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## OPERATING AND FINANCIAL REVIEW (continued) 

## Operational Results (continued) 

## Other 

The total net Corporate & Other costs for the year ended 30 June 2014 were $32.3 million compared to $27.1 million for the prior year, which included net costs of $28.2 million (2013: $33.0 million) for Corporate, $2.0 million (2013: $0.2 million) for Asia Development, $1.3 million (2013: $0.5 million) for Digital Development, a profit of $1.5 million (2013: $1.5 million) for Digital Operations, and depreciation of $2.0 million (2013: $1.3 million). Net interest expense in FY2014 was $0.3 million, compared to net interest income in the prior year of $4.2 million. No dividends were received from VREG in FY2014 (2013: $3.8 million). EBITDA cost for the year to 30 June 2014 was $30.0 million, in line with the prior year. 

Net interest revenue was lower in the current year compared with the prior year due to lower cash reserves and draw down on debt facilities, as a result of the payment of the shareholder distributions and capital funding of the Wet’n’Wild Sydney development. During the year VRL also endorsed a program of Digital Development work across the divisions, focussing on enhancing on-line data collection, analytics and overall engagement with customers via digital means. 

Asia Development net costs are associated with the South East Asia and China Theme Parks expansion strategy and projects outlined earlier. It is expected that these costs will be higher in FY2015 as the Hong Kong office is established. As noted above, no dividends were received from VREG in FY2014 – these dividends depend on film performance and available free cash flow in VREG. 

The recently formed Digital division consisting of Edge Loyalty and MyFun continues to exceed expectations, showing strong organic growth through the expansion of the business into new channels and markets. During the year Digital completed the acquisition of Lifestyle Rewards, which has helped expand Digital’s reward and loyalty offering. The division has exciting plans to enter the Asian market in calendar year 2015 via a roll-out of products similar to Australia. VRL is confident that the Digital division will continue to develop and contribute materially to earnings in the medium term. 

## Financial Position 

During the year ended 30 June 2014, total assets of the consolidated entity decreased by $31.6 million, including decreases in cash of $16.5 million, film distribution royalties of $17.9 million and equity-accounted investments of $13.0 million, which were partly offset by a net increase in property, plant & equipment of $18.0 million, which included an increase relating to the remaining Wet’n’Wild Sydney build cost, and decreases from the disposals relating to US Water Parks and depreciation/amortisation. Total liabilities increased by $19.2 million, including increases in borrowings of $62.4 million, provisions of $23.9 million (being the special dividend of 15 cents per share declared in June 2014), which was partly offset by a reduction in trade and other payables of $50.0 million. 

Total equity of the consolidated entity decreased by $50.8 million to $521.3 million during the year. This was mainly attributable to decreases in contributed equity of $15.2 million (mainly resulting from the capital reduction of 12 cents per share in December 2013) and retained earnings of $40.4 million, partly offset by an increase in the non-controlling interest of $3.9 million. Net profit attributable to members of the parent was $45.8 million, but after accounting for dividends and distributions paid or payable during the year of $86.1 million, retained earnings of the consolidated entity decreased by $40.4 million. 

The VRL group’s net debt as at 30 June 2014 was $350.5 million, giving a gearing ratio of 40%, compared to the prior year’s gearing ratio of 32%. Of the total debt of $480.9 million, $23.1 million is classified as current liabilities, and $457.8 million is classified as non-current liabilities. The VRL group is in compliance with all required debt covenants as at 30 June 2014. 

During the year ended 30 June 2014, the VRL group restructured its US Water Park investments, which included the disposal of the Wet’n’Wild Phoenix and Wet’n’Wild Hawaii businesses, and resulted in a loss on disposal of investments/businesses of $1.2 million, which is included in material items of income and expense in the Reconciliation of Results on page 16 of this report. Other than as disclosed above, there have been no significant changes in the state of affairs of the consolidated entity during the financial year. 

## Events Subsequent to Balance Date 

There have been no material transactions which significantly affect the financial or operational position of the consolidated entity since the end of the financial year. 

## Environmental Regulation and Performance 

The VRL group was subject to the National Greenhouse and Energy Reporting Act  for the year ended 30 June 2014, however this has not had any material impact on the VRL group. 

## Business Objectives and Future Prospects 

## Strategy/Objectives 

The strategy and objectives of the VRL group are summarised as follows: 

– Ongoing improvement in operating performance of each division; 

– Continued development of innovative and competitive products and services such as higher yielding cinema offerings and site refurbishments in the Cinema Exhibition division, new attractions at existing locations and development of new locations for the Theme Parks division; 

– Ongoing expansion in relation to the Group’s involvement in theme parks in China and South east Asia; 

– Ongoing review of potential further investments across the VRL group’s various divisions, subject to acceptable financial returns; 

– Increase in output of films per year by VREG, improving the financial performance of the Film Production division; 

– Continuing to monitor opportunities in the digital and online space; and 

– Continuing to closely monitor and review corporate overheads, including remuneration costs, in light of ongoing efficiency reviews. 

## Business Risks 

Material business risks that could have an effect on the financial prospects of the VRL group, and the way in which the VRL group seeks to address some of these risks, are as follows: 

– Consumer spending – a shift in the patterns with which consumers spend their disposable income could impact the Group in all of its businesses, however historical experience has shown that the Group’s entertainment offerings are generally impacted less by economic downturns compared to other discretionary expenditures of consumers; 

– Competition – all of the Group’s businesses are continuously vying for customers against a wide variety of competitive forces; 

– Technology – the media through which people receive entertainment content is ever-changing, with increased digitalisation and portability being key focuses for many consumers, although the uniqueness of the Group’s ‘out-of-home’ entertainment experiences appear to have reduced the extent and impact of this issue; 

– Piracy – the ongoing issue of film and music piracy poses a challenge to the Group’s Cinema Exhibition, Film Distribution and Film Production businesses, and the VRL group is actively working with other industry participants to reduce the severity of this risk; 

– Lack of quality films – the Cinema Exhibition and Film Distribution businesses are dependent on a solid and reliable flow of quality, high grossing film content. This risk has been partly mitigated in Film Distribution by long term supply contracts with major suppliers, including Warner Bros., and in Cinema Exhibition by new offerings (e.g. Gold Class) and alternative content and uses; 

– Film production volatility – film production is an inherently volatile business. This risk is partly mitigated by VREG adopting a portfolio approach, however the Film Distribution division may also be impacted; 

– Weather – extreme weather events can challenge admission levels at the Theme Parks division’s businesses, with potential customers not travelling to such destinations when the weather is severe, such as floods or cyclones. The VIP season pass ticket promotion seeks to partially address this risk by allowing tickets to be utilised when better weather returns; 

– International tourism – tourism can be affected by multiple factors including foreign currency exchange rates, severe weather, disease outbreaks and terrorism threats, however none of the VRL group’s businesses, including in the Theme Parks division, are heavily reliant on international visitation (although they are still affected to some extent); 

– Safety – the Theme Parks and Cinema Exhibition businesses operate public venues and (in the case of Theme Parks) rides and other attractions, with the consequence that there is risk of physical injury or harm. The VRL group takes its commitment to the safety of both its staff and its patrons at all of the Group’s venues very seriously, primarily in order to ensure that a safe environment is always provided for patrons and staff, and as a secondary issue, to minimise any adverse legal or reputational consequences of any serious incidents; and 

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