Preliminary Results for year ended 31 December 11

RNS Number : 8321Y
Sportech PLC
07 March 2012
 



 

07 March 2012

 

Sportech PLC ("Sportech", "the Company" or "the Group")

Preliminary Results for the year ended 31 December 2011

 

Introduction

 

Sportech, one of the world's leading pools and tote betting organisations, is pleased to announce its preliminary results for the year ended 31 December 2011.

 

The Group occupies a strong position in the established regulated and emerging gaming markets around the world and is well positioned for continued growth in 2012 and beyond.

 

Financial highlights

 

·      Revenue increased by 66% to £118.2m (2010: £71.2m)

·      EBITDA* increased by 33% to £26.1m (2010: £19.7m)

·      Adjusted** profit before tax increased by 33% to £15.8m (2010: £11.9m)

·      A return to profit, with profit before tax of £8.0m (2010: loss of £5.9m)

·      Adjusted** earnings per share ("EPS") of 5.7p (2010: 5.4p)

·      Basic EPS of 2.6p (2010: loss per share of 3.9p)

·      Net bank debt reduced by 18% to £59.2m (2010: £72.2m)

 

*      EBITDA is stated pre exceptional costs and share option expense.

**     Adjusted numbers are stated before amortisation of acquired intangibles, exceptional costs, share of loss after tax of joint venture and other finance charges.

 

These results include the first full twelve months' contribution from Sportech Racing, which was acquired in October 2010.

 

Strategic and operational highlights

 

Football Pools

 

·     Continued refinement of product offering, leading to an increase in spend per customer and enhanced distribution.

·     Initial entry into social gaming through a white label distribution agreement with Bodugi Limited.

·     Subject to the award of a full licence, cricket pools ready for launch in India by the Essel Group, Playwin's parent company and Sportech's joint venture partner. Provisional gaming licence awarded to the Essel Group.

·     Appeal on VAT claim, which could exceed £80m with simple interest applied, expected to be heard by the First Tier Tax Tribunal in the summer.

 

Sportech Racing

 

·     Completed the integration of the Sportech Racing business into the Sportech Group, across all offices in the UK, USA, Netherlands, Ireland, France and Germany.

·     Established an interactive division in the USA to focus on the current, and future, online opportunities. 

·     Invested £2.2m in refurbishing the venues business in Connecticut where we have gross betting revenues ("handle") of $180m, reversing four years of decline in betting handle and outperforming industry trends.

 

e-Gaming

 

·    Successful migration of the casino and poker customer base onto Playtech gaming software at end of 2011.

·     Division moving to growth phase, ending 18 months of transition.

·     Concentration of promotion on the Vernons brand including launch of television advertising campaign.

·     A unique and leading position in the USA.

 

Ian Penrose, Chief Executive of Sportech PLC, said:

 

"We are continuing to make good progress.

 

We have diversified our business interests and revenue streams from a focus on the UK market, in which pools betting has a small market share, to establishing business interests where pools and tote (pari-mutuel) betting is a significant form of betting, and in those markets which are exploring the liberalisation of betting and gaming.

 

Our acquisition of one of the oldest gaming businesses in the USA has given us a unique and leading licensed position in North America, expected to be one of the world's largest gaming markets.

 

We have invested in technology, facilities and our people as we improve our focus and delivery to the customer in order to drive improved profitability.

 

Our financial results for 2011 highlight the significant improvement in the financial position of Sportech. Whilst we are conscious of the ongoing economic uncertainties in our two principal markets of the UK and USA, we have started 2012 well, with trading for the first two months in line with management's expectations."

 

-ends-

 

For further information contact:

 

Sportech PLC                                                                               020 7268 2400

Ian Penrose, Chief Executive

Steve Cunliffe, Finance Director

 

Pelham Bell Pottinger                                                                 020 7861 3232

David Rydell/Emma Kent/Rosanne Perry

 

Investec Bank plc                                                                         020 7597 5169

Patrick Robb

 

Panmure Gordon & Co                                                                020 7459 3600

Andrew Burnett

 

Chairman's Statement

 

Overview

 

This is the first set of full year results for the enlarged business, following the acquisition of Sportech Racing in October 2010, and the performance highlights the strong improvement in the strategic, operational and financial position of the Group. Over the last six years Sportech has been transformed into one of the world's leading pools and tote betting organisations. This is an exciting time for Sportech as the Group looks to capitalise on its unique and market leading positions in regulated gaming markets worldwide.

 

The Group's results have been in line with market expectations, notwithstanding the significant changes and challenges faced as the Board implemented its strategic objectives. During 2011 the focus has been on the integration of Sportech Racing, returning the Group to profit, reducing its debt levels and positioning the Group for growth in 2012 and beyond. 

 

Financial performance

 

Group revenue has increased by 66% to £118.2m (2010: £71.2m). EBITDA has increased by 33% to £26.1m from £19.7m. Operating profit (before amortisation of acquired intangibles and exceptional costs) has increased by 18% to £20.5m (2010: £17.4m). Following a 15% reduction in net finance costs to £4.7m(2010: £5.5m), adjusted profit before tax was £15.8m (2010: £11.9m) with adjusted earnings per share of 5.7p (2010: 5.4p).

 

The Group has returned to profit, reporting a profit before tax of £8.0m, an improvement of £13.9m on the loss of £5.9m in 2010. Basic earnings per share amount to 2.6p compared to a loss per share of 3.9p last year.

 

The reduction of net bank debt has been one of the key objectives for the Board in 2011. Net bank debt has been reduced by 18% in the year to £59.2m (2010: £72.2m). Over the past six years, net bank debt has been reduced by 45%.

 

Dividend

 

As in previous years, no dividend is proposed. The Board believes that it is in a position to capitalise on growth opportunities in regulated gaming markets worldwide, whilst continuing to reduce debt as appropriate. 

