Aristocrat Leisure (ALL) is facing a $40 million cost in this half from yesterday’s settlement of a $144 million class action against the company.
The one-off cost will further depress what is going to be a poor set of figures, to go with the glum set in the first half.
At yesterday’s profit briefing, Aristocrat’s soon to depart chief executive Paul Oneile said the $40 million expense of the case had not been recognised in the June accounts "given its contingent nature”.
Aristocrat said in a statement to the ASX in May that "Under the terms of the proposed settlement, the group would incur a net cost after expenses and tax of up to $40 million, which will be funded by cash and available facilities”.
It’s no longer ‘contingent’ following settlement of the case in the NSW Supreme Court yesterday.
The company has refused to say whether the remainder of the money for the settlement will come from: the best bet is from insurance.
The company said that first-half profit slumped 44% to $70.4 million in the first half, beating the shock July 29 downgraded estimate of $70 million by the tiniest of margins; so small as to be able to be ignored..
The company earned $125.9 million in the first half of 2007.
The shares in the world’s second biggest poker machine maker came back in the afternoon to close up 13 cents (they were up 27 cents at one stage) at $5.72 as news of the settlement made investors think again.
The smarter investors will recognise that they have been suing themselves (those who remained a shareholder, that is). That close is above the low reached in the wake of the July 29 write-down of $4.50. They are still more than 70% down on the 52 week high of $15.19.
The slump profit coincides with a stalling US economy that’s forcing casinos to scale back purchases; Japanese gamblers who are avoiding games that comply with new regulations and Australian pubs have cut back on purchases or machine upgrades because of smoking banks and the cost of constructing new outdoor smoking areas in several states.
Mr Oneile said in a statement that: "The first half of 2008 has been particularly challenging with replacement demand in our key markets running at historic lows."
Adding to the company’s woes has been the impact of the higher value of the Australia. Although off its highs of over 98 US centson last month, it spent much of the first half well above 85 US cents. The cost to ALL was $10 million off earnings.
Earnings before interest and tax from the US market, the company’s biggest market, fell 30% to $78.7 million, while Australian earnings fell 37% to $25.2 million because of the impact of the smoking bans and those high petrol prices and interest rates which curbed consumer spending.
Japanese earnings rose to $26.6 million from a year ago when the introduction of new rules curbed demand and earnings from the rest of the world, which includes Macau, Europe and South Africa, fell 63% to $16.5 million.
Directors said the Group’s disappointing performance was primarily driven by the impact of economic and regulatory conditions in its two largest regions – Australia and North America.
"The Group’s third largest region, Japan delivered significant growth, a strong turnaround from the prior two years. The lack of new venue openings in the Asia-Pacific region was a key contributor to the decline in earnings, having been the fastest growing region in the prior corresponding period.
"Market conditions in Australia deteriorated markedly as a result of the combined impact of a number of adverse external factors with the level of sales in the half falling to a level which on an annualised basis represents an unsustainable implied 40 year replacement cycle.
"In North America, the replacement cycle has also continued to decline driven by depressed operator revenues impacted by prevailing economic conditions. Following the full transition of the Japanese market to Regulation 5 in October 2007, the overall size of the pachislot installed base has continued to decline. The Group did however sell over 32,000 units in the half, more than in the full 2007 year."
"The strength of the Group’s cash flow and its positive medium term outlook have supported the decision to maintain the half year dividend in line with the prior year at 14 cents per share, fully franked," directors added.
