Ladbrokes Plc (OTC:LDBKF) Q2 2014 Earnings Conference Call August 12, 2014 4:30 AM ET
Peter Erskine – Chairman
Ian Bull – CFO
Richard Glynn – CEO
Patrick Coffey – Barclays
Jarrod Castle – UBS
Vaughan Lewis – Morgan Stanley
Richard Stuber – Nomura
Ian Rennardson – Jefferies
Ed Birkin – Credit Suisse
Well, good morning, ladies and gentlemen. Thank you very much for joining us today for the Results of the First Six Months of the Year. As you all know we’re under no illusion that 2014 is a critical year for Ladbrokes.
Regardless of a tough trading environment, Half 1 profits were always going to be down on Half 1 last year or a bit up on Half 2. The team is fully aware of its task, make Ladbrokes more competitive. That translated to a first half where the management team had to deliver a series of technical and operation improvements, so the business could compete in the World Cup.
So, it is pleasing to be able to report that those objectives were all achieved and the plan is on track. The executive team delivered on all the operational improvements.
The Playtech integration is complete. Ladbrokes Israel is fully established. The mobile product is delivering good customer numbers. The retail state was rolled out new machine cabinets, more SSBTs and driven growth in football and our international footprint is growing.
The World Cup was a fierce battle ground, and we responded to the challenge and most importantly a customer responded to us. We had a good World Cup with our technology, our customer service and our products all performing well. The task now is to build on that success.
So, as a board, we are pleased to report on the progress delivered in the last six months. We do feel that our performance gives us a platform for the next six months and beyond. But we are realistic that there remains much to do.
Now you will hear that phrase much to do a number of times today. And its meaning is simple, turning our operational delivery into financial performance.
While we will always be exposed to the vagaries of results and Westminster, we are confident that the business is fundamentally stronger and more competitive than before and is well positioned to deliver growth. This belief underlines our dividend commitment for the year.
So, I will now hand over to Ian and Richard for the results presentation. Ian, over to you.
Thanks Peter and good morning everyone. I’m going to start then with an overview of this morning’s results and then moving to looking at the performance of each of our operating divisions in more detail.
As a summary, looking back to the objectives we set ourselves in February, we’ve seen a fundamental transition finalized in this half and very much on track both operationally and also financially after adjusting for some of the extreme results we saw in the first half.
So, looking at the group numbers, net revenue grew by 1.6% driven by 4.4% staking growth, that’s excluding the World Cup, Australia and High Rollers but with lower margins from results.
Operating profit of £56.8 million is well down than last year as expected. Though equally is ahead of the second half last year as we guided in February. Finance costs are broadly in line and I’ll cover net debts, little later on in the presentation, so altogether a PBT of £44 million and underlying earnings per share of £0.43 per share.
Our corporate tax rate of 10% is at the similar level to our guidance. And I don’t expect it to be higher than this 10% level for the full year and for some time. You will have seen that the board has declared an interim dividend of £0.43 flat on last year and consistent with our commitment to pay dividends of no less than £8.9 per share for the 2014 financial year. High Rollers provided another strong contribution in the half of £10.7 million.
So, turning now to slide 6, and you can see the drivers by division in group operating profit from 2013 to 2014. In October, we said that the business transition would mean that Half 1 PBT will be down year-over-year. And in February we reconfirmed this and said that we expected the Half 1 PBT would be ahead of H2 last year.
As you’re aware, in the first half, the industry incurred unusually high losses in football in Q2, notably in weeks, two, four and 12. And then losses in Ascot and Epsom in June, as others have already commented on.
In total, these Ladbrokes by £29.3 million year-on-year. We did also cover some benefit from a strong World Cup, generating £18.5 million gross win in H1. So, in aggregate these events reduced profits by around £11 million in H1, which together with the increased depreciation, amortization reflects two thirds of the year-on-year reduction.
We guided the first half EBIT will be down year-over-year, the results of therefore made this impact somewhat more pronounced. It is worth bearing in mind to see the true underlying results. So, when I look the retail and digital performance in a moment, I will take out these results and the World Cup to get an underlying view of each division.
Corporate costs are on track, including a small change in share based payments and I expect the corporate cost will be towards the upper end of our no more than £25 million guidance.
So, let’s look at the main underlying trends by operating division starting in U.K. Retail. And before I look at the detailed graph, on staking, we saw increases of 5% OTC driven by 54% increase in football with strong contributions from SSBTs and of course the World Cup.
These together completely offset the continuing decline in both horse and greyhound betting, which in H1 was down around 2%, very much in-line with recent history but noticeably sharper towards the end of the first half reflecting probably some substitution into the World Cup.
U.K. Retail EBIT was 59.6%, down £15.6 million on 2013. And you can see from the left of the chart that the post-post results and the World Cup benefit explained around £8.5 million or just over half of this change.
Looking at the remaining drivers, on the revenue side OTC gross win is broadly stable backed by 1,750 SSBTs. Our machines have started to deliver growth and by around 9,000 new clarity cabinet machines.
And on the cost side, you can see that we’ve delivered a performance better than we guided you to in February with an increase of 4.3%. We have continued to push on costs and specifically in H1, we’ve seen a continued focus on staff cost efficiencies through scheduling which delivered a net reduction and that’s despite the pay review.
We’ve seen property rent-on-rate renewals achieved on better terms that we expected. And we’ve seen procurement savings too with new contracts on distribution, IT costs and short controllable.
Looking ahead, we’ve identified further cost savings of £3 million to £4 million in the second half which should result in U.K. Retail delivering an overall increasing cost of 4.4% for the year, an improvement on our 5% guidance in February. So a pretty determined job from Nick and the Retail team.