 

VAT claim

 

As previously reported, the Group has submitted a claim for the repayment of VAT which could exceed £80m with simple interest added. The Board now expects the claim to be heard at the Independent First Tier Tax Tribunal in the summer of 2012.

 

Board and employees

 

During the year, the Board composition was addressed and alongside my own appointment as Chairman, we were pleased to make three further appointments to the Board. Peter Williams joined as Senior Independent Non-executive Director and Chairman of the Remuneration and Nomination Committees, Mor Weizer joined as a Non-executive Director and David McKeith joined as an Independent Non-executive Director and Chairman of the Audit Committee. 

 

The development of Sportech into an international business with offices in the UK, USA, Europe and Asia has placed significant demands upon our executives and employees. The Board would like to thank them for their dedication and commitment towards the business.

 

Outlook

 

Sportech has revitalised its business over recent years, establishing a unique position in the regulated and emerging gaming markets worldwide, which should deliver significant opportunities, most notably for our licensed gaming business in the USA. Current trading is in line with the Board's expectations and the Board expects to capitalise on Sportech's unique position in gaming markets to deliver further momentum into 2013 and beyond. The Board looks forward to the future with confidence.

 

 

 

 

Roger Withers

Chairman

7 March 2012

 

Business and financial review

Group strategy

 

Sportech is one of the world's largest pools and tote-led gaming companies. Operating in highly regulated markets worldwide, our pools and tote-led business will be supported by a comprehensive e-gaming platform to enhance and broaden the customer offering as government regulation changes towards online gaming internationally.

 

Our key strengths

 

Sportech has the following key attributes on which the strategy is based:

 

·     A diversified earnings profile with activities in Europe, North America and shortly Asia, protecting the Group from its previous UK dependence.

·     A unique heritage and reputation for integrity - operating the world's oldest football gaming business, The Football Pools, since 1923 and commencing tote activities in the USA in 1932.

·     The number of licences issued to it by gaming regulatory bodies including those in the UK, USA, Alderney and the Netherlands.

·     A mix of business to business ("B2B") and business to consumer ("B2C") activities in the UK, Europe and the USA.

·     Ideally positioned to benefit from the expected regulation of online gaming in the USA with operational businesses and activities, both B2B and B2C customers and active gaming licences.

 

Regulation

 

We have successfully diversified our business interests from a focus on the UK market, in which pools betting has a small market share, to establishing business interests where pools and tote (pari-mutuel) betting is a significant, if not the dominant, form of betting. In many of these markets, regulation for gaming and/or online gaming is being positively reviewed.

 

UK

 

The UK Government has announced a formal consultation with regard to the regulation and taxation of offshore remote gambling operators. Over 90% of Sportech's UK sourced revenue is onshore and as such Sportech welcomes the announcement and is actively engaged with the Government to ensure the full impact of any potential changes are fully understood, particularly in the unique area of football pools betting.

 

USA

 

The acquisition of Sportech Racing brings the Group a unique and unrivalled position in North America for a European owned organisation, in terms of existing licences, customers, market share and strategic positioning. This comes at a time when the Department of Justice ("DoJ") clarified its position on online gaming on 23 December 2011 and when a number of states are exploring the liberalisation of betting and gaming.

 

We have a number of gaming licences, including an exclusive licence in perpetuity to operate up to 18 retail venues and telephone betting facilities in Connecticut (which have handle revenues of $180m). In addition, we have a further 29 state licences to provide horseracing wagering facilities and systems, through which we provide tote betting systems to around 100 racecourse partners. We host our operations and data centres in New Jersey and California where we process over $6 billion of horseracing bets in the USA alone.

Netherlands

 

Sportech holds the exclusive licence to operate all betting on horseracing in the Netherlands. We do this through 15 betting shops, 50 point of sale locations in bars and shops and via our online horseracing site, Runnerz.nl. The Government in the Netherlands is in the process of establishing laws around e-gaming, which is currently considered outside the regulated market. We are actively engaged in the process. As an established operator, employer and taxpayer in the Netherlands, Sportech is in a position of strength from which to develop as the laws are clarified.

 

India

 

Sportech considers that the market for legal gaming in India has great potential. As a consequence, and in view of required regulatory change, we have taken a long term approach to this market. A joint venture with India's leading lottery business, Playwin, was established in 2010 to offer play for fun sports prediction games. Playwin's parent company, the Essel Group, secured a provisional gaming licence in Sikkim in 2011, which is shortly expected to become a full gaming licence. Sportech's joint venture with Playwin will provide technology and services to companies, including other members of the Essel Group, that are capable of being used in the operations of pools games.

 

Business overview

 

The focus during 2011 was on integrating Sportech Racing into the Group and establishing a platform for future growth, whilst delivering financial results in line with both management and market expectations. We are pleased that we were able to deliver on these overall objectives, particularly given the challenges of an international integration exercise during difficult economic times. The major areas of activity in the year have been:

 

·    Integration of the Sportech Racing business into the Sportech Group, across all offices in the UK, US, Netherlands, Ireland, France and Germany.

·    Establishment of an interactive division in the USA to focus on current and future online opportunities. We are pleased that we have increased the number of contracts secured since this division was established.

·    Since the acquisition of Sportech Racing was completed, there have been no tote customers lost, and we have secured two new contracts, in addition to our interactive initiatives.

·    Completion of an initial £2.2m investment programme into refurbishing our venues business in Connecticut, which has had the desired impact of enhancing the customer experience and boosting staff morale. As a consequence, betting volumes have improved significantly against historic trends as well as outperforming industry trends. Focus is now on extending the estate from its current 15 locations to the 18 permitted under our licence.

·    Continued focus on the refinement of our product offering within The Football Pools, leading to an increase in spend per customer and enhanced distribution including our first entry into social gaming with Bodugi Limited later this year.

·    Continued operational enhancements have delivered ongoing cost reductions in The Football Pools business.

