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

Interim results for the six months ended 30 June 2011

 

Sportech is pleased to announce its Interim results for the six months ended 30 June 2011, which include a six months contribution from Sportech Racing, acquired in October 2010.

 

Financial highlights

 

·      Revenue up 100% to £57.4m (2010: £28.6m)

·      EBITDA* up 35% to £12.4m (2010: £9.2m)

·      Adjusted profit before tax** up 28% to £7.4m (2010: £5.8m)

·      Profit before tax up to £3.7m (2010: loss of £5.9m)

·      Adjusted earnings per share of 2.6p (2010: 2.9p) on larger share base

·      Earnings per share of 1.2p (2010: loss of 4.0p)

·      Total net bank debt reduced by 10% to £65.2m (31 December 2010: £72.2m)

 

Strategic and operational highlights

 

·      Football Pools: broadening distribution, modernisation continues:

o  Agreements signed with Jennings, Better and Chisholm betting shops as well as Ladbrokes.com to make products available online

o  International distribution agreements with both Centrebet in Australia and Phumelela Gold in South Africa for a suite of pools products

o  Extension of market-appealing products: £3m pools jackpot won for the third time in 18 months

·      Sportech Racing:  making good progress:

o  Interactive products and services division established to focus on regulated online horseracing market with new contracts in Illinois and Puerto Rico

o  £1m refurbishment programme in Connecticut completed with significant improvement in betting volume trends

o  Renewal and extension of tote contracts within the Americas and Germany

o  International reach extended: terminal supply contracts secured with Fintoto (Finland) and with Tabcorp Holdings Limited (Australia)

·      e-Gaming: transition to Playtech platform well underway:

o  Vernons Casino and Vernons Poker soft launched on the new portal in August 2011

o  Littlewoods Casino, Poker and Bingo on plan for transition in the second half of 2011

·      Cricket pools expected to be launched in the second half of 2011 after provisional gaming licence awarded to Essel Group, Playwin's parent company and Sportech's joint venture partner in India

·      Board strengthened with the appointments of Roger Withers as Chairman and Peter Williams and Mor Weizer as Non-executive Directors

·      Appointment of David McKeith, as a Non-executive Director and Chairman of the Audit Committee announced separately today

 

Ian Penrose, Chief Executive of Sportech PLC, said:

 

"We are pleased with the Group's performance during the first half of 2011.  Having successfully integrated Sportech Racing, we are focused on the continued development of our existing Group activities. The Group has produced a strong improvement in EBITDA performance, generated strong cash flows and reduced its net bank debt by 10% in six months, reflecting the current and longer term growth potential of the business."

 

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

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

 

 

For further information, please contact:

 

Ian Penrose, Chief Executive

Steve Cunliffe, Finance Director

Sportech PLC                                                           Tel: +44 (0)20 7268 2400

 

David Rydell / Emma Kent / Rosanne Perry

Pelham Bell Pottinger                                             Tel: +44 (0)20 7861 3232

 

 

Forward-looking statements

 

Certain statements in this interim report are forward-looking. Although the Group believes that the expectations reflected in this forward-looking statement are reasonable, it can give no assurance that these expectations will prove to have been correct. As these statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by these forward-looking statements.

 

 

 

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

Interim results for the six months ended 30 June 2011

 

Overview

 

Sportech is now one of the world's leading operators and suppliers of pools and tote betting services, occupying a unique position in the highly regulated and emerging gaming markets worldwide. The interim results for the six months ended 30 June 2011 reflect the significant progress made by the Group in achieving this market-leading position. The Group has made a number of operational and strategic improvements to take advantage of current and future opportunities, whilst investing in key projects. The Board has been strengthened with the appointment of Non-executive Directors who bring valuable skills and experience to the Group.  The financial performance, with a 35% increase in EBITDA to £12.4m and a 10% reduction in net bank debt to £65.2m, is testament to the success of these improvements and focused investments. We expect that the second half of the year will see Sportech continue to build upon these firm foundations.

 

Financial performance

 

The financial performance for the six months ended 30 June 2011 includes a full six months of results from Sportech Racing following the completion of the acquisition in October 2010. Overall, Group revenue has increased by 100% to £57.4m (2010: £28.6m), Group EBITDA has increased by 35% to £12.4m (2010: £9.2m), adjusted operating profit has increased by 14% to £9.8m (2010: £8.6m) and adjusted profit before tax was £7.4m, a £1.6m (28%) improvement over 2010.

