Ladbrokes PLC Annual Report & Accounts 2014
In H2 2013 we committed
to undertake and complete
a major operational restructuring in time for the 2014 World Cup

in order to ensure Ladbrokes was competitive and could return to growth in H2 2014.
Richard Glynn, Chief Executive Officer
Richard Glynn
Chief Executive Officer

Chief Executive's review

Although operating profit(1) was down on 2013 with weak, industry-wide football results in January and December a key factor, our results for 2014 are beginning to show the financial benefits of this restructuring. Despite an exceptionally high loss of £8.1m on Boxing Day football we achieved our target of delivering headline operating profit(1) growth in H2, with H2 operating profit(1) up 30.4%, a considerable improvement on H1 2014 which was down 33.7% year on year. We are confident that Ladbrokes is competitive with clear plans to improve further our business and positioned to deliver a good result in 2015.

DELIVERING ON OUR DIGITAL POTENTIAL

2014 was a pivotal year for our Digital business during which we completed the key operational steps envisaged in the Playtech agreement of May 2013. In December 2013, we launched Mobile sports betting onto the Mobenga platform and completed the launch of Playtech Casino products followed by the transfer of all our Digital products on the Playtech IMS system by the end of April 2014. The integration of our products, prices and data into IMS allowed our marketing and data teams in Ladbrokes Israel to begin in H2 2014 to market effectively to our Digital customers. More importantly, it gives our customers the benefits associated with single wallet capability across all our Digital products.

In addition, we maintained our drive to offer the best betting and gaming experience on mobile devices, the key market battleground. Our partnership with the Chelsea Apps Factory has produced a highly competitive offering throughout 2014, delivering a wide range of application upgrades, tournament modules and unique functions. Customers responded positively to our improved offer with c. 80-160% growth in Mobile Sportsbook staking in every month of 2014 and 110% for the year. Overall Sportsbook trends were also strong with staking increasing by 32% for the year. We had a good World Cup with Sportsbook staking increasing by 30% on a comparable market basis. Building on the success of our Mobile product in 2014, we launched new tablet based products in December and in H2 2015 we intend to launch an improved desktop product also on Mobenga. As a result Ladbrokes will offer customers a competitive and innovative sports-betting product on a stable and standardised platform across all digital channels.

The marketing intelligence provided by Ladbrokes Israel is key to maximising the return we get from our marketing expenditure. In the second half of 2014 following expiry of our previous on-line casino supplier arrangements and the launch of IMS, Ladbrokes Israel was able to apply its full marketing expertise to Casino. In Q3 we returned the Gaming business to growth, the first time for six quarters. In Q4, trends improved further with our cross-selling rates growing by around 30% during 2014 and casino actives growing by 57%.

Overall in 2014, despite weaker margins driven by industry-wide customer friendly results, Digital net revenue increased by 22.9% to £215.1m and operating profit (before exceptional items) by 70.7% to £14.0m with strong performances in Mobile Sportsbook, our Australian operation and the return to growth in Gaming the key drivers.

The good growth in customer numbers and Sportsbook stakes already delivered in 2014 and the return to Gaming growth should translate into continued Digital revenue growth during 2015.

A SUSTAINABLE UK RETAIL BUSINESS

In 2014 we demonstrated, once again, that retail betting continues to be an attractive entertainment proposition for customers and a major source of cash flow to support dividends and investment across the Group.

In UK Retail, we enhanced our product offering and made progress in growing our football business. This is central to delivering better margins in the medium-term as well as off-setting the decline in traditional over the counter horse race and greyhound betting which is less relevant to younger customers.

We deployed more SSBTs across the estate bringing the total to 1,730. SSBTs are popular with football customers allowing them to build customised coupons and bet across a range of other sports and events. Around 80% of SSBT staking is on football, supporting this important area of growth. SSBT staking grew throughout 2014 with weekly staking levels at the end of the year above the peaks we saw during the World Cup. We also improved our coupon offer for traditional football customers and increased in-store and in-window visibility of the latest football offers, pricing and results. As a result, combined with a strong World Cup, OTC football staking increased by 29.4% and gross win by 9.5%. Building on the strong customer response, we will deploy more than 2,000 additional SSBTs in 2015 across the estate with at least one SSBT per shop.

In H1 we rolled out over 9,000 new Clarity gaming machines in time for the World Cup. Clarity gives our customers an enhanced gaming experience in both roulette (B2) and the faster growing £2 stake slots (B3). In parallel with this roll-out, we introduced the changes required to comply with the ABB Code and our internal responsible gambling standards. Customers have responded well to the new machines and revenues grew by 6.4% in H2, ahead of our expectations. In Q2 2015, new regulations on £50+ staking are being introduced. We are already preparing our shop teams to meet the new requirements whilst continuing to deliver a good customer experience.