·    Focus on improving customer experience, through enhanced customer service and improved payment mechanics.

·    Our e-Gaming business has been successfully migrated to the Playtech software and platform and is now embarking upon a customer acquisition strategy.

·    Relocation of our two North American offices to new sites in Atlanta and New Haven, Connecticut, with minimal disruption.

·    There has been a strong focus on cash generation and this has been used to develop growth opportunities and continued debt reduction.

 

The activities highlighted above have placed the Group in a strong position to build upon these successes and deliver on the Board's strategic ambitions over the next few years. 

Financial overview

Summary results

 

Revenue

 

2011

£m

 

2010

£m

Increase/

(decrease)

£m

Football Pools

47.7

52.1

(4.4)

Sportech Racing**

67.3

15.0

52.3

e-Gaming

4.1

4.3

(0.2)

Inter-segment elimination

(0.9)

(0.2)

(0.7)

Total

118.2

71.2

47.0

 

EBITDA

 

2011

£m

 

2010

£m

Increase/

(decrease)

£m

Football Pools

18.5

19.7

(1.2)

Sportech Racing**

10.0

1.7

8.3

e-Gaming

1.6

1.6

-

Corporate costs

(3.8)

(3.3)

(0.5)

Inter-segment elimination

(0.2)

-

(0.2)

Total

26.1

19.7

6.4

 

Operating profit *

 

2011

£m

 

2010

£m

Increase/

(decrease)

£m

Football Pools

17.3

18.7

(1.4)

Sportech Racing**

6.9

1.0

5.9

e-Gaming

1.4

1.5

(0.1)

Corporate costs

(4.9)

(3.8)

(1.1)

Inter-segment elimination

(0.2)

-

(0.2)

Total

20.5

17.4

3.1

 

 

*   Operating profit before amortisation of acquired intangibles and exceptional costs.

**  Sportech Racing 2010 results for part year following acquisition on 5 October 2010.

 

The Group's financial performance is in line with market expectations, notwithstanding the significant changes and challenges in the year.

 

Group revenue has increased by 66% to £118.2m (2010: £71.2m), generating an EBITDA of £26.1m (2010: £19.7m). Operating profit (before amortisation of acquired intangibles and exceptional costs) amounts to £20.5m (2010: £17.4m).  With a reduction in net finance costs to £4.7m due to repayment of debt (2010: £5.5m), adjusted profit before tax amounts to £15.8m (2010: £11.9m). Adjusted earnings per share is 5.7p (2010: 5.4p).

 

The Group incurs an annual non-cash amortisation charge of £5.9m (2010: £5.9m) on the intangible assets acquired with Vernons in 2007. The Group has also incurred exceptional costs of £0.9m in the year (2010: £9.9m), principally redundancy costs in respect of the continued rationalisation of the business. In the prior year, the Group incurred trading exceptional costs of £2.5m and, following the adoption of IFRS 3 'Business Combinations' (revised), exceptional acquisition related expenses of £7.4m. The Group also has other finance costs of £0.4m (2010: £1.4m). In 2011 this principally

related to the non-cash finance charge in respect of the deferred consideration payable on the acquisition of Sportech Racing. In the prior year, these costs included £0.9m in settling bank refinancing costs.

 

Corporate costs

 

In a year during which the Group has increased its size and scope of operations, corporate costs have remained tightly controlled. After accounting for a non-cash share option expense for the Group, under IFRS 2 of £1.1m (2010: £0.4m), total corporate costs amount to £4.9m (2010: £3.8m).

 

Taxation and other matters

 

The Group has incurred a tax charge of £2.8m (2010: £0.4m). The weighted average applicable tax rate was 28.8% (2010: 27.7%), having adjusted for non-taxable transactions such as the loss incurred by joint venture, non-cash interest on deferred consideration and share option expense. The Group remains with a net deferred tax asset of £3.0m (2010: £3.5m), having utilised £0.3m during the year and reduced the asset by £0.2m to reflect the reduction in the UK corporation tax rate. During the year, the Group paid total tax of £1.0m (2010: receipt of £1.7m).

 

The Group announced in April 2009 that it had submitted a claim for in excess of £40m to HM Revenue and Customs ("HMRC") for the repayment of VAT overpaid in respect of the "Spot the Ball" game from 1979 to 1996. Interest may also be added to the principal sum claimed which, if applicable, could more than double the sum claimed.  The claim has not been recognised in the Group's financial statements. Following the anticipated rejection by HMRC in December 2010, Sportech appealed this decision in January 2011. The Board now expect the claim to be heard at the Independent First Tier Tax Tribunal in the summer of 2012.

 

Net debt and banking facilities

 

The reduction of net bank debt has been one of the key objectives for the Board. We are therefore pleased to report a further reduction of 18% in net bank debt during the year to £59.2m (2010: £72.2m). Over the past six years, net bank debt has reduced by 45%. The Group has also reduced its bank leverage ratio (net bank debt/EBITDA) from 5.3 times at the end of 2005 to 2.3 times at the end of 2011.

 

Cash generated from operations amounted to £25.7m (2010: £16.3m). Following net interest payments of £4.7m (2010: £5.5m) and tax payments of £1.0m (2010: tax receipts of £1.7m), cash generated from operating activities prior to exceptional costs was £20.0m (2010: £12.5m). After trading cash exceptional costs of £0.9m (2010: £2.5m) and exceptional acquisition costs of £nil (2010: £7.4m), net cash generated from operating activities amounted to £19.1m (2010: £2.6m). We invested a further £5.3m (2010: £2.5m) into tangible and intangible assets and invested a further £0.8m (2010: £0.5m) into Sports Hero, our Indian joint venture with the Essel Group.

