash flow
management, the Group announced that it
would bring a more optimal level of gearing
into the balance sheet. This will be effected
through:
The Group expects to continue the payment
of supplementary unfranked dividends
on an ongoing basis and to complete
the proposed on-market share buy-back
program over the planned time horizon,
subject to its overall earnings performance,
prevailing economic circumstances,
alternative strategic demands on funds
or alternative, more effective capital
management opportunities becoming
available.
The Group is confident that it retains
ample financial flexibility and its actions
are consistent with its overall capital
management objectives. The outlook
for cash flow remains positive, with the
business requiring limited capital investment
to grow organically combined with tight
controls over working capital and continued
focus on cash flow management.
The Group will continue to proactively
review capital management initiatives
on an ongoing basis.
Subsequent to balance date, the Group
replaced its existing debt facilities with
a new three year $835 million debt and
USD200 million Letter of Credit facility.
These increased facilities support the next
stage of the Group's capital management
program. Despite the prevailing weak credit
environment following the US sub prime
issues, financing costs under this new
facility have increased only marginally and
will not have a material impact on future
reported earnings. This result is testament
to the Group's strong underlying business
and financial strength and its investment
grade credit rating.
For financial management purposes,
the Group pays particular attention to
the interest cover ratio (EBITDA/Interest
Expense) as it reflects the ability of the
Group to service its debt and is regarded
as more relevant than gearing calculations.
The Group's objective is to maintain
conservative debt levels and to continue
to operate at debt coverage ratios which
are well within those considered appropriate
of an investment grade rating.
Monthly profits earned offshore are
translated into Australian dollars at the
prevailing month end rate. Assets and
liabilities are translated at exchange
rates prevailing at the reporting date.
Translational exposures are accounting
in nature and are not hedged, other than
naturally where possible.
In the current period, Revenue and Profit
after Tax were adversely impacted by
$81.2 million and $18.4 million respectively
as a result of the translational impact of
the generally stronger Australian dollar
compared with the prior corresponding
period. In addition, the net effect of the
retranslation of the net assets of foreign
controlled entities (recognised through the
foreign currency translation reserve) was
$14.6 million.
Based on the Group's 2007 mix of
profitability, the major exposure to
translational foreign exchange results from
the Group's US dollar profits. A USD 1
cent change in the USD/AUD exchange
rate results in an estimated $2.1 million
translational impact on the Group's reported
Profit after Tax. This impact will vary as the
magnitude of overseas profits change.
The transactional foreign exchange impact
is dependent on the actual realisation of
timing differences of the various currency
cash flows and their recognition through
the profit and loss account. As a result,
the impact of transactional foreign
exchange on the profit and loss account
can only be estimated. Cash flow
exposures are subject to active monitoring
and risk management, including the
hedging of specific transactions and
natural hedges.
In overall terms, taking into account
specific and natural hedges and timing
differences, the transactional foreign
exchange impact on the Group's profit for
the year is estimated to be insignificant.
Future impacts will depend on the mix
of the Group's business and the timing
of the recognition of foreign exchange
denominated transactions through the
profit and loss account.
In this review, segment profit/(loss) is before
charges for licence fees, research and
development costs, corporate expenses,
international service recharges, advance
pricing agreements and any impairment
of intangible assets and other non-trading
assets. The total amount of these items is
included in the unallocated category. Constant
currency amounts refer to results restated
using exchange rates applying in 2006.
Despite difficult market conditions, revenue
increased by 1.4% primarily driven by higher
average unit prices (a combination of mix
and price) offset by a reduction in platform
volumes. Sales of multi-terminal gaming
machines also contributed to increased
revenue although these were unfavourable
to overall margin. Also contributing to the
reduction in margins was the impact of
unfavourable mix in games sales despite
increased volumes.
Although market sentiment is improving,
full smoking bans in New South Wales
(`NSW'), Victoria and South Australia
adversely impacted operator revenues
with a consequential impact on spending
on gaming floors. This was exacerbated
by the increase in club taxation rates in
NSW and the introduction of new taxes in
Victoria. Platform volumes fell 11.6% while
conversion volumes increased 8.4%. The
Group's share of the installed base remains
at 67%.