On our 24 state optimization, it’s also progressing well. In the first half we closed 29 shops and to date we’ve closed 46 and we continue to address the weaker performing shops within the portfolio.
As we await the final implementation plans from DCMS, I will refrain from further guidance on higher levels of closures until position is clearer and their financial impact better understood. This is likely to be in February given the October deadlines and the subsequent implementation.
The closures have given rise to exceptional cost of £13.9 million in the half for the cash impact of £1.5 million in H1.
Let me turn now to gross win trends, where we are seeing continued resilience, underlying stability and some signs of growth.
Top left you can see our regular slide, which shows gross win per shop for the last 14 quarters, with OTC in grey and machines in red. As you can see Q1 was impacted by the Football results and Q2 benefited from the World Cup which offset the poor year-on-year results from Epsom and Ascot.
Looking at machines, the lower chart shows that we have delivered machine growth in each of the past four quarters. And importantly, we’ve returned to gross win per shop for re-growth which continued to improve after 2013 and in Q2 became positive again.
As Richard will show in a moment, this is a good result, with the implementation of the ABB code, causing a significant decline as we advised in Q1. This has been offset by the roll-out of our new clarity gaming machine which we completed just before the World Cup in June.
So, net growth coming out of Q2 and we expect second half machine revenue to grow 1% to 2% like-for-like growth subject to any further DMCS changes across.
And free cash flow generation remained strong and similar to the first half of 2013 despite the results this year. CapEx, as you can see is lower reflecting the completion of the 2012-2013 expansion program.
I’d now like to turn to our digital business, where again, I’m going to concentrate on the underlying on our Dotcom business so you can see the true underlying position and the early benefits of our significant operational changes.
As before, I’ve adjusted for the World Cup and for results to show the underlying position. Digital delivered a strong Sportsbook NGR performance powered particularly by mobile, which went live on the Mobenga platform in late December last year. The mobile digital performance has been good throughout the year, as Richard will discuss in a moment.
Gaming was down driven primarily by casino. This was as expected and I’ll come back to this. DNA is as guided and digital operating costs have been well controlled during this key migration period, again as expected.
I think given the huge increase in activity and capability, June and the digital team have performed well.
In February, we said that we were targeting digital for NGR sequential growth on H2 of last year. Overall in H1, we delivered a 14% increase in revenue versus H2 and we beat our target of holding EBITDA on the same period.
Look at our other digital operations, Australia and Baghdad delivered broadly flat EBIT performance on H1 last year and a startup cost on our digital operations in both Belgium and Spain explain the final £2 million to £2.5 million of the change in EBIT and more on those territories in a moment.
Over on slide 10 then, we can now show you the early signs, of how we see our Ladbrokes.com business is progressing. And in H1, it’s been all about Sportsbook. Top left you can see the Sportsbook staking trends going back to Q3 of last year.
With mobile staking rising rapidly post the launch on Mobenga last December and delivering growth of 95% in Q1 and 114% in Q2, benefiting from a really strong World Cup performance.
With mobile growing to around 50% of Sportsbook staking in Q2, this represents some of the strongest digital growth rates that we have delivered for some time. This is underpinned by good customer engagement and demonstrated by strong growth in actives. So Sportsbook digital active were up 21% in the first half to 598,000. And real money sign-ups were up 52% to 326,000. Mobile performance was even stronger with actives up 74% and sign-ups by 176%.
In the bottom left chart, you can see how the Sportsbook performance is starting to theme through into NGR, where Q1 margins were weak so NGR was suppressed. The continued growth in Q2 with more stable margins and the World Cup, delivered over 50% revenue growth in Q2.
As I noted, the gaming business does contrast sharply with sports betting and he’s down again in Q2, although revenue is stable and sequentially on Q1.
Looking at specific products, we saw a 20% decline in casino revenue we saw stable gains revenue and declines in our much smaller program Bingo businesses.
Now, given we migrated off MGS Casino products at the end of March and then completed the IMS back-office conversion by the end of April, this performance was as expected.
In terms of marketing spend we incurred 31% marketing, a percentage of NGR as we invested in customer acquisition around the World Cup.
Now, as you can see, CPA was much lower at £70, reflecting the opportunity the World Cup provided to acquire new relationships plus the benefit of Ladbrokes Israel, with our much improved Sportsbook products.
We continue to expect the full year to in our 25% to 30% range for marketing. And before I leave the digital business, I would just note that following the review, we have decided to stop taking digital business from a number of markets. And with have completed this withdrawal over the next month or so.
The pro forma impact in H2 is around about £2 million per EBIT, reflecting the lost NGR and the benefit of closing, supporting call centers and related back office and processing facilities.
Let me now turn to give you a financial overview of the World Cup showed on slide 11. Across the group, we recorded an overall 24% gross win margin on a 22% increase in staking, adjusted for comparable markets, a pleasing outcome given the early few days of the tournament.
And looking at our key businesses, digital staking grew by 43% empowered by mobile. Retail staking increased and almost exactly the same as the increased new stakes since 2010. And slippage was well ahead, up 27% reflecting the increased range of football products we are now offering to customers as we develop our football betting over-the-counter business.
We have three additional important territories for digital audition business, where we have also made good progress leveraging the brand and diversifying our business.
In Australia, you will recall we invested around about £25 million so far on acquiring the bookmaker business, and most recent £12 million on bets in Q2 of this year. This has established Ladbrokes as a strong digital operator.
In the top left table, you can see substantial organic and inorganic growth that the team is delivering down under with staking up 60% and a very large increase in the customer base.