 

The Group currently has drawn senior facility term loans of £62.5m (2010: £73.0m). A further £2.5m (2010: £4.0m) of senior facility term loans remain undrawn and are available to finance business development opportunities. The maturity date of the senior facility is June 2013. In addition the Group has a £3.0m working capital facility which is due for renewal in June 2012. The facilities contain standard financial covenants all of which were met by the Group during 2011. The margin over LIBOR in respect of the term facilities is 3.0% per annum.  As the senior facility is available until June 2013, the Group plans to refinance its existing debt during the first half of 2012 and has started discussions with interested lenders. Given the dramatically improved financial profile of the Group, the Board is confident of securing a debt facility in line with the Group's ongoing requirements.

The Group has a number of interest rate swap agreements in place in respect of £50.0m of its term debt, with maturity dates from February 2012 to February 2016 at an average rate (before the lending margin of Lloyds Banking Group) of 4.8%. Of these swaps, £10.0m unwind each year, commencing in February 2012. Under international accounting rules, such swap arrangements are fair valued at each reporting date. These swaps are valued at the end of the year as a net liability, after deferred tax of £2.8m (2010: £3.3m). These agreements, which were entered into over four years ago, have reduced the Group's exposure to volatility in the credit markets.

 

Deferred and contingent consideration on the acquisition of Sportech Racing

 

Deferred consideration of $10.0m plus interest at the rate of 1% above Bank of England base rate is payable on 30 September 2013 in respect of the acquisition of Sportech Racing. The discounted value of the deferred consideration translated into sterling at 31 December 2011 is £6.1m (2010: £5.5m). There is also the potential for performance related contingent consideration of up to $8.0m to be paid subject to certain performance criteria being met. A fair value of £nil has been attributed to this contingent consideration (2010: £nil).

 

Share capital and share premium

 

Current shares in issue total 198,810,302. During 2011, the Company, having obtained the approval of its shareholders at the 2011 AGM and the High Court in Scotland, cancelled its share premium account in its entirety, with a resultant credit to retained earnings of £20.7m.

Business Review

 

Football Pools

 

Increase/

(decrease)

Stakes placed

75.8

79.2

(3.4)

Gross win

Sales related costs

Overheads

EBITDA

18.5

19.7

(1.2)

Depreciation and amortisation

Adjusted operating profit

17.3

18.7

(1.4)

 

We continue to develop our Football Pools business and extend its distribution network, whilst focusing on costs and cost-effective customer acquisition. Revenue for the year amounted to £47.7m (2010: £52.1m) on stakes placed of £75.8m (2010: £79.2m), generating EBITDA of £18.5m (2010: £19.7m) and an adjusted operating profit of £17.3m (2010: £18.7m).

 

Our focus on developing appealing products, extending the frequency of game play and extending the distribution of these products continues.  During the year and for the third time in 18 months, our £3m Classic Pools jackpot was won, with the jackpot shared amongst four lucky players, each winning £750,000.

 

To enable our customers to have more opportunities to win this jackpot, from the start of the 2011/12 football season we extended the number of opportunities to play our core Classic Pools game by ten competitions to 83 in 2011.  Further games are being added in 2012. We are pleased with the impact this initiative has had on our financial results during the second half of 2011 and the strengthening of the core revenue streams into 2012. This extension of game play in the second half of the year has led to the anticipated increase in average customer spend per week, with revenue per customer increasing by 15% in the second half of the year to £2.66 (2010: £2.32). This has led to a reduction in the rate of decline of football pools revenue by 3% from the previous period of 11.5% to 8.5%, a revenue saving of £1.6m.

 

We have also been successful in converting customers to automated payment methods such as direct debit and recurring card transactions, as retention rates are considerably higher utilising these payment methods than traditional methods of cheque and one-off card payments. We are pleased therefore that we have increased the percentage of our core direct customers who play by these methods to 55% (2010: 50%). As at 31 December 2011, we had a total of 447,000 Football Pools customers, slightly down on our 30 June 2011 number of 459,000. We consider that because of the initiatives noted above, we approached 2012 with a stronger core base of customers than in previous periods.


From the start of the new season we have also introduced a daily Jackpot 12 game with a continual rolling jackpot until won. This was won for the first time towards the end of 2011 with a £42,000 payout to the winner. We believe that, over time, this game has the potential for significant pool jackpots.

 

Broadening the distribution of the football pools products has always been core to revitalising The Football Pools and reversing a decline in customer numbers. In this respect, at the start of 2011 we launched the football pools on Ladbrokes.com, enabling customers of Ladbrokes.com to play a selection of our products. We have also extended our distribution on the high street, with our products now being offered by Jennings, Better and Chisholm bookmakers via Finsoft technology. Internationally, from the start of 2011/12 football season, we have commenced a football pools distribution partnership arrangement with Phumelela Gold, South Africa's leading horseracing, tote and betting organisation.

 

We have made our first entry into the social gaming space by signing a distribution and white label agreement with Bodugi Limited, a social-gaming based pool operator. We consider that social gaming is an important aspect for enhancing the distribution of pools-based products to a wider market and we are reviewing a number of further initiatives in this area. This is due to go live at the start of the 2012/13 football season.

 

Our continued investment in modernising The Football Pools has led to further cost reductions with operational overheads reduced by £2.8m (13%) year on year. Our focus on driving efficiencies through our operational activities continues and we expect further operational savings in 2012.

 

Sportech Racing

 

Increase/

(decrease)

Revenue

EBITDA

10.0

1.7

8.3

Depreciation and amortisation

Adjusted operating profit

6.9

1.0

5.9

 

*Results for part year following acquisition on 5 October 2010.

 

We are pleased with the results and progress made to date since the acquisition of Sportech Racing in October 2010. Following the successful integration into the Group, we are now focused on further developing the business and taking advantage of the many significant opportunities that lie ahead.

 

Revenue for the year was £67.3m (2010: £15.0m), generating an EBITDA of £10.0m (2010: £1.7m) and an adjusted operating profit of £6.9m (2010: £1.0m), all prior year comparatives being for the period from acquisition date.