The UK Retail team also kept cost increases to a level well below our initial cost guidance for 2014 and generated free cash flow before exceptional items of £138.0m during the year. Retail net revenue increased by 0.7% to £811.5m whilst operating profit before exceptional items declined by 10.9% to £119.3m. A strong performance in the World Cup and growth from improved machines performances was offset primarily by the impact of well reported customer friendly football results in January and in December, and continued weaker staking trends, particularly for racing, across the year.

We stated in April that regulatory changes and our continued drive to optimise the estate would inevitably lead to shop closures and we closed 89 loss or near loss making shops this year. I am pleased to say that we achieved these closures without making compulsory redundancies, although this is becoming increasingly difficult to achieve.

The increase in Machine Games Duty from 1 March 2015 and the anticipated impact of the new UK regulations in 2015 means that further shop closures will be inevitable. We continue to optimise the performance of our estate and expect to close a further 60 shops during 2015. We will again try to limit the impact of these closures on our shop teams.

In 2015, we will continue our focus on improving retail performance and on targeted growth, driven in particular by football staking, wider deployment of SSBTs and our 2014 investment in the Clarity machine estate. We also remain focused on cost efficiency across the division.

DIVERSIFYING OUR PROFITS INTO EUROPE AND AUSTRALIA

We continued to expand and grow our international operations in regulated jurisdictions in a capital efficient manner. In 2014, across the whole Group, net revenue derived from non UK customers has increased to c.14% up 1 percentage point on 2013.

We firmly established our exciting digital challenger brand in Australia and further developed our European Retail businesses in 2014.

After acquiring Bookmaker Pty Ltd in 2013, we acquired Betstar Pty Ltd for £12.1m (AUD 21.4m) in April. Betstar was integrated in only six weeks and we have delivered our cost synergy targets on plan. On a pro forma basis, including the relevant results of both businesses in each period, 2014 staking increased by 25%, actives by 88% and net revenue by 151%. Our Australian business is well positioned for continued growth in 2015.

In Belgium we made further investment in our retail estate and established a Ladbrokes branded digital presence. In Belgium retail, where we remain the market leader, we introduced virtual products and SSBTs. Belgian customers have responded well to these new products and retail net revenue increased by 10.3% and operating profit (before exceptional items) by 21.4% in 2014 on a constant currency basis.

Our Spanish joint venture, Sportium, expanded into Catalunya, Castilla La Mancha, Rioja and Extremadura. Spanish retail gross win grew by 54%(2). We also pushed ahead with Sportium.es, our digital sportsbetting joint venture with Cirsa, launched in December 2013. Overall, the Spanish business, united under one brand, is growing steadily, with a target of reaching break-even profit point during 2015 and becoming profitable thereafter.

In 2015, we expect to benefit further from growth in Australia and from even further geographical expansion in Spain. In Belgium we will continue to generate benefits from our investment in new products and SSBTs.

In Ireland, trading in Northern Ireland which was profitable, showed similar top-line trends and cost performance to UK Retail. However, our business in the Republic of Ireland was loss-making and did not deliver on its plan. Overall revenue in Ireland declined as a consequence by 10.9% and operating profit by 56.9%. We have tasked our International team to undertake a fundamental review of our Republic of Ireland business during Q1 2015 to establish options to take this business forward.

2014 WORLD CUP - A COMPETITIVE LADBROKES

the 2014 World Cup across all channels, with enhanced products, stronger marketing capability, targeted campaigns, all supported by a newly launched marketing campaign 'The Ladbrokes Life'. Our customers responded well. In particular our enhanced Mobile offer saw the strongest response in what became labelled the 'Mobile World Cup'.

Mobile actives increased by nearly 700% over the 2010 tournament and mobile staking by over 1,100%, albeit from a small base, resulting in overall growth in Digital sports staking of over 40% and actives increasing by 28% on a comparable market basis.

In UK Retail, we outperformed the market with staking up 7.9% and recorded significant increase in slippage as customers took advantage of a wider range of multiples and coupon offers. In Spain and Belgium we generated over 100% increases in staking and good online activity.

Overall margins were strong at 24.3%(3) and we generated an overall gross win of £28m(3) for the tournament well ahead of 2010. The 2014 World Cup showed what we can achieve by offering customers attractive opportunities to bet alongside competitive products across all channels supported by effective and efficient marketing of the Ladbrokes brand. It provided the best evidence that Ladbrokes was back on track.

SOCIAL RESPONSIBILITY, TAXATION AND SELF-REGULATION

The Betting Industry has been subject to a number of publicly announced taxation and regulatory changes - many of which will impact during 2015. These include taxation of remote revenues, extension of UK licensing and regulation to remote operations, changes to regulations around gaming machine staking above £50 and a review of the voluntary codes relating to gambling advertising. While the industry entered 2015 with many of the substantive issues surrounding it having been addressed, significant challenges remain in terms of public and stakeholder perception.