On a pro forma basis, net revenue is up around 200% and the EBITDA positive business. Overall Australian revenue is running ahead of our acquisition plan and following a very rapid 28-day integration, the expected cost synergies have been taken.
We have noted that we expect the racing content fees in both Victoria and Queensland to cost around £1 million in the second half.
In H1 we also the saw the first six months trading with our sporty and digital brand and the launch of the Belgium digital business, in the end of April, they are both making good progress albeit early days in Belgium. And we expect to record a further combined development loss in the second half of £2 million to £3 million.
Finally, Baghdad is now positive PBT in the half with good growth in commissions.
Now turning to European Retail which is on slide 13, and we have continued the pleasing progress with our Sportium JV with Cirsa. The core regions together are now EBITDA positive with like-for-like growth. And as regulation allows, we will expand into even more regions, most recently Catalonia with Barcelona.
The P&L is showing that year-over-year improvement in spite of the investments in the expansion. So we expect a further development loss of around £1 million in the second half.
Our Belgium business showed broadly flat staking with the World Cup offsetting poor industry-wide horse racing delivering net EBIT growth, so a productive and busy period for Damien and the International team.
Looking at our Irish business, Northern Island saw similar trends of the U.K. particularly football impacted in Q1. And in the Republic, in a tough economy, we have seen continued and aggressive competition impact us despite a good cost performance by our U.S. – our Irish Retail teams, excuse me.
We will review whether our change in trading approach is having the desired effect of the coming few months.
I’d now like to spend a few moments on free cash flow and our balance sheet.
On slide 14, you can see CapEx in the first half remains well controlled at £27 million and split across the group. Spend is down year-over-year, the primary reduction being the reduction in U.K. per CapEx as we have moved from an expansionary phase in our portfolio to one-off optimization.
Investment CapEx is targeting comfortably returns in excess of our WACC. There are a few one-offs to point out here. Business combinations reflect the best our acquisition in Q2, and other items include payment of the 2013 exceptional of £14 million, that related tax settlement most of the remainder.
I expect the full year to show stronger free cash flow generation and stronger dividend cover, from the expected growth in the second half. And therefore, I expect to remain within our one and half and two times net debt to EBITDA guidance for the full year.
We have also made significant progress in making our balance sheet more reversed. And in the first half, we completed a refinancing of the group’s balance sheet, completing a long-dated retail bond which was oversubscribed and extending bank facility maturities including canceling surplus facilities. This gives an extended average maturity to over 4.5 years with a blended interest rate in the 7% range depending on drawing facilities.
And as importantly, our banking covenants remain unchanged. So, we have substantially improved our liquidity position.
In February, we gave you quite some specific guidance on how we saw 2014. And as you hopefully you can see from this chart, we are on track with our core guidance, and I have indicated on this slide any updates where relevant in order for you to make it easy for you to track.
So, in summary for H1, a good operational performance in a tough trading environment, we delivered a good World Cup financially and adjusted for results the underlying trends are very much where we expected them to be.
Digital sports program was good, and we’ve continued to drive our diversification in Spain, Belgium and Australia. We continue to generate strong free cash flow and have greatly improved the group’s liquidity position following the refinancing.
Let me say a few words on current trading over the last five weeks. Net revenue has grown by 6.6% and that’s excluding the World Cup in Australia. Machines and Sportsbook are on trend.
OTC staking has declined modestly with football staking up of course because of the World Cup, and racing staking has shown further declines as we saw the end of Q2.
We have recorded growth in Casino and the gaming segment overall. This is very early, though a recent trend is encouraging. And for those of you who are already thinking on the phasing of the Q3, Q4 EBIT split, I’m expecting broadly something like a 40%-60% split of H2 EBIT in Q3 and Q4. This is given the casino profile, U.S. cost phasing and the racing festival in Q4 in Australia.
So, still lots to play for, with the EPL season starting in a few days. We are on track to deliver results with our expectations, subject of course to a more usual level of results from margins.
So thank you for listening. I hand over to Richard.
Thank you, Ian and good morning ladies and gentlemen. We entered this year with a clearly articulated plan. For operational delivery in Half 1 to be competitive in the World Cup and to position the business for growth in the second half and beyond, understanding what that would mean for our figures in the first half of the year.
I’m going to talk first therefore about how we’ve laid some solid foundations. Before I explain how these foundations were the platform for a really competitive performance about the World Cup. And finally, I’ll outline for you the steps that we will take to maintain our momentum and deliver growth into 2015.
A lot has been delivered over the last six months. A high degree of execution risk in the business has been removed. We’ve worked hard to ensure that all our capabilities across all channels were in place ready to compete in what we knew would be the toughest of markets.
The World Cup validated our belief that the strong Ladbrokes brand supported by competitive products and technology, with coordinated campaigns all executed by experts remains really compelling for customers.
We’re now positioned to move the business from operational delivery to growth, but it’s mobile that’s proving to be the real consumer battle ground. Now as you all know, mobile consumers are really discerning. So our product has to evolve to continually engage this new audience.
And over the last six months, we’ve delivered seven new application releases and that’s with 40 new features delivered. We’ve created special event modules such as the very successful online World Cup center. We’ve enhanced our capability for cross-sell. We’ve made the mobile platform available over more platforms, and most notably Windows 8.1. We became the first major app for sports betting in the Windows app store.
We’ve had multiple ways to pay and now PayPal accounts for 30% of first time deposit. Perhaps most importantly, we’ve seen reliability that now matches customer expectation. The Grand National, sort of satisfy over 54,000 concurrent mobile users with 100% availability. And the World Cup Final saw 334,000 bets placed just on the final itself without a hiccup.