Some £26.7m (40%) of the Sportech Racing revenue was derived from providing tote services to race tracks and betting shops ("OTBs") across the world, with market-leading positions in many countries including the USA, where the business processes approximately 50% of all betting on horseracing. In total, we process approximately $13 billion of horseracing bets internationally. We have made continued progress in this area with the renewal or extension of 16 contracts within the Americas, successfully winning a further two new contracts and the five-year renewal of our contract to supply services to the German Tote operator, WinRace. 

 

We established an interactive products and services division at the start of the year to focus on the regulated online horseracing market and have made good progress to date. Our first new full supply contract providing turnkey online technology, customer care and marketing services to race tracks in Illinois went live on 1 August 2011. We also contracted to provide a full online horseracing tote service for our existing customer, Camarero Race Track in Puerto Rico, whose website was launched this month, March 2012. We are delighted to report that we have also secured an additional racecourse customer for our interactive division, Evangeline Downs in Louisiana. We are actively pursuing other opportunities.

 

Our Tote Services division also sells tote systems, terminals and associated software services to customers across the world. During the year, we generated £6.2m of revenue (9% of Sportech Racing revenue) principally supplying terminals and pari-mutuel software. We are pleased to continue with our valued ongoing supply relationship with the Turkey Jockey Club and Fintoto (in Finland) and also to have supplied both hardware and software to the Jockey Club in Argentina in 2011. We are also pleased to report that earlier this year, we delivered a new tote system and terminals to our customers in Chile to operate five race tracks in that country and 201 betting shops.

 

In addition, we were delighted that we extended our international reach into the important gaming market in Australia, securing a 1,240 unit terminal sale to Tabcorp, Australia's leading wagering and gaming entertainment business.

 

Sportech Racing holds unique positions in both Connecticut, USA and in the Netherlands whereby we have exclusive licences to operate all betting on horseracing.

 

The exclusive licence in Connecticut runs in perpetuity and grants us the ability to operate 18 retail venues (of which 15 are open) and telephone betting facilities, which, combined, generate gross betting revenues of $180m. This has generated £34.4m (51%) of revenue for Sportech Racing in the year.  The venues and telephone betting business benefited from a £2.2m capital investment plan into our facilities and employees, in order to improve our delivery to our customers. We are pleased to report that this initiative has had an immediate impact on our trading performance. The total number of bets placed (handle) was significantly better than the industry average, with overall volumes for the year, being broadly flat (0.2% down) compared to the industry average of a decline of around 5.6% and a decline of 7.2% for 2010, prior to our ownership. This year has also started well with handle being slightly ahead of last year.

 

Our business in the Netherlands, as described in the Regulation section of this report, has also witnessed improvements in revenue trends compared to the previous year, with our online site in particular recording a 15.7% improvement. We expect to build upon these achievements in 2012.

e-Gaming

 

Increase/

(decrease)

Gross win

Sales related costs

Overheads

EBITDA

1.6

1.6

-

Depreciation and amortisation

Adjusted operating profit

1.4

1.5

(0.1)

 

Our e-Gaming division has been in a period of transition for the past two years as we prepared to migrate our systems and customers, at the earliest contractual opportunity, to the single wallet and platform offering from Playtech, our 10% shareholder and strategic partner. We are pleased to report that, at the end of the year, we successfully launched Vernons.com, incorporating VernonsCasino.com and VernonsPoker.com on the Playtech gaming portal. In addition, we have transferred the majority of our revenue generating customers on LittlewoodsCasino.com and LittlewoodsPoker.com from our previous platform supplier, 888 PLC, to the Playtech platform. As with all migrations, there was an inherent risk that customers would not transfer and we estimate that 89% of revenue generating customers transferred across to the new platform.

 

Following the transfer, we moved into the planned growth phase and have commenced a period of player recruitment, including a recently launched television campaign, focused on the Vernons brand. Whilst the recruitment campaign is in its early stages, we are pleased with the results to date. Across our e-gaming portfolio, as at the end of February 2012, gross margin contribution is ahead of the prior year by approximately 30%.

 

We continue to operate LittlewoodsBingo.com on the GTech G2 platform. We anticipate that we will transfer this product and customer base onto the Playtech platform later in 2012, to unify the product offering to our customers.

 

In accordance with the Group's strategy, we have started to give the Vernons brand increased prominence this year. We shall be looking to exit from the Littlewoods brand online over the coming year.

 

In view of the uncertain operating environment in place for the majority of the year, we are pleased to have held EBITDA at the same level as the previous year at £1.6m (2010: £1.6m) with only a small drop in operating profit at £1.4m (2010: £1.5m).

Principal risks

 

The Board regularly reviews the risks associated with the Group's activities and strategy. In reviewing such risks, the Board ensures that appropriate systems and controls are in place to firstly mitigate the occurrence of such risks and secondly mitigate the impact of any such risks. The principal risks the Group faces remain the same as outlined in the Annual Report and Accounts 2010 on pages 24 to 25, except with the addition of the regulatory risk which has arisen from the Bribery Act 2010 becoming effective during the year. The Group has introduced procedures and regular training to ensure that all employees are aware of and adhere to the requirements of the Act.

 

Ian Penrose

Chief Executive

 

Steve Cunliffe

Finance Director

7 March 2012

 

 

Consolidated income statement

For the year ended 31 December 2011

 

 

 

 

Group

 

 

2011

2010

 

Note

£m

£m

Revenue

118.2

Cost of sales

(64.7)

Gross profit

53.5

Distribution costs

(1.1)

Administrative expenses

(38.7)

Operating profit before amortisation of acquired intangibles and exceptional costs

20.5

17.4

Amortisation of acquired intangibles

(5.9)

Exceptional costs

(0.9)

Operating profit

13.7

Finance costs

(4.8)

Finance income

0.1

Other finance charges

(0.4)

Net finance costs

(5.1)

Share of loss after tax of joint venture

(0.6)

Profit/(loss) before taxation

8.0

Adjusted profit before taxation*

15.8

Taxation

(2.8)

Profit/(loss) for the year from operations attributable to equity shareholders

5.2

(6.3)



Earnings/(loss) per share from operations


Basic

2.6p

Diluted

2.5p

Adjusted earnings per share from operations


Basic

5.7p

Diluted

5.4p

* Adjusted profit before taxation is profit before taxation, amortisation of acquired intangibles, exceptional costs, share of loss after tax of joint venture and other finance charges.