Ladbrokes has over the last couple of years played a lead role in driving social responsibility across the industry. We demonstrated our commitment to social responsibility by establishing a committee of the PLC board to set targets in social responsibility and to link these targets to executive remuneration. Key to this has been the appointment of a Head of Responsible Gambling who has reviewed our approach and policies on responsible gambling and will ensure these are applied across all our channels and evolved over time.

Ladbrokes played a leading role in establishing the first gambling industry responsible gambling standards body - The Senet Group - with other leading betting operators. The Group, which has already developed the first multi-operator responsible gambling advertising campaign, will continue to evolve in the years to come and is an important commitment by the industry to submit to independent oversight of its approach to responsible gambling. Other sectors of the wider industry must now endorse similar approaches.

Informing both Ladbrokes and the industry's approach has been the extensive research carried out by The Responsible Gambling Trust. This ground breaking work has identified that incremental, targeted interventions are key to helping individuals exhibiting problematic behaviour to help themselves. Customer data provided by our unique 'Odds On' card has enabled Ladbrokes to develop an algorithm to identify players exhibiting 'at risk' behaviour. We are currently testing the algorithm in one region and we plan to roll it out more widely before the end of the year.

Q4 RESULTS

Operating profit(1) for the Group in Q4 at £35.6m was flat on Q4 2013 (£35.6m), driven largely by the poor football results on Boxing Day. Across all of our platforms we recorded a loss on Boxing Day of c.£8.1m, Ladbrokes' worst ever football daily loss on record.

Notwithstanding this loss, Ladbrokes showed signs of further improved operational strength, notably in machines, Mobile Sportsbook, Digital Gaming and Australia, providing evidence that operational investment of the past 18 months is now delivering financial returns.

In UK Retail, Q4 OTC amounts staked were down 6.8% with gross win margins at 15.6% down by 1.5 percentage points on Q4 2013 driven by customer friendly football and horse results. Football staking improved by 1.1% as we benefitted from our focus on coupon products and our investment in SSBTs where staking per terminal increased. Staking on traditional products declined by c.8.5% improving on the trends seen in Q3 benefitting from new products introduced during Q4.

Machine revenue increased by 7.0%, gross win per shop per week was up 9.8% and on a per terminal per week basis was £996. Overall net revenue declined by 2.4%.

Digital net revenue increased by 20.1%. In Ladbrokes.com, we saw another strong quarter of growth with Sportsbook actives up 14%, staking up 30% and Mobile staking up again over 114%, the highest rate of growth in 2014. Weaker results at the end on the quarter however meant that the Ladbrokes.com Sportsbook margin was down 1.7 percentage points to 6.5% and, although staking and customer metrics were strong, Sportsbook net revenue declined by 7.0%.

Ladbrokes.com Gaming net revenue grew by 9.3% reflecting strong increases in actives with Games up 31% and Casino up 57% and the impact on revenues of losses to some higher value customers in Casino.

Australia performed well and, with normalised results across the Spring Carnival, delivered a Q4 gross win margin of 9.6% (Q4 2013: 5.2%). Net revenue increased by 239% with strong growth in actives and staking increased by 32.8% strongly benefitting from the Betstar acquisition.

In Belgium, staking increased in Q4 by 35.9%(2) but, with margins impacted significantly by poor European football results net revenue only increased by 8.4%(2). In Ireland, trends in the Republic remain poor and with Boxing Day impacting margins, overall Irish revenue declined by 18.4%(2).

OUTLOOK AND CURRENT TRADING

For the period 1 January to 24 February 2015, net revenue for the Group (excluding High Rollers) increased by 1.5% despite the impact of losses to a small number of larger customers in the period and the adverse industry-wide football results in weeks 3 and 8.

In UK Retail we have seen similar OTC staking trends to Q4 and continued strong machine revenue growth. OTC gross win margins were slightly ahead of last year and, overall, net revenue in UK Retail is ahead. In Digital, Ladbrokes.com Sportsbook and Gaming customer KPIs remain good and Australia is generating strong growth both organic and from Betstar. Trading elsewhere is in line with our expectations.

In H2 2014, our financial results are now showing benefits from the major operational restructuring undertaken over the past 18 months. In 2015, Ladbrokes faces significant headwinds from the increases in Machine Games Duty in March and the Point of Consumption Tax. However, we have clear plans to improve further our business. Barring the imposition of material unforeseen adverse regulation and/or taxation and assuming normalised sporting results, we are confident in our plans for 2015 and in generating continued underlying growth.

DIVIDEND

As the Group implemented its operational turnaround, the Board committed to pay dividends of 8.9p per share for 2013 and 2014, outside our historic dividend policy which is based on earnings cover whilst remaining within our target leverage policy of net debt being in the range of 1.5/2.0 times EBITDA (before exceptional items).

The Board currently intends to continue to pay a dividend of 8.9p per share for the 2015 financial year.


(1) Excludes exceptional items and High Rollers.
(2) Constant currency basis.
(3) Including Sportium Joint Venture on a 50% basis.