These are good the changes such as these don’t sell themselves to our customers. So we focused on giving customers a reason to visit or to return to the site and to trial a product. And the customer has responded. Mobile staking is up 105%, sign-ups of 176%, actives up 75% and conversion increased by 14 percentage points. We’ve recorded month-on-month growth since we launched.
Tellingly, mobile turnover is now larger than desktop. Having been nearly half its size, only eight months ago. In parallel with that, we’ve also overhauled our desktop product. We’ve improved reliability, provided a far more intuitive journey for our customers and added new products, such as Perform Live Streaming and the Ladbrokes exchange with incidentally a far more aggressive and centralized promotion at the overall exchange capabilities planned for the second half and into 2015.
Our offer is now a match for others in the market. And perhaps for the first time supports rather than detracts from the mobile offer and therefore, our customers’ overall digital experience.
Just to remind you, Ladbrokes Israel, only became fully operational towards the end of Q1. Games were the first products, to which we could apply this new found digital marketing expertise was because we didn’t have to wait for either a platform transition or technical enhancements, and the results were encouraging.
Games NGR was up 10% in Q2, actives up 27% and sign-ups up 25%. Now it’s only one quarter and it’s only a relative small part of the product set. So we’re not by any means getting carried away. But it does give an indication of how effective Ladbrokes Israel can be when we can bring that expertise to bear.
Again to remind you, IMS, the back-office platform only came into operation in May. So, as soon as that was available, we began to lay the data foundations to support enhanced and targeted CRM.
Casino and cross-sell are therefore our next areas of real focus. They present us with a material opportunity. The real discipline for our teams is to acquire customers profitably and then stimulate activity based on the customer’s expected play profile. And we’re confident that now the product is strong with the underlying technology embedded, we can apply the sophisticated marketing behind researching of brand and deliver growth particularly in digital gaming through H2 and into 2015.
And it’s these marketing disciplines that will be important in the post point of consumption tax area where only by lowering the cost per acquisition increasing the conversion percentages, increasing the cross-sell and increasing the retention rates we’d be able to mitigate the impact of this tax.
Cost reduction and contract renegotiation per say and by themselves will be insufficient to rather blend tools to defray this additional cost.
Before I talk about retail, let me just address for a few minutes, U.K. regulation. And the ongoing uncertainty that’s proven such a drag on the industry. The lightening rod has clearly been machines. But no one should be under any illusion whatsoever, enhanced regulation will apply across the whole betting and gaming industry.
The Ladbrokes Athos is relatively simple. We should be there to support and to help people at risk to help themselves and we’ve been proactive in this respect, it’s why we run the first ever television outfit promoting responsible gambling. We linked responsible gambling to executive remuneration, we’re a leading advocate of the ABV code implementation and we’re using our proprietary data to develop algorithmic predictors for problem gambling.
Alongside the industry, we’re in discussions with DCMS and the Gambling Commission about the recent decision to change machine regulation. If you remember, these changes will only allow machine stakes above £50 where customers can be identified. For us, that’s an account such as odd zone for people, who don’t have account capability or loyalty cards via interaction behind the counter.
We expect details and the timing of the implementation to be finalized in the autumn of this year. So, at that time, we’ll look at the inevitable implications. And once we know more we can comment particularly in regard to shop closures.
I believe that the regulators are encouraged by Ladbrokes’ approach and I think they appreciate that we have helped to shape the debate. But our message to government is clear and consistent.
This industry now desperately needs a period of fiscal and regulatory stability if it’s to remain vibrant and if it’s to be allowed to grow.
Now we’ve worked hard to ensure that retail remains a viable attractive cash generative and profitable channel. Our key areas of focus were improving machine performance driving football through enhanced pricing and through the SSBT’s improving margins and keeping costs tightly controlled. And we’ve made progress in each of these areas.
We entered the year knowing that our machine estate needed upgrading. We completed the rollout of the new clarity machines ahead of the World Cup as planned. That roll-out coincided with the introduction of the ABB code of conduct.
Responsible implementation of the code in accordance with both the spirit and the letter inevitably had an adverse impact on turnover. But as the new machines have started to be enjoyed by our customers and the customers’ behavior has normalized in response to the code, we’ve seen machine performance improve. And we’re now targeting 1% to 2% net like-for-like growth year-on-year.
We’ve also achieved record weekly performance from the new SSBT estate during the World Cup, reinforcing our view that the younger customer is increasingly comfortable using digital style products such as the SSBTs and such as the machines within the retail estate.
Turnover from SSBTs is growing week-on-week with 70% of the revenue delivered from football betting of which 40% of that is bet-in-play and a significant proportion incremental to traditional OTC turnover. But not withstanding this progress, there is still room for improvement in the SSBTs. And therefore we believe this further opportunities for growth through H2 and into 2015.
Our goal hasn’t always remains to improve the quality and mix of our trading earnings. An important element of this was to target football, and in particular the higher margin multiple bet that are increasingly popular.
Again, Ladbrokes needed to give its customers a compelling reason to choose us. So, we revamped the entire coupon range offering more bets at better prices in a more attractive coupon dispenser with enhanced promotions all rolled out in time for the World Cup. And the response was pleasing.
With the amount stake and this is excluding the World Cup, up 27% in the first half and 25% season on season with 60% of these stakes derived from multiple products. So we’re going to continue this approach into the new football season.