Consolidated statement of comprehensive income

For the year ended 31 December 2011

 

 

Group

 

 

2011

2010

 

 

£m

 

£m

Profit/(loss) for the year


5.2

(6.3)

Other comprehensive income:

Actuarial loss on retirement benefit obligations



Actuarial (loss)/gain on retirement benefit obligations

(0.7)

0.2

Deferred tax on movement on retirement benefit obligations

0.3

(0.1)

Movement on derivative financial instruments

0.8

(0.3)

Deferred tax on movement on derivative financial instruments

(0.3)

-

Currency translation differences

0.1

0.2

Other comprehensive income for the year net of tax

0.2

-

Total comprehensive income/(expense) for the year attributable to equity shareholders

5.4

(6.3)

 

Consolidated statement of changes in equity

For the year ended 31 December 2011  











 

Other reserves





Ordinary

shares

Share

premium

Share

option

reserve

Pension

reserve

Currency

translation

reserve

Financial

instrument

reserve

Retained

earnings

Total

 

£m

£m

£m

£m

£m

£m

£m

£m

At 1 January 2010

50.3

20.7

0.9

-

-

(3.0)

16.6

85.5

Comprehensive income









Loss for the year

-

-

-

-

-

-

(6.3)

(6.3)

Other comprehensive income









Financial instrument reserve movement*

-

-

-

-

 

-

(0.3)

-

(0.3)

Actuarial gain on retirement benefit obligations*

-

-

-

0.1

-

-

-

0.1

Currency translation differences

-

-

-

-

0.2

-

-

0.2

Total other comprehensive income/(expense)

-

-

-

0.1

0.2

(0.3)

-

-

Total comprehensive income/(expense)

-

-

-

0.1

0.2

(0.3)

(6.3)

(6.3)

Transactions with owners









Share option credit

-

-

0.4

-

-

-

-

0.4

Proceeds from shares issued

49.1

-

-

-

-

-

(4.0)

45.1

At 31 December 2010

99.4

  20.7

1.3

0.1

0.2

(3.3)

6.3

124.7

Comprehensive income









Profit for the year

-

-

-

-

-

-

5.2

5.2

Other comprehensive income









Financial instrument reserve movement*

-

-

-

-

 

-

0.5

-

0.5

Actuarial loss on retirement benefit obligations*

-

-

-

(0.4)

-

-

-

(0.4)

Currency translation differences

-

-

-

-

0.1

-

-

0.1

Total other comprehensive (expense)/income

-

-

-

(0.4)

0.1

0.5

-

0.2

Total comprehensive (expense)/income

-

-

-

(0.4)

0.1

0.5

5.2

5.4

Transactions with owners









Share option credit

-

-

1.1

-

-

-

-

1.1

Cancellation of share premium account

-

(20.7)

-

-

-

-

20.7

-

At 31 December 2011

99.4

-

2.4

(0.3)

0.3

(2.8)

32.2

131.2

*Net of deferred tax










Consolidated balance sheet

As at 31 December 2011

 

 

Group

 

 

2011

2010

 

Note

£m

£m

ASSETS

Non-current assets

Goodwill

147.6

Intangible fixed assets

50.4

Property, plant and equipment

14.3

Net investment in joint venture

0.3

Trade and other receivables

0.1

Retirement benefit assets

-

Deferred tax assets

3.0


215.7

Current assets

Trade and other receivables

8.6

Inventories

2.6

Cash and cash equivalents

3.3


14.5

TOTAL ASSETS

230.2

LIABILITIES

Current liabilities

Overdraft

-

Derivative financial instruments

(3.7)

Financial liabilities

(14.0)

Trade and other payables

(22.9)

Provisions

(0.3)

Current tax liabilities

(1.5)


(42.4)

Net current liabilities

(27.9)

Non-current liabilities


Financial liabilities

(54.6)

Share of net liabilities of joint venture

-

Retirement benefit liability

(1.3)

Provisions

(0.7)

Deferred tax liabilities

-


(56.6)

TOTAL LIABILITIES

(99.0)

NET ASSETS

131.2

EQUITY

Ordinary shares

99.4

Share premium

-

Other reserves

2.4

Financial instrument reserve

(2.8)

Retained earnings

32.2

TOTAL EQUITY

131.2

 

Consolidated statement of cash flows

For the year ended 31 December 2011

 

 

Group

 

 

2011

2010

 

Note

£m

£m

Cash flows from operating activities

Cash generated from operations

25.7

Interest received

0.1

Interest paid

(4.8)

Tax (paid)/received

(1.0)

Net cash generated from operating activities before cash exceptional costs

20.0

Cash exceptional costs - acquisition costs in relation to Sportech Racing

-

Cash exceptional costs - other

(0.9)

Net cash generated from operating activities

19.1

Cash flows from investing activities

Investment in joint venture

(0.8)

Acquisition of Sportech Racing, net of cash acquired

-

Purchase of intangible fixed assets

(1.4)

Purchase of property, plant and equipment

(3.9)

Net cash used in investing activities

(6.1)

Cash flows from financing activities

Proceeds from issuance of ordinary shares, net of issuance costs

-

Bank arrangement fee paid - exceptional cost

-

Proceeds from borrowings

1.5

Repayment of borrowings

(12.0)

Net cash (used in)/generated from financing activities

(10.5)