Reported revenue decreased by 14.4%
and profit fell 19.2%. In constant currency
terms, revenue declined by 4.8% and
profit by 9.9%, reflecting a reduction in
overall sales volumes only partially offset
by improved pricing. Margin declined as
a result of a combination of adverse mix,
lower recurring revenue margins and the
relative fixed cost base of the business.
Underlying selling, marketing, general and
administration cost increases were limited
to 2.4% despite investment in resources
to support new products and developing
future opportunities such as server-based
gaming, the Viridian
The overall size of the market declined
reflecting both the subdued state of the
replacement cycle and the lack of new
jurisdictions opening up in the period. At the
same time, market volumes were skewed
towards stepper (mechanical) product,
contrary to the trend of the past few years
where video has made up the dominant
share of overall sales. Platform sales declined
22.6% to 13,807 units with the Group
retaining its approximate 40% share of all
new video sales, albeit in a smaller overall
market segment when compared with 2006.
The Group finally re-launched its 5-reel
stepper product in August, after a number
of false starts. While performance in the
field has been encouraging, operators have
been reluctant to commit to purchasing
units without a trial period, which slowed
the rate of sales. Nevertheless, by the
end of the year, a total of 586 units had
been sold, 452 units were placed on
participation, with a further 538 units on
trial/order.
The 2008 outlook for the business is
positive with the overall size of the market
expected to increase as new jurisdictions
open up, a progressive reversion towards
a normal level of video vs stepper sales
mix expected to benefit the Group's sales
volumes, and a full year's contribution of
stepper sales. In addition, the Group is
expecting to benefit from positive operator
feedback in relation to its new Viridian
Revenue and profit declined due to the
timing of sales and collections, with the prior
corresponding period having benefited from
collections of 2005 and legacy revenues.
The timing of this revenue recognition also
distorted margin in percentage terms. On a
full accruals basis, prior to the recognition
of collections on legacy contracts, constant
currency revenue increased 28% and
profit 39% year on year with the business
recording a margin of 39.7%.
The Group continues to focus its sales
efforts on a small group of selected key
accounts, comprising many of the region's
principal gaming operators and will continue
to add selected products to its South
American product library to increase both
sales and its recurring revenue installed
base as markets in the region continue
to expand.
Revenue increased by 81% driven by
an increase in unit sales albeit at a lower
average selling price. The result improved
from a loss of $5.6 million to a profit of
$5.9 million reflecting higher volumes at
a broadly flat Yen gross margin per unit,
offset by inventory provisioning and re-
work costs associated with the transition
to new Regulation 5 games. The margin
at 6.5% remains substantially below
the 20+% recorded in prior years under
Regulation 4 as a result of the relatively
low volume vs the fixed cost base of the
business and the effect of the $8.3 million
(2006: $7.4 million) provision which was
booked for redundant inventory resulting
from the transition to Regulation 5. In
constant currency terms, gross margin
before inventory provisioning and fixed
selling costs improved from 23.4% in
2006 to 27.3% in the current year.
Although the pachislot market remains in
an uncertain state, since the full transition
to Regulation 5 in the final quarter of
the year, there appears to have been a
positive change in operator sentiment, with
selling prices stabilising and a heightened
operator interest in new product. The
outlook for 2008 is positive as the
market adjusts to the new Regulation
5 environment and the Group remains
confident of re-establishing its 5%-6%
market share, albeit in a market which in
the short term will be somewhat smaller
than its peak of a few years ago.
The market remained difficult in 2007 as
operators continued to defer purchases of
new product so as to retain more `player
friendly' grandfathered games. Reported
revenue fell by 5.3% as a result of lower
volumes, while the relatively fixed cost base
of the business resulted in profit declining
17.4% with margins deteriorating by
5.5 percentage points.
The restrictive regulatory environment
and the introduction of responsible gaming
legislation requiring random interruptive
Player Information Display (`PID') have
reduced the national installed base of
gaming machines in clubs and hotels by
over 20% from a peak of 25,221 in 2003
to 20,163 at the end of September 2007.
Singapore, where two major casinos are
currently being constructed but are not
expected to open until 2009/10. In the
Philippines, further gaming machines have
been placed in PAGCOR venues under the
Group's participation agreement, although
revenues at this stage remain relatively
modest. The Group has also established a
preferred supplier status for the region with
the Elixir group, which resulted in significant
sales in the year.