Its football and these other sports, which are helping to counter the ongoing decline and attractiveness, the industry seeing and the dog and particular horse racing markets. Whereas both of them continue currently to be important, if turnover trends do not improve and if the current cost structures are maintained for horse betting in particular, it may rapidly reach the point where it becomes unsustainable as a product.
Now we’ve understood for some while that retail needs to be both a destination in its own right and an integral part of a multi-channel proposition. By offering benefits to our customers such as showing more sports, free Wi-Fi, counter-less shops, cash out facilities and really great customer service, we can ensure that the retail channel remains vibrant in its own right.
But in parallel, we’re introducing into the stores tablets we’re deploying bonuses to customers based on their cross-channel activity. We’re facilitating the transfer of funds between online and offline products to ensure that a vibrant high street presence is increasingly an integral part of the wider customer proposition.
But we always said that it was only when we had the right products with the appropriate technology supported by CRN in the hands of experts but the Ladbrokes brand strength would start coming to the fall.
So, consequently recently, we refreshed our brand under the banner the Ladbrokes life. The campaigns on and the metrics are encouraging particularly with the 18-34 year olds. With our brand awareness now surpassing that of our major competitors, and our share of voice rising to 14% during the World Cup, despite materially lower advertising spend than some others.
The opportunities for further exploitation of this new brand proposition, especially in social media are really exciting.
Moving outside the U.K. our approach remains to enter regulated markets and grow dominant positions with tight cost disciplines. In Spain, our performance in Madrid where we achieved positive EBITDA last year and the gain in H1 demonstrates the attractiveness of continued expansion into regions such as Catalonia where we already have a market leading position with 322 outlets taking our total presence in Spain now to 1,075 outlets with amounts staked up 40% year-on-year, NGR up 45% year-on-year with Sportium Digital coming on-stream and beginning to gain traction.
In Belgium, Ladbrokes is the dominant retail brand and we’re now evolving that to a multi-channel proposition. The rollout of SSBTs across the estate is already driving encouraging growth and the launch, of the virtual products are imminent.
Finally, looking at Australia, well Australia is a mature market where it’s very expensive to buy scale. Last year we acquired the bookmaker business. The appeal there was slightly different. It was an experienced innovative management team heralding from an affiliate marketing background who were really excited about creating Australia’s digital challenger brand.
Within weeks of the acquisition, the Ladbrokes brand was launched into the Australian market from scratch on to an existing platform. And we now have 34% brand recognition in that market.
We’re continually giving customers reasons to open account with us. With innovations such as the unique loyalty card, which allows customers to withdraw winnings from ATMs all the way across the country, the minute a bet is settled.
The Betstar business was then acquired and integrated within 28 days. Underlying performance is really strong with stakes increasing by 60%, net revenue by 216% and actives by 380%. And the team there is now poised for a really competitive spring carnival.
So, so far I’ve deliberately concentrated on what we delivered operationally. Right back at the start of the year, we set ourselves a challenge that was to be genuinely competitive across all channels during what we knew would be an intensely competitive World Cup.
The market was indeed hugely competitive with both new brands and old brands spending millions above the line and offering unsustainable bonuses online. But we plan for this event for many months and the results were pleasing.
Overall, digital amount stake compared with 2010 we’re up 29% with mobile stakes up 1,100% albeit from an admittedly low base. Digital actives were up 28% with mobile actives up 700%.
U.K. Retail OTC rose 8% with a 27% improvement in slippage. Overall gross win margin was 22.7% with a digital margin a healthy 24.3%. And our sites had an uptime of 99.9% and the international businesses, recorded impressive growth. We were competitive and that’s despite some of our digital capabilities particularly cross-sell yet to come fully on-stream.
I just would like to acknowledge at this time publicly the red team’s endeavors in delivering these results. While satisfying, we all appreciate this is just the beginning, we have much more to do with more innovations to land and with more growth to deliver. But this performance sets us up well to deliver that growth with more customers, more actives playing more often. And when we acquired new customers, acquired to price, we feel happy to have paid. The key now is to keep them playing and to keep them satisfied.
I’m now going to set out for you, if I may once again what we will do to maintain momentum and deliver growth through the second half and into 2015.
Looking at retail, we’ll focus on driving growth through the machines and driving growth through the SSBT estate, pushing the football product further driving enhanced quality of earnings whilst maintaining a really tight control over costs.
In digital CRM is now going to be increasingly influential for both Sportsbook and across the different gaming products. With actives, acquisition conversion and cross-sell the key metrics will maintain an effective but a very disciplined approach to marketing, to win new customers only at the right price and to keep them playing with us for longer.
Internationally, we’ll build on the actions we’ve taken in the first half particularly in the key regulated markets of Spain, Belgium and Australia where we think they offer opportunities for growth. And overall, we’ll continue to manage the group costs very tightly and to strengthen the balance sheet further.
We’ve worked hard over the last 12 months to support our brand with products that meet customer expectations. Operationally, we’ve upgraded the business substantially. A large chunk of the heavy lifting is now complete. And the execution risk substantially reduced.
We set ourselves a major task, that was to be fighting fit in time for the World Cup and we’re pleased with our performance particularly in mobile. We’re encouraged but by no means taking anything for granted. We’re not getting carried away and we’re certainly not losing our focus, big challenges still await us.
There is plenty more to do, there are plenty more innovations to deliver, all needed to turn our newly competitive position into sustainable growth and importantly grow shareholder value.
But Ladbrokes is today a materially different business compared with 12 months ago, stronger, agile, more robust and far more competitive. We remain confident about the direction we’re taking and are well positioned for growth in the second half and into 2015. Thank you very much.