Net increase/(decrease) in cash and cash equivalents

2.5

Cash and cash equivalents at the beginning of the year

0.8

Cash and cash equivalents at the end of the year

3.3


Reconciliation of net bank debt

Increase/(decrease) in cash in the year

2.5

Cash outflow from repayment of loans

12.0

Cash inflow from loans taken

(1.5)

Movement in net bank debt for the year

13.0

At 1 January

(72.2)

At 31 December

(59.2)


Net bank debt comprises:

Cash and cash equivalents

3.3

Loans repayable within one year

(14.0)

Loans repayable after one year

(48.5)

At 31 December

(59.2)

 

Notes to the Preliminary Statement

For the year ended 31 December 2011

1.   Reporting entity

 

Sportech PLC ("the Company") is a company domiciled in the UK and listed on the London Stock Exchange. The Company's registered office is 249 West George Street, Glasgow, Scotland G2 4RB. The consolidated financial statements of the Company as at and for the year ended 31 December 2011 comprise the Company, its subsidiaries and joint venture (together referred to as "the Group"). The principal activities of the Group are those of football pools and associated games, e-Gaming, the provision of pari-mutuel wagering services and systems and off-track betting venue management.

 

2.   Basis of reporting

 

a.   The preliminary results have been prepared on the basis of the accounting policies set out in the Group's 2011 financial statements and have been consistently applied to all years presented.

 

b.  The financial information set out in this announcement does not constitute statutory financial statements for the year ended 31 December 2011 within the meaning of section 435 of the Companies Act 2006, but is extracted from those financial statements. The auditors have reported on those financial statements and have given an unqualified report which does not contain a statement under section 498 of the Companies Act 2006.

 

c.  The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU), IFRIC interpretations and the Companies Act 2006 applicable to companies reporting under IFRS. The financial statements have been prepared under the historical cost convention.

 

d.  The Group has committed banking facilities in place with Lloyds Banking Group until June 2013. The Group plans to refinance its existing debt during the first half of 2012 and has started discussions with interested lenders. Given the dramatically improved financial profile of the Group, the Directors are confident a debt facility in line with the Group's ongoing requirements can be secured. The Group meets its day-to-day working capital requirements through a working capital facility, which is due for renewal in June 2012. The Directors have no reason to believe that the current working capital facility will not be renewed at a similar level to that currently in place. The Group's forecasts and projections, which have been prepared for the period to 31 March 2013 and taking into account reasonably possible changes in performance, show that the Group will be able to operate within the level of its current facilities, meet term loan repayments as they fall due and comply with its banking covenants. After making reasonable enquiries, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly they continue to adopt the going concern basis in preparing the financial statements.

 

3.   Estimates

 

The preparation of consolidated financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.

 

4.   Segmental reporting

 

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Executive Committee which makes strategic and operational decisions.

The Group has four reportable segments; Football Pools, Sportech Racing, e-Gaming and Corporate costs.

Additional information on the Group segments is as follows:

 

 

2011


 

 

 

Inter-

 

 


Football

Sportech

 

segment

Corporate

 


Pools

Racing

e-Gaming

elimination

costs

Group


£m

£m

£m

£m

£m

£m

Revenue from sale of goods

Revenue from rendering of services

Total revenue

47.7

67.3

4.1

(0.9)

-

118.2

EBITDA before exceptional costs and share option expense

18.5

10.0

1.6

(0.2)

(3.8)

26.1

-

-

-

-

(1.1)

(1.1)

Depreciation and amortisation (excluding amortisation of acquired intangibles)

(1.2)

(3.1)

(0.2)

-

-

(4.5)

Segment result before amortisation of acquired intangibles and exceptional costs

17.3

6.9

1.4

(0.2)

(4.9)

20.5

Amortisation of acquired intangibles

Exceptional costs

Operating profit/(loss)

11.1

6.6

1.4

(0.2)

(5.2)

13.7

Net finance costs

Share of loss after tax of joint venture

Profit before taxation






8.0

Taxation

Profit for the year from operations






5.2

 

 

 

2010


 

 

 

Inter-

 

 


Football

Sportech

 

segment

Corporate

 


Pools

Racing

e-Gaming

elimination

costs

Group


£m

£m

£m

£m

£m

£m

Revenue from sale of goods

Revenue from rendering of services

Total revenue

EBITDA before exceptional costs and share






option expense

19.7

1.7

1.6

-

(3.3)

19.7

Share option expense

-

-

-

-

(0.4)

(0.4)

Depreciation and amortisation (excluding






amortisation of acquired intangibles)

(1.0)

(0.7)

(0.1)

-

(0.1)

(1.9)

Segment result before amortisation of acquired intangibles and exceptional costs

18.7

1.0

1.5

-

(3.8)

17.4

Amortisation of acquired intangibles

Exceptional costs

Operating profit/(loss)

Net finance costs

Share of loss after tax of joint venture

Loss before taxation

Taxation

Loss for the year from operations

 

5.   Exceptional costs

 

Exceptional costs by type are as follows:

 

2011

2010


£m

£m

Included in administrative expenses:


Redundancy costs in respect of the rationalisation and modernisation of the business

0.5

0.7

Seeding costs in respect of new games

-

Integration costs in respect of the acquisition of Sportech Racing

-

Transaction costs - acquisition of Sportech Racing

-

Other exceptional costs

0.4


0.9

Included in net finance costs:


Bank arrangement fee

-

Total exceptional costs

0.9

  

6.   Net finance costs

 

2011

2010

 

£m

£m

Interest payable on bank loans, derivative financial instruments and overdrafts

4.8

Interest receivable on cash balances

(0.1)

Bank arrangement fees

-

Non-cash finance charges*

0.5

(Profit)/loss on foreign exchange contracts

(0.1)

Net finance costs

5.1

*Non-cash finance charges are in respect of the deferred consideration payable on the acquisition of Sportech Racing in October 2010.