Revenue increased by 63% and profit
increased by almost 160% driven by record
unit volumes and a higher proportion of
premium product sales. Sales volumes were
particularly strong in France and Slovenia,
with regulation changes combined with
strong game performance resulting in
increased demand for the Group's products
across much of the region.
The Group expects the momentum and
growth experienced during the year to
continue in 2008 although this is heavily
dependent on the receipt of key product
and cabinet approvals. The Group is also
expanding into new jurisdictions in the
region and expects to launch its first game
into the Spanish market in 2008.
Revenue increased 16% and profit
increased over 30%, reflecting higher
recurring revenue placements and systems
revenue. At the end of the reporting
period, the Group had a recurring revenue
product installed base of over 900 units,
an increase of 131% on the prior year. The
Group also installed the first System7000
Prime
The Group's growth in Macau was the
standout, driven by the outstanding
performance of the Group's products in this
expanding market. As a number of major
new casinos opened and existing casinos
expanded their operations, the overall
installed base of gaming machines grew
38% to more than 10,000 over the year.
This work
included building additional functionality
to meet the demands of casino operators
and to ensure it complies with the various
Gaming Laboratories International (`GLI')
standards. This system is expected to be
approved for use in Class III casinos by
GLI in the first quarter of 2008, with trials
planned during the first half of the year.
During the year, the European Free Trade
Association Court overturned a challenge
against Norsk Tipping (`NT'), allowing it
to recommence the rollout of ACE's VLT
system in Norway. ACE had originally been
awarded the contract by NT to provide
a turnkey server-based gaming solution
in 2002. ACE has been actively working
with NT to resume the rollout of VLTs
connected to the ACE system with the first
500 terminals expected to be installed and
operational during the second half of 2008.
The Elektron cek business achieved strong
sales in Europe and Asia. In Macau,
Elektron cek has grown its share of the
installed base of MTGMs from 55% to
61%. Sales in the United States and
Australia were lower than expected due
to ongoing regulatory delays which have
hindered the product from gaining traction
in these markets. In Australia, although
approval was obtained to sell Elektron cek
products to the NSW club market, the
Government has subsequently announced
a cap on the number of units that may be
installed, which will impede the products'
potential.
This report details the policy and principles
that govern the remuneration of directors
and executives of the Company, the link
between remuneration policy and principles
and the Company's performance for
the financial year, and the remuneration
and service agreements of directors and
executives.
February 2007. Up to the
date of his appointment and for the full
year ended 31 December 2006, SCM
Kelly held the role of Chief Financial Officer
and met the definition of executive key
management personnel for that period.
Throughout this report, details in relation
to SCM Kelly for the full 2007 year are
shown under director disclosures. For
the full 2006 year, SCM Kelly's details are
shown under executive key management
personnel disclosures.
The combination of fixed and variable pay
components including short and long-term
incentive strategies is aligned with these
principles to achieve the above objective of
the remuneration policy. Senior executive
remuneration is by design structured to
have a larger proportion of `at risk' reward
to leverage long-term performance. Short-
term incentive rewards require achievement
of specific Net Operating Profit and Funds
Employed targets as measured against a
combination of corporate, business and
personal objectives. Long-term incentive
rewards require achievement of Total
Shareholder Return (`TSR') and/or Earnings
Per Share Growth (`EPSG') targets versus a
comparator group. These specific measures
enable the Company to clearly evaluate
its performance in delivering long-term
sustainable shareholder value creation.
The fees paid to non-executive directors
reflect the demands and responsibilities
associated with their roles and the global
scope and highly regulatory environment
that the Company operates in. Fees
include a provision for the onerous probity
requirements placed on non-executive
directors by regulators of the global
jurisdictions in which the Company
operates. The Company's non-executive
directors only receive fees (including
superannuation) for their services. The only
addition to fees is the cost of reasonable
expenses which are reimbursed as incurred.
Non-executive directors' fees and payments
are reviewed annually by the Board. Non-
executive directors do not participate in any
short-term incentive plans; however, non-
executive directors are able to contribute
a portion of their remuneration to purchase
shares on-market during appropriate trading
periods.