Thanks Richard. We’ll now move to questions-and-answers. Ian and Richard would join me.
If you would be kind enough to ask your question and say which firm you’re from. We have also got the members of the team in the audience, if you ask a particularly detailed question. So, let’s start over there, the gentleman in the end. Thanks.
Patrick Coffey – Barclays
Thanks, hi, it’s Patrick Coffey from Barclays. Three questions, if I may. Just on the marketing spend in digital in the first half. You guided to 25% to 30%, it’s come in at 31% of net revenue.
For the full year, is it still expected to be in the 25% to 30% range or should we be expecting that you’re going to need to spend a bit more to gain the scale there so, just kind of keen to hear your guidance for the full year and also into next year? Please, on that one?
In terms of slide 26, on machine gaming gross win. How much of the growth0020from weeks 22 to 26, it’s really all about the football World Cup rather than the impact of new machines and customers getting back to normality, as you say? Isn’t it just simply a spike on the back of the World Cup? So, I’m interested in why you have confidence to guide to like-for-like, its 1% to 2% for the full year?
And then just finally on the dividend, how do you think about the dividend payments and what I mean is, do you think about dividend cover or is it about the de-leveraging schedule which you appear to be on a de-leveraging schedule at the moment. What would be the trigger for a cost in the dividend? Thanks.
Okay, Ian if you could take, the marketing spend and slide 26 on the World Cup and stocks dividend, if we need to?
Good morning, Patrick. Yes, the full year guidance is 25% to 30% and we’re 31% in Q2 as we pushed a little bit harder going into the World Cup. But we’re still comfortable in the range for 25% to 30% for the full year on marketing.
I think on slide 26, I don’t know if you want to put it on the screen if that’s helpful, so you want to flick to it. But I think you can see from that slide the shape of it where I think the reality is we started the year, the calendar year with probably the weaker cabinet estate in the business.
The code came in as you can see on the slide at the beginning of March. And then it was only really out of March and into the World Cup where we completed the rollout of 9,000 cabinets. So you get three competing effects there.
I think what’s encouraging I think as to answer your question if I understand is what’s the confidence in the 1% to 2% like-for-like growth? What we’ve seen through the World Cup period but also subsequent in the current trading is we’ve seen a very stable period of around about 1.5% to 2% growth in like-for-like machines.
So, that gives us the confidence in trading we’ve seen coming out of the World Cup and the five weeks recent trading to give that guidance for the full year.
And your final part on dividend, I think – when we think about the kind of cash flows of the business in three ways, how do we invest in the business, how do we get the right kind of leverage and how do we spot a dividend because we’re quite conscious that dividend is important to our shareholders.
So, it’s getting the balance of the three correct rather than over-emphasizing one or the other really. I think you’ve seen, we’ve repeatedly said that we want to make sure that the dividend this year is maintained £0.89 in full year, that’s at least flat on last year.
And if you look at our cash flows and the expectations of the full year, the cash flow is not only able supporting dividend that level and keeping the leverage in the 1.5 to 2 times and continuing to invest in the business, so it’s three things simultaneously.
Gentleman there in the middle of the row or towards the end. Thank you.
Jarrod Castle – UBS
Thank you, good morning. It’s Jarrod Castle from UBS, three questions if I may. Two on regulations I guess. Firstly, you mentioned that you’re bit concerned about POC being purely enforced. What around POC enforcement do you see as a possible difficulty just given what the U.S. government does I seem to be very good at that.
Secondly, what would you want the government to do in relation to dogs and horses to I guess be more beneficial to the bookies. And then, lastly, just on potential shop closures, I know you’re going to kind of reevaluate given what happens with government regulation on the new machines.
But when you look at the estate, what post the 50 closures would you consider as underperforming. And in terms of underperforming is that based on ROIC versus WACC or indeed loss making? Thanks.
I’ll take the first one Jarrod I don’t remember saying anything POC being poorly enforced. But I’m happy to take the question anyhow. I think POC is coming in. I think we’ve mentioned quite clearly the cost and contract renegotiations are only part of that I think that you have to apply the marketing disciplines which are going to defray that.
As you quite rightly say, the Americans have been pretty good at enforcing things in the post UIGA era. The government said they’ll start arresting people who don’t have licenses if they enter European territory, I’d like to see that. I’d certainly like to see working with the credit card providers to make sure that people who don’t have licensing don’t get the due code. And therefore passes the responsibility through. I think that would fundamentally change the basis by which people can enter the U.K. and market into the U.K.
Once that happens and I think that you will see a flight to brand and a flight to quality. And then at this moment in time, we used the World Cup as our testing bed for competing in that environment post POC. I think we performed well during the World Cup and we’re well positioned to drive our brand into that world. So those are the things that I’d like to see on enforcement.
The question about dogs and horses in particular horses is a two-part question. The government really only has a role to play in levy. And I think we’ve said quite clearly that we’re happy with the levy continuing. The levy is something that which is to support the needs of racing, how much racing needs to keep going. It isn’t something that racing wants, it’s actually the formula how much they need.
So, until something better comes on we’re happy to work with the government on the levy. The other side of the question is that I think across the industry you’re seeing that turnover in horse racing is declining. I think you’re seeing the fixtures less appealing with the average number of riders, average number of horses down, more favorites winning.
We have a structural problem in the product. We want to work really close with racing. Personally, I love it as a product, the customers love it as a product but we need to work really closely with racing over the next few years to make sure that the interest of the 18 to 24s, 18 to 34-year old males increases in that product.
And also to make sure the costs are sustainable. Because at this moment in time, we have more people trying to take more of a pie out of horse racing – out of betting rather than looking at the product of making that grow.