 

Overall, the Group has reported a significant return to profitability, with profit before tax of £3.7m (2010: loss of £5.9m) and profit after tax amounting to £2.3m (2010: loss of £5.8m), an £8.1m improvement.

 

Earnings per share reflect the improved financial performance but also the significant share issues in January 2010 and October 2010 in connection with the acquisition of Sportech Racing. Basic earnings per share amounted to 1.2p (2010: loss of 4.0p). Adjusted earnings per share amounted to 2.6p (2010: 2.9p).

 

Football Pools

 

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 six months amounted to £23.7m (2010: £26.1m) on stakes placed of £39.1m (2010: £39.9m) generating EBITDA of £8.7m (2010: £9.8m) and an adjusted operating profit of £8.2m (2010: £9.4m).

 

Our focus on developing appealing products, extending the frequency of game play and extending the distribution of these products continues.  We are delighted to announce that on the first day of the 2011/12 football season and for the third time in 18 months, our £3m Classic Pools jackpot has been won, with the jackpot shared amongst four lucky players, each winning £750,000. This follows the two previous largest jackpot wins in 2010 - the payout of £4m to 15 customers in March 2010 and the October 2010 win by a single long-standing customer of the £3m jackpot, the highest ever single winner in the history of the Football Pools.

 

To enable our customers to have more opportunities to win this jackpot we have, from the start of the 2011/12 football season, extended the number of opportunities to play our core Classic Pools game by ten competitions to 83 in 2011. Whilst not all customers will take up these additional games and some games will be used as promotional tools, we are pleased with the early results of this initiative and expect to see this deliver a positive financial impact in the second half of 2011.

 

From the start of the new season we have also introduced a daily Jackpot 12 game with a continual rolling jackpot until won. We believe that over time, this will create the potential for significant pool jackpots on an easy-to-play product which will continue to attract new customers and new distribution partners to the Group.

 

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 the year 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 the new football season, we have commenced a football pools distribution partnership arrangement with Phumelela Gold, South Africa's leading horseracing, tote and betting organisation. In addition, our products will be available in Australia via Centrebet, the leading Australian bookmaker, by the end of September. We expect to announce further distribution arrangements in the near future.

 

Our continued investment inmodernisingthe Football Pools has led to further cost reductions with operational overheads reduced by £1.1m in the period versus the same period last year. Our focus on driving efficiencies through our operational activities continues and we expect further operational savings in the second half of 2011.

 

We highlighted twelve months ago that we were focused on increasing spend per head from our existing large core customer base, rather than targeting expensive low margin recruitment. This focus has continued into 2011 with the extension of the Classic Pools games to 83 as stated above. 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. We are pleased therefore that we have increased the percentage of our core direct customers who play by this method to 55% (2010: 50%). As at 30 June 2011, we had a total of 459,000 Football Pools customers, a reduction of 37,000 (7%) on the same period last year, a lower rate of decline than previous periods.

 

e-Gaming

 

Our e-Gaming division is currently in a period of transition as we migrate our systems and customers to the single wallet offering of Playtech, our 10% shareholder, strategic partner and the world leader in online gaming technology. This process is significantly advanced and we anticipate being fully active and operational on the Playtech platform by the end of the year. Vernons Casino and Vernons Poker were soft-launched on the new Playtech gaming portal earlier this month. Littlewoods Casino, Littlewoods Poker and Littlewoods Bingo will all move across to the Playtech platform during the second half of 2011 and we anticipate seeing the financial benefit of this move from 2012 onwards.

 

As a result of the challenges faced during this migration process, we have focused on core customer retention and lapsed customer reactivation rather than new customer recruitment. Active customers in the period amounted to 19,200 (2010: 21,900), with gross win per player stable at £179 (2010: £182). In view of this uncertain operating environment, we are pleased to have held EBITDA and operating profit at the same level as the previous year at £0.9m (2010: £0.9m) and £0.8m (2010: £0.8m) respectively.

 

Sportech Racing

 

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

 

Revenue for the six month period was £32.1m (2010: not owned), generating an EBITDA of £4.7m (2010: not owned) and an adjusted operating profit of £3.2m (2010: not owned).

 

Some £13.2m (41%) of the Sportech Racing revenue was derived from providing tote services to racetracks 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 £8.5 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 contracts and the five-year renewal of our contract to supply services to the German Tote operator, WinRace. 