Non-executive directors' fees, including
committee fees, are set by the Board within
the maximum aggregate amount of
A$1,750,000 approved by shareholders at
the Annual General Meeting in May 2004.
Current fees for directors effective from 1
July 2007 are set out in the table below.
The Chairman does not receive any
additional fees for his committee
responsibilities. Other non-executive
directors who also chair, or are a member
of a committee, receive a supplementary
fee in addition to their annual remuneration.
A resolution was passed at the Annual
General Meeting in May 2004 to cease
retirement allowances for any directors
appointed after May 2003. There currently
remain two eligible directors who were
appointed prior to May 2003 with existing
accrued retirement allowances who have
had their entitlements frozen as at 1 June
2004. The frozen allowances are preserved
and indexed to the annual change in the
Consumer Price Index (All Groups) and
may only be paid out when eligible directors
actually leave the Board.
Fixed remuneration is reviewed annually
against the external market and compared
to similar sized roles from a specifically
identified peer group of Australian
companies (based on market capitalisation)
to ensure competitive positioning. The
international nature of the Company's
operations and the global responsibilities
of the executives, in addition to the mix
of knowledge, skills, experience and
performance, are considered when
determining remuneration. The onerous
probity requirements placed on executives
by regulators of the global jurisdictions
in which the Company operates are also
considered in determining remuneration
levels.
Executives also receive other benefits
including salary continuance, trauma, death
and disability insurance, financial planning
consultation, annual health assessments,
the costs of which are included within
fixed remuneration. In addition, executives
are able to maintain memberships to
appropriate professional associations.
As appropriate, expatriate executives
receive additional support including
accommodation allowances, travel and
life insurance, and taxation advice.
The short-term incentive plan ensures a
clear linkage between reward and returns
to shareholders by defining key profit and
funds employed targets which need to
be achieved. The short-term incentive
plan applies to those executives who are
able to directly influence the Company's
performance and increase value for
shareholders. The short-term incentive
targets are reviewed annually as part of
the remuneration review cycle.
The plan rewards performance against
overall Company financial targets,
performance against business unit financial
targets and performance against individual
objectives. A combination of these
measures applies to all participants in the
plan with each individual's ability to influence
Company and business unit performance
considered when establishing incentive
targets and their respective weightings.
These targets are structured so that
participants are eligible to receive an
incentive payment if the Company or the
business unit achieves over 85% of target
net operating profit after tax (`NOPAT')
and less than 125% of target Funds
Employed/Working Capital on a graduated
performance scale. Target short-term
incentives vary from 10% to 76% of fixed
remuneration depending on the role and
seniority of the individual. Typically, senior
executives have target short-term incentives
of in excess of 20% of fixed remuneration.
Financial targets are established following
Board review and approval of the annual
plan for the following year. The various
measures, associated range of weightings
and payment thresholds as applied to
executive directors and executives are
detailed below. Above-target incentive
payments are provided for performance
exceeding target levels.
All incentives require final approval from the
Remuneration Committee and the Board
prior to payment following any adjustments
made at the discretion of the Remuneration
Committee and the announcement of
the Company's full year results. Actual
performance measures, criteria and targets
may vary from year to year dependent upon
market conditions and other factors which
the Board may determine.
Performance Share Plan and the
Performance Option Plan. It is intended
that either of these plans, or a combination
of the two, will be used to provide key
executives with a long-term incentive
which aligns their interests with those
of shareholders. To date, the Company
has only offered participation in the
Performance Share Plan.
A long-term incentive plan was
implemented in 2004 which offered key
executives conditional entitlements to
ordinary shares which vest, subject to the
Company achieving certain performance
targets versus a specified comparator
group of companies, on completion of
the designated performance period. The
Performance Share Rights cannot be
transferred, have no voting or dividend
rights, and are not quoted on the Australian
Securities Exchange.
Key executives are allocated a certain
value of participation (`Participation
Value') in the PSP, being a designated
percentage of their fixed remuneration.