I’ll just move on to shop closures. I don’t actually, when you use terms like ROIC and WACC, I look at Ian, because he understands those acronyms better that I do. What we look at is things that are non-contributory. The shops that are non-contributory, we’ve taken it down from just under 3% when we started to less than 1% of the estate is non-contributory. We look at that, we continue to drive that through, we will continue to look at that.
And when we see regulation, we will continue to look at the impact that hasn’t to say what do, we have to do to mitigate that.
Jarrod Castle – UBS
That’s it. Thank you.
And then, the gentleman in the front.
Vaughan Lewis – Morgan Stanley
Sure, thanks. Vaughan Lewis from Morgan Stanley. Just looking at retail in aggregate there is a very wide profitability gap with your peers. Is there anything you can do to close that and is that the idea behind the sort of £3 million to £4 million of cost savings and what would the full year benefit of that be in 2015?
Second one, could you just give us what the pro forma point of consumption tax hit would have been in the first half for the digital business? And then thirdly, Richard, you talk a lot about profit growth returning in the second half and into next year. Are you expecting profits to be up in 2015 than even with all the moving parts and all the extra duties and so on? Thanks.
Ian, take the first parts if you would and then.
Yes. I think on shop profitability Vaughan, I think obviously and the closest comparison would be William Hill. So, I think if you look at that, if that was your point.
I think we look it in different ways. If you look on a per shop basis, from a staking level, actually we stand up very well against Hill and slightly ahead on a short basis. I think when we see, and obviously with a focus on football, which counters the whole staking and we expect to make more progress there.
I think from where we can’t see a gap in OTC growth, in margin I think we’ve seen a gap historically between ourselves and Hill’s which Nick and the team, have put a lot of focus on really in starting to close that gap so more to do. But there has been a gap there.
Machines growth, I think we’re pretty much neck and neck with our friends in terms of performance on a short basis. And costs, I think we’ve taken a slightly different approach to Hill’s if I’m honestly speaking, I think we have invested to grow and we see that in the OTC performance.
Clearly we’ll keep that under review but we’ve invested in Wi-Fi, we’ve invested in Sky, we’ve invested in the customer experience, obviously multi-channel plays are all. We invested to grow and we’ll see how that performs because you want to keep that under review. And finally, from a state optimization point of view, we’re going to keep on optimizing.
So, I don’t think it’s as simple as just cost. I think there is a number of facets, the P&L we want to keep focusing on the retail but fundamentally belief in the strong sustainable business.
On the point of consumption and digital.
It’s probably, if you take the front half, it’s probably around about £11 million as POC impact profile, just the front half.
Vaughan Lewis – Morgan Stanley
And just the full year, annualization of the retail cost savings index?
Well, we’re looking for next year. I’ll give you stronger guidance on cost impact next year. I mean, we’ve low with the guidance to 4.4% for this year. So, we’ll try to give the guidance next year.
I think your point on profit, we’ve always said the first half was about operational delivery and the profit wouldn’t be very special. We always said the second half would be better. We’re comfortable the consensus is out there. And we’re really not in a position where we would be giving any guidance for next year as yet. But we’re very confident that the machine will start to deliver in the second half for the year and continue.
Vaughan Lewis – Morgan Stanley
Richard Stuber – Nomura
Hi, Richard Stuber from Nomura, please. Just a couple of questions, the first one is, I know you’ve exited some more grey market places, could you say what percentage of your revenues will still be coming from the grey markets after you’ve exited – once you’ve announced?
The second question is on the horse racing versus other sports, can you say what the split is by saying that revenue for both the retail division and the online division is?
And the final question is say in your announcement you mentioned you have a license in Nevada, which you got a few months ago. Could you tell us a little bit – give us more color around that and what you hope to do in the U.S.? Thank you.
The first two parts, Ian.
Hi Richard. So, grey markets, as you’ve noted we’ve exited few and we keep these things under constant review because of the look at regulation and leave a framework in each of those.
I think we’ll be looking for where and how many more. I mean, if you look at our dotcom business we’re still over 90% in the U.K. so it’s a pretty small proportion of what’s outside of U.K.
Nevada, yes, as we said Nevada, we own a business out there. It’s a technology platform. We were very pleased with the licensing program. We’re now an open and unrestricted, Ladbrokes is an open and unrestricted licensee in Nevada, it allows us to do everything. We’re rolling out a mobile platform in Nevada now, which is going through regulatory approval as we speak.
We provide the platform to a number of the casinos out there in fact I think if you look closely enough, we provide the platform for one of our major competitors out there, which is always sweet. But it’s very much just a stake in the ground. I think that as you find regulation evolving in the U.S., we want to be out there and we want to be very well positioned to compete particularly in sports betting.
As and when this opens up and particularly now that we have a pretty damn good exchange platform, which may well play quite a part in the U.S. going forward.
Richard Stuber – Nomura
So, can I just follow up one question which wasn’t answered? Do you have the sort of split between horse racing and?
Yes, so if we come to start of retail, we’re probably – we’re actually – that’s very interesting. If you look at one set of results ourselves and Hills are pretty much an identical proportion which is horse racing and dogs, which together about two thirds of OTC staking. And in digital the proportion, I can’t remember, it’s probably about 30%, it’s a much low proportion in digital than it is in retail.
Now the gentleman, couple of rows back. Thanks.
Ian Rennardson – Jefferies
Yes, it’s Ian Rennardson from Jefferies. In the digital business, what are your absolute ambitions, you’ve made £3 million of EBIT this year, Hill’s made £81 million in the first half. Where do you think you can take that business? And secondly, are you seeing any pressure from Playtech to renegotiate the terms of the deal because they’re way-off getting paid?