 

To capitalise on this strong market position, 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 some good progress in the period. Our first new full supply contract providing online technology and marketing services to race tracks in Illinois went live on 1 August. We are also pleased to announce the signing of a binding letter of intent to provide a full online horseracing tote service for our existing customer, the Camarero Race Track in Puerto Rico. This is expected to be live towards the latter part of this financial year. We are actively pursuing new customers in this important market sector and anticipate making further announcements in the near future.

 

Our Tote services division also sells tote systems, terminals and associated software services to customers across the world. During the first half of 2011, we generated £1.2m of revenue (4% of Sportech Racing revenue) principally supplying terminals and pari-mutuel software to existing customers. For the second half of 2011, we expect to complete on contracts for systems and terminals to our customers in Argentina, Chile and Finland.

 

We are pleased to announce a further extension of our international reach into the important gaming market in Australia, having secured a 1,240 unit terminal sale to Tabcorp, Australia's leading wagering and gaming entertainment business.  The terminals will be delivered in stages through to March 2012.

 

Sportech Racing holds unique positions in both Connecticut, USA and in the Netherlands whereby we have exclusive licences to operate all betting on horseracing. This has generated £17.7m (55%) of revenue for Sportech Racing in the six month period.  In Connecticut, the venues and telephone betting business benefited from a £1.0m capital investment plan to improve the facilities for our customers and as a result we have seen an immediate improvement in betting volumes. The handle for the Triple Crown series was up 7% on the prior year and ahead of the general market performance.

 

Corporate costs

 

In order to ensure that we have been able to integrate and manage the acquisition of Sportech Racing appropriately, it has been necessary to strengthen our central management team and the Board. Corporate costs have therefore increased to £1.9m (2010: £1.5m). In addition, we also have a non-cash share option expense under IFRS 2 of £0.5m (2010: £0.1m).

 

Net finance costs

 

The Group has incurred net interest payments of £2.4m, £0.4m lower than last year, principally due to the repayment of debt.

 

The Group has also incurred other finance charges of £0.2m (2010: £1.2m) primarily being the non- cash interest costs associated with the deferred consideration payable to Scientific Games Corporation in September 2013 in respect of the acquisition of Sportech Racing. In 2010, other finance charges related to arrangement fees in respect of new banking facilities (£0.9m) and foreign currency exchange contract losses (£0.3m).

 

Net bank debt

 

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 £7.0m (10%) in the six month period to £65.2m (31 December 2010: £72.2m) continuing the progress made in previous years. The Group has reduced its bank leverage ratio (net bank debt/EBITDA) to 2.85 times as at 30 June 2011.

 

In addition to net bank debt, the Group has deferred consideration payable in September 2013 in respect of the acquisition of Sportech Racing of $10.0m plus interest at the rate of 1% above the average Bank of England base rate for the deferral period.

 

Total shareholders' equity and the Group's net assets have increased to £127.8m (30 June 2010: £108.6m).

 

Banking facilities

 

Our balance sheet remains strong, supported by banking facilities with a maturity for senior debt of June 2013 and a £3.0m annual working capital facility to June 2012 which was renewed in the period. The Group currently has drawn senior facility loans of £68.5m (30 June 2010: £77.5m) with a further £2.5m of senior facility term loans undrawn and available to finance business development opportunities.

 

Dividend

 

Continuing the policy of recent years, no dividend is proposed, as the Board believes that the Group's significant cash generation should be used to reduce debt as well as undertake selective investment.

 

Taxation

 

A tax charge for the period of £1.4m (2010: credit of £0.1m) has been provided at the expected average annual current tax rate for the Group of 29.7% (2010: 28.0%) excluding the impact of share option charges and joint venture losses. The Group has a net deferred tax asset of £2.3m (31 December 2010: £3.5m) representing primarily tax losses to be utilised against future profits, deferred tax provided on interest rate swap liabilities and tax allowances for tangible assets in excess of accounting charges incurred. Tax payments of £0.3m were made during the period (2010: refund of £1.5m) representing payments on account for the 2011 tax liability.

 

VAT claim

 

The Board has previously announced that the Group had submitted a claim for in excess of £40m to 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 successful, given the time frame of the claim, could more than double the sum claimed. The claim has not been recognised in the Group's financial statements.

 

In December 2010, the Group received the anticipated formal notice from HMRC advising that the claim had been rejected. We lodged an appeal with the