This designated percentage, which ranges
from 40% to 76%, is determined based on
a combination of each executive's level of
responsibility, performance, potential and
retention risk. The number of Performance
Share Rights to be allocated is then
determined based on an assessed value
of each Performance Share Right for
the purposes of remuneration packaging
(`Remuneration Value of a Performance
Share Right') at the commencement of the
performance period
The Remuneration Value of a Performance
Share Right is determined by the Board
based on an accounting valuation
performed by Deloitte Touche Tohmatsu
(`Deloitte'), having taken into account
the likelihood that vesting conditions
will be met. This Remuneration Value of
a Performance Share Right will not be
equal to the market value of a share at
the commencement of the performance
period as a result of Performance Share
Rights being contingent rights to shares
in the future. The Remuneration Value
of a Performance Share Right at the
commencement of a performance period is
influenced by the Company's share price at
the date of grant, volatility of the underlying
shares, the risk free rate of return,
expected dividend yield, time to maturity
and the likelihood that vesting conditions
will be met.
At 1 January 2007, for the 2007 grant
of Performance Share Rights, the
Remuneration Value of a Performance Share
Right was determined, in accordance with
the above methodology, as $7.79 per share
compared with a closing market price (on
31 December 2006) of an Aristocrat Leisure
Limited share of $15.90.
The comparator group comprises 50
companies of a similar size, based on the
market capitalisation of the Company at the
start of the performance period, excluding
financial services, property trust/investment
and resources companies. A participant will
be allocated 45% of their offered shares if
the Company achieves performance ranked
at the 50.1st percentile, and up to 100%
of their offered shares at or above the 75th
percentile.
The Plan is designed to attract, motivate,
reward and retain those key executives
who can directly influence the long-term
success of the Company. The Plan has
been specifically designed to provide an
opportunity for participants to acquire equity
in the Company in the form of performance
shares upon achievement of the prescribed
performance measures. In doing so, the
Plan reinforces direct alignment between
individual performance and reward with
the long-term objectives of the Company
and delivering sustainable returns to
shareholders over a three to five year
performance period.
Participation in the Plan, performance
measures, the designated performance
period and the quantity of the Performance
Share Rights offered to each participant
is determined by the Remuneration
Committee and approved by the Board.
It is the Company's intention to make offers
under this Plan annually, or at such other
times as are appropriate, subject to the
ability of the Company to offer such share
plans, future directions in executive variable
remuneration, and approval of the Board
and shareholders, where applicable.The
terms of individual plans may vary from
offer to offer.
TSR performance against the individual
TSRs of a specified comparator group of
companies was initially selected as the sole
measure for Series 1 and 2 of the long-term
incentive plan. TSR allows the Company's
performance to be objectively assessed
against a specified comparator group from
the external market. For the 2005 and
subsequent plans, EPSG was added as
another performance measure following
discussions with various shareholder
representative groups. Both the TSR and
EPSG measures are widely recognised
as an effective method of assessing
comparable shareholder returns and
value creation delivered to the Company's
shareholders.
The POP was approved by shareholders
in May 2005. The POP is an executive
incentive scheme designed to drive the
continuing improvement in the Company's
operating performance. The POP provides
for eligible employees to be offered
conditional entitlements to options over fully
paid ordinary shares in the Company. There
have been no grants under the POP to date.
The ESOP was approved by shareholders
in November 1998. New issues under this
plan were discontinued during 2004 on
the introduction of the Performance Share
Plan detailed above, however, the plan will
remain in place until all options granted prior
to its discontinuance are exercised or lapse.
Options were granted under the plan for
no consideration and for a five year period.
Options were divided into four equal
tranches that must be held for at least
18, 30, 42 and 54 months respectively.
Employees' entitlements to the options
vest as soon as they become exercisable.
The options cannot be transferred, have
no voting or dividend rights and they are
not quoted on the Australian Securities
Exchange. The exercise price of the options
is based on the weighted average price
for all shares in the Company sold on the
Australian Securities Exchange during
the one week period leading up to and
including the grant date (or such other
date or period as ensures compliance with
any relevant laws relating to taxation or as
otherwise determined at the discretion of
the Board). Options are exercisable, subject
to performance hurdles, under the terms of
each option series.
The performance hurdle which must
be achieved before the options vest is
based on either share price growth or
TSR performance. At the time ESOP
was established these measures were
considered to be the most appropriate
for driving shareholder return and value.
The performance hurdle is tested on an
ongoing basis commencing on the expiry
of the minimum holding period.
Options vest if one of the following applies:
The Company does not make loans to
executives to exercise options. Amounts
receivable on the exercise of the options are
recognised as share capital if issued or as
reserves if purchased under the share trust
which has been established during 2005 to
acquire shares in lieu of obligations under
employee share-based remuneration plans.
The Company operates an employee
share plan, referred to as GESP, which
was approved by shareholders at the
November 1998 Annual General Meeting.
The plan enables eligible employees to
gain some equity in the Company through
an annual share allocation designed to
align the interests of employees with
Company objectives and shareholders.
The Board determines each year whether
offers of qualifying shares will be made.
The plan allows for up to a maximum
value of A$1,000 of fully paid ordinary
shares to be allocated per employee for
no cash consideration and is made to all
eligible permanent full-time and part-time
employees. Participants in this plan are
able to receive dividends and exercise
voting rights in respect of shares held under
the plan, however, shares must not be
withdrawn from the plan or disposed until
the earlier of three years after issue or the
cessation of employment.
Remuneration and other terms of
employment for the Chief Executive Officer
and Managing Director, Chief Financial
Officer and Finance Director, and each
of the executives which make up the key
management personnel group and the
other nominated executives* are formalised
in service agreements. Key provisions of
the agreements relating to remuneration
for executive directors, key management
personnel and other nominated executives,
as at 31 December 2007 are set out in the
following table:
TSRs of the specified comparator group over the period 1 January 2004 to 31 December 2006, series 1A and 2 would be allocated in full. These are shown as
vested in the current year. The level of vesting of series 1B, 3 and 4 determined by the Board on 26 February 2008 will be reflected in the 2008 Remuneration Report.
An independent accounting valuation for
each tranche of Performance Share Rights
at their respective grant dates has been
performed by Deloitte. In undertaking the
valuation of the rights, Deloitte has used
a Total Shareholder Return model (TSR)
and an Earnings Per Share Growth (EPSG)
model. These models are described below.
Deloitte has developed a Monte-Carlo
simulation-based model which incorporates
the impact of performance hurdles and the
vesting scale on the value of the shares.
This pricing model takes into account
factors such as the Company's share
price at the date of grant, volatility of
the underlying shares, the risk free rate
of return, expected dividend yield and the
likelihood that vesting conditions will be met.
The accounting valuation of rights issued
is allocated equally over the vesting period.
The Black-Scholes Generalised model
was used to determine the fair value
of Performance Share Rights which
incorporates the impact of the earnings per
share performance condition. This pricing
model takes into account factors such as
the Company's share price at the date of
grant, current price of the underlying shares,
volatility of the underlying share price, the
risk free rate of return, expected dividend
yield and time to maturity. The accounting
valuation of rights issued is allocated
over the vesting period so as to take into
account the actual level of vesting over the
performance period.
For the purposes of remuneration packaging,
the TSR accounting valuation as at the
commencement of the performance period is
adopted for determining the total number of
Performance Share Rights to be allocated as
this valuation best reflects the fair value of
Performance Share Rights to each executive
at that time. The requirements of Accounting
Standard AASB 2 in relation to the treatment
of non-market vesting conditions such as
EPSG and share based remuneration
requiring shareholder approval results in
accounting expense and disclosures differing
from the value allocated for the purposes of
remuneration packaging.
An independent valuation of each tranche
of options at their respective grant date
has been performed by Deloitte. In
undertaking the valuation of the options,
Deloitte has used a TSR model, a modified
version of the Merton Reiner Rubinstein
Barrier Option model. It is called a `Barrier'
model because it takes into account that
the options are subject to a performance
hurdle. Deloitte has advised that this model
is more appropriate than the Black Scholes
or Binomial models for valuing this type
of option. This pricing model takes into
account factors such as the Company's
share price at the date of
the grant, volatility of the underlying share
price, the risk free rate of return, expected
dividend yield and time to maturity.
The numbers of shares (excluding those
unvested under the GESP and the PSP) in
the Company held during the year ended
31 December 2007, and the comparative
year, by each director and executive key
management personnel of the consolidated
entity, including their personally related
entities, are set out below. No amounts
are unpaid on any of the shares issued.