Bank arrangement fees, non-cash finance charges and (profit)/loss on foreign exchange contracts are together shown as other finance charges in the income statement. Included in the above table are exceptional costs of £nil (2010: £0.9m).

 

7.   Taxation

 

2011

2010


£m

£m

Current tax:


Current tax on profit/(loss) for the year

2.1

Adjustments in respect of prior years

0.2

Total current tax

2.3

Deferred tax:


Origination and reversal of temporary differences

0.3

Impact of changes in tax rates

0.2

Total deferred tax

0.5

Total taxation charge

2.8

 

The tax on the Group's profit/(loss) before tax differs from the theoretical amount that would arise using the weighted average tax rate applicable to profits and losses of the consolidated entities as follows:

 

2011

2010

 

£m

£m

Profit/(loss) before tax

8.0

Add share of loss after tax of joint venture

0.6

Profit/(loss) before tax and share of loss of joint venture

8.6

Tax calculated at domestic tax rates applicable to profits/(losses) in the respective countries

2.5

 

(1.5)

Tax effects of:


- permanent differences

0.1

- deferred tax not previously provided

(0.2)

- effect of changes in tax rates

0.2

- adjustments to tax in respect of prior years

0.2

Total taxation charge

2.8

 

The weighted average applicable tax rate was 28.8% (2010: 27.7%). The increase is as a result of a full year of Sportech Racing results and its overseas operations incorporated in the business.

 

8.   Earnings per share

 

The calculations of earnings per share ("EPS") are based on the following profit/(loss) attributable to ordinary shareholders and the weighted average number of shares in issue:

 

2011

 

2010

 

 

Weighted

 

 

 

Weighted

 

 

 

average

Per

 

 

average

Per

 

 

number

share

 

 

number

share

 

Profit

of shares

amount

 

Loss

of shares

amount

 

£m

'000

Pence

 

£m

'000

Pence

Basic EPS

5.2

198,810

2.6

 

The calculations of adjusted EPS are based on the following profits attributable to ordinary shareholders, the weighted average number of shares and an estimated tax charge of 28.8% (2010: 27.7%):

 

2011

 

2010

 

 

Weighted

 

 

 

Weighted

 

 

 

average

Per

 

 

average

Per

 

 

number

share

 

 

number

share

 

Profit

of shares

amount

 

Profit

of shares

amount

 

£m

'000

Pence

 

£m

'000

Pence

Operating profit before amortisation of acquired intangibles and

exceptional costs

20.5

198,810

10.3


17.4

161,179

10.8

Net finance costs (excluding exceptional cost and other finance charges)

(4.7)

198,810

(2.4)


(5.5)

161,179

(3.4)

Adjusted profit before tax

15.8

198,810

7.9

Tax at 28.8% (2010: 27.7%)

(4.5)

198,810

(2.2)

Adjusted basic EPS

11.3

198,810

5.7

 

Certain employee options (707,070 in number; 2010: 727,272) have been excluded from the calculated diluted EPS as their exercise price is greater than the weighted average share price during the year and therefore would not be dilutive. The number of shares that have a dilutive effect on adjusted EPS is 9,249,000 (2010: 2,973,000).  Diluted basic EPS is 2.5p (2010: there was no effect on basic loss per share of 3.9p) and diluted adjusted EPS is 5.4p (2010: 5.2p).

  9.   Cash flow from operating activities

Reconciliation of profit/(loss) after taxation to cash flows from operating activities

 

Group

 

2011

2010


£m

£m

Profit/(loss) after taxation

5.2

Adjustments for:


Taxation

2.8

Exceptional costs

0.9

Share of loss after tax of joint venture

0.6

Depreciation

2.1

Amortisation of intangibles acquired with Vernons

5.9

Amortisation of other intangibles

2.4

Net finance costs

4.7

Other finance charges

0.4

Share option expense

1.1

Movement in retirement benefit obligation

(0.1)

Movement in provisions

(0.3)

Changes in working capital:


Decrease in trade and other receivables

3.6

Increase in inventory

(1.6)

Decrease in trade and other payables

(2.0)

Cash flows from operating activities

25.7

 

10. Maturity of financial liabilities

 

 

Group

 

 

2011

2010

 

 

£m

£m

Bank loans repayable within one year

14.0

Bank loans repayable between one and two years

48.5

Bank loans repayable between two and five years

-

Total bank loans

62.5

 

 

 

Group

 

 

2011

2010

 

 

£m

£m

Current

Bank loans repayable within one year


Bank loans due within one year

14.0

Non-current


Bank loans due after one year

48.5

Deferred consideration due after one year

6.1

Total non-current financial liabilities

54.6

Total financial liabilities

68.6

 

11. Acquisition of Sportech Racing

On 5 October 2010, the Group acquired 100% of the issued share capital of the racing businesses and venues management business of Scientific Games Corporation Inc. No measurement period adjustments were identified and therefore the fair value of assets and liabilities acquired disclosed in note 15 of the Sportech PLC Annual Report and Accounts 2010 remain unchanged.

There has been no change in the assumptions concluded by management relating to the probability of the contingent consideration becoming payable and therefore there has been no effect on the 2011 income statement.

12. Ordinary shares

Allotted, called up and fully paid

 

2011

2010

Ordinary shares of 50p each (2010: 50p)

'000

£m

'000

£m

At 1 January

198,810

99.4

Issue of shares during the year

-

-

At 31 December

198,810

99.4

 

13. Share premium

 

2011

2010

 

£m

£m

At 1 January

20.7

Cancellation and transfer to retained earnings

(20.7)

At 31 December

-

 

In December 2011, the Company lodged a court confirmation and a statement of capital with Companies House in Edinburgh, following approval obtained from shareholders at the AGM in May 2011, showing the successful petition to cancel the share premium account in full. As a result, £20.7m has been transferred from the share premium account to retained earnings leaving a balance on the share premium account at 31 December 2011 of £nil (2010: £20.7m).

 


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