I’ll take those. I don’t think we’ve made any secrets about our ambition. First of all the ambition rather gullibly is to grow quite dramatically. If I look at the U.K. we have about 22% to 23% market share in retail. Of course there are more competitors in the online space.
But I don’t see any reason why over the next couple of years we can’t get back to our representative proportion of the digital space and grow outside the U.K. quite noticeably in digital. So that is our – the scale of our ambition. I think if you look at the fact, the casino is just coming on-stream for us now.
The cross-sells are only just starting for us. The scale of the opportunity for the Ladbrokes brand is really quite exciting. Lot of focus, still an awful lot to deliver, still really, really keen to make sure we take nice steps but there are some good opportunities there for us.
If I look at the Playtech deal, we’re one year into a 4, 4.5 with an option for a 5-6 year online deal, this is still a minimum of four years to go on that. There is an awful lot left to play for. I don’t think that anyone would have anticipated that we would have integrated the products, the platform, the technology, the people, setup Ladbrokes Israel, migrated all the customers, segmented the database in much less than a year.
We had a target there weren’t moving the first match of the World Cup for us. So, we have to get it all done in time there. We’ve now got 4 to 4.5 years to actually capitalize on that. All of our goals are absolutely aligned. The cong room goals are all based on growing EBITDA. We talk about how much money they’re going to make at the end of the five-year deal, not one year into it.
Ian Rennardson – Jefferies
Gentlemen, on the end of the row.
Ed Birkin – Credit Suisse
Good morning, it’s Ed Birkin from Credit Suisse. First off, on the U.K. retail, can you give us an idea of the contribution of the SSBTs even in terms of absolute revenues or perhaps to the growth of ATC? Secondly, can you tell us when your contracts for SAS and TVA up for renewal. And then finally in your digital, can you give us what our CPA was, cost per acquisition in actual terms then compared to last year? Thank you.
Yes, it sounds like me, I’m going to get it. So, SSBTs are, I mean, they’re an interesting but not the major significant proportion of OTC in terms of counter turnover yet but they’re interesting proportion.
I’m not going to give you the exact split, I think that’s quite relevant for us to keep those kind of commercial secret.
I’d love to tell you about the depths and details of the turf in SAS contracts but I’m afraid we’re commercially not permitted to do that multi-year contracts. And digital CPA, we were £70 for the front half of the CPA. I think last year we were £91, £92. So, a big step forward with the Ladbrokes Israel team.
I would just add two things on that Ed that, the CPA was pleasing because this is the time when you have chart in the World Cup in there when actually competition for customers is intense. And you would expect pressure on the CPA so, the discipline which really good then.
And SSBT, the key about the SSBT is if you’re focus is on driving football and 70% of it is football, 40% is betting play and a lot of it is incremental, it builds the football relevance in the estate. And it binds the 18 to 34-year old into a more digitally based experience in the retail estate. So that I think is the key rather than the absolute number at this moment in time.
Ed Birkin – Credit Suisse
Okay. Thank you. Can you give us an idea of what the growth contribution was there out of the turnover growth?
Well down SSBT.
I suspect without knowing he won’t.
I was trying off the top of my head what it is anyway.
Ed Birkin – Credit Suisse
Leave it with me, then, we’ll have a look.
You’ll see more clues outside.
Ed Birkin – Credit Suisse
Thank you very much.
Any other questions. Gentlemen on the end.
Patrick Coffey – Barclays
Sorry, another one from me, Patrick Coffey, Barclays, just a question on shop staff and how they’re incentivized. So, obviously we’ve got the regulatory changes and staff and I are encouraged to interact with the customer potentially ask them to stop betting on the machines.
In terms of their incentivization today, incentivize in their sales per shop basis, and therefore is that likely to change if they go in effectively telecasting this to potentially consider spending less in the shop? Thanks.
I think we’ve got really, really precise on what staff are doing. Staff are intervening with the customer when a customer goes beyond that preset personal limit, so a way they’re exhibiting any signs of distress. They’re not telling customers to stop betting, the goal is socially responsible betting. It isn’t no betting.
So, what the customer is doing is hoping, what the staff, are doing is intervening in a very well trained way to help a customer to help themselves. There is an inevitable downturn on turnovers, a consequence of that.
Staff are incentivized on many facets, the quality of care, compliance with 21 regulations, the overall performance of the shop, the overall performance of the estate, their personal scores from their managers. There is no contradiction whatsoever between the absolute application of the spirit and the law of the code with making more money in a shop.
And the, staff are really trained to make sure that actually by interacting with customers they get a better experience, a better long-term experience. The vast majority of customers enjoy their betting any problems at all, it’s from those customers that we’ll get the growth. Our job as well is to help customers who need to help themselves. There is no conflict between the two.
Any final questions? I don’t see any. Thank you for coming. Just so that everybody is completely clear because always the risk of these things is, what we think you said is what people have heard.
We are encouraged by the World Cup and frankly why, because we’ve kind of proved that the machine we’ve built in digital now works. It can cope with the scale. Our cost of acquisition was very sensible and we’re very encouraged with the growth. But there is absolutely among executives no sense of complacency.
And we very much recognize as a business that is all to deliver in the second half and ongoing and getting this machine rebuilt to work in the financials. We’re very encouraged that we can continue to improve retail. But we’re also very pleased with where we outturn the first half year operationally on digital. So thank you for listening. We look forward to seeing you all in six months’ time. Thank you very much.
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