Where shares are held by the individual
director or executive and any entity under
the joint or several control of the individual
director or executive they are shown as
`benefically held'. Shares held by those
who are defined by AASB 124 Related
Party Disclosures
SCM Kelly retains an interest in a Zero Cost Collar (ZCC) arrangement over 125,000 shares, entered into on 5 March 2007 with an expiry of 10 March 2008. This ZCC has the effect
of protecting the value of the shares at a level below the share price at the time the contract was entered into and enabling participation in price gains to nominated levels above the
share price at the time the contract was entered into. This contract is scheduled to expire within an authorised trading window.
Shareholdings of directors and executive
key management personnel reported as
`non-beneficially held' include those that
have been disclosed under representation
made to them by the parties within the
AASB 124 definition of personally related
entities. Directors and executive key
management personnel have relied upon
the representations made as they have
no control or influence over the financial
affairs of the personally related entities to
substantiate the shareholdings declared.
In the event that a personally related entity
declines to provide shareholding details, the
shareholding of that personally related entity
is assumed to be nil.
The Company's Constitution provides that:
"the Company must indemnify every person
who is or has been a director, secretary
or executive officer of the Company". The
liabilities covered by those indemnities are
those arising as a result of the indemnified
party serving or having served as a
director, secretary or executive officer of
the Company or of its subsidiaries but are
restricted so as not to cover: (i) liability in
respect of conduct involving a lack of good
faith; (ii) conduct which an indemnified
party knows to be wrongful; and (iii) liability
which arises out of a personal matter of the
indemnified party. The Company maintains
a Directors and Officers insurance policy,
the premium paid and the terms of cover
secured by that premium are confidential.
The Board, based on recommendations
from the Remuneration Committee in
conjunction with the Nomination and
Governance Committee, determines the
CEO's key performance indicators (`KPIs')
annually and reviews performance against
these on an ongoing basis, with a formal
evaluation being completed at the end of
each year. The CEO, under the delegated
authority of the Board, determines the
KPIs of senior executive team members
and reviews their performance on an
ongoing basis. The CEO formally reviews
the performance of senior executives
annually with the Remuneration Committee,
which reports its findings to the Board for
endorsement.
Board composition
The Board has determined that its optimal size
is between seven and nine members. As at
31 December 2007, the Board comprises of
six independent non-executive directors and
two executive directors. Details including the
term of office, qualifications and experience,
and information on other directorships held by
each member of the Board, can be found
in the Directors' Report.
Continuing education of directors
A continuing education process for directors
through ongoing management presentations
and tutorials from external experts takes
place during the year permitting directors
to pose questions about the Group and
factors impacting on the business or likely
to impact on the business.
Board meetings
The Board meets regularly and during 2007
the Board met a total of 12 times which
included two two-day meetings focused
on strategy and budget. The number of
meetings attended by each director is
tabled in the Directors' Report. Executive
management is regularly invited to attend
and present at Board meetings. During the
year the non-executive directors also held
meetings without the presence of executive
management.
Independent professional advice
Any director may seek independent
external advice in relation to any Board
matter at the expense of the Company
with the prior consent of the Chair.
Whenever practicable, the advice should
be commissioned in the joint names of the
director and the Company and a copy of
the advice should be made available to the
entire Board.
Audit Committee
The committee comprises four
independent non-executive directors. The
committee is chaired by an independent
chair who is not the Chair of the Board.
The current committee members are
Mrs P Morris (Chair), Mr RA Davis, Mr
DJ Simpson and Mr AW Steelman. The
committee is scheduled to meet four times
throughout the year. During the year in
addition to scheduled committee meetings,
separate meetings also took place
between the Chair of the committee and
both the Company's external and internal
auditors. The number of actual committee
meetings and attendance by members is
contained in the Directors' Report.
Nomination and Governance Committee
The committee comprises three
independent non-executive directors. The
current committee members are Mr RA
Davis (Chair), Mrs P Morris and Mr DJ
Simpson. The committee is scheduled to
meet three times per year. The number of
actual committee meetings and attendance
at meetings by members is contained in the
Directors' Report.
Regulatory and Compliance Committee
The committee is chaired by Mr WM Baker
who is an independent non-executive
director. The committee also comprises
another independent non-executive director,
Ms SAM Pitkin, an independent external
member, Mr H Keating, and Mr BJ Yahl as
a member of executive management. The
committee is scheduled to meet four times
per year. The number of actual committee
meetings and attendance at meetings by
members is contained in the Directors'
Report.
Remuneration Committee
The committee comprises three
independent non-executive directors.
The current committee members are Ms
SAM Pitkin (Chair), Mrs P Morris and Mr
DJ Simpson. The committee is scheduled
to meet four times per year. The number of
actual committee meetings and attendance
at meetings by members is contained in the
Directors' Report.
Nomination, selection and appointment
process of new directors
Recommendations for the nomination of new
directors are made by the Nomination and
Governance Committee. Generally, external
consultants are used to identify potential
directors. Those nominated are assessed
by the committee against a range of criteria
including professional skills, experience,
qualifications and background including
probity and integrity. Any non-executive
director appointed during the year will stand
for election by shareholders at the next
Annual General Meeting of the Company.
Formal letters of appointment are issued
to those joining the Board and individual
service agreements are entered into with
all directors. All new directors undergo an
induction program which includes being
provided with a director's handbook, a
copy of the strategic plan for the Company
together with latest budgets/forecasts
and meetings with senior management
including the CEO and his direct reports.
Other directorships
Directors are required to limit the number
of directorships of other listed companies
to five in order to ensure that sufficient time
is available to attend to the affairs of the
Company. The Chair is required not to hold
more than one other position as Chair of a
listed company. The CEO should only accept
appointment to the board of another listed
company with the approval of the Board.
Board performance as a whole is reviewed
by reference to the core competency criteria
set out in the evaluation process, while
committee performance is reviewed in the
context of the objectives and responsibilities
set out in the relevant charter of each
committee. These reviews were undertaken
during the fourth quarter of 2007.
On an ongoing basis, all directors are
encouraged to raise any issues of concern
regarding the performance of any other
director with the Chair, or if the concern
relates to the Chair, with the Chair of the
Audit Committee. The Chair or Chair of
the Audit Committee, as applicable, is
responsible for determining the appropriate
follow up of any matters raised.
Code of Conduct
The Board has adopted a Code of
Conduct (the `Code') which applies to
directors and all employees. The Code
is reinforced through various training
programs and Company publications.
The Code provides an ethical and
behavioural framework for the way
business is conducted and contains a
set of general business ethics including
(but not limited to):
The Board and senior management of
the Company are committed to the Code
and the principles contained within it.
The Code is regularly communicated and
distributed to employees. New employees
are issued with an employee handbook
which contains amongst other things,
the Code and they are required to certify
(prior to commencing their employment)
that they have read and understood the
requirements contained in it.
The Company has implemented training
courses dealing with harassment in the
workplace, discrimination, legal and
operational compliance globally which
all employees are required to complete.
In addition, the Company has provided
training to relevant employees on privacy,
fair trading, restrictive trade practices and
gaming legislation.
All reported incidents are reviewed by a
select group of senior executives who
decide on the appropriate course of action
to be taken. A summary of all reported
incidents and action taken is provided
to the Audit Committee. Any reported
incidents involving senior executives are
reported directly to the Chair of the Board
and the Chair of the Audit Committee by
the Tip-offs Anonymous service provider.
Securities Trading Policy
The Company's policy prohibits any director
or employee dealing in the securities of the
Company if they are in possession of any
price-sensitive information. Subject to this,
directors and senior executives may only deal
in the shares of the Company from the day
after until the 42nd calendar day following:
During the year, the Board amended the
Securities Trading Policy to provide for
a share trading window to open where
any half year or full year profit guidance
is released to the ASX where the Board
determines, at its discretion, that such
guidance is sufficiently comprehensive
that a window can be opened.
Auditor independence
The Company has adopted a formal Charter
of Audit Independence. The Charter restricts
the types of non-audit services that can be
provided by either the internal or external
auditors. In addition, any non-audit services
which are to be provided by the internal or
external auditors need to be pre-approved
by the Chair of the Audit Committee.
The Audit Committee reviews the
independence of the auditors four times
a year. The Company requires the senior
external audit partner to rotate every five
years. The Charter also places restrictions
on the hiring of employees or former
employees of the auditor firms. The
Company expects the external auditor to
attend the Annual General Meeting of the
Company and to respond to questions
relating to the conduct of the audit and the
auditor's role.
The Company promotes effective
communication with shareholders and
encourages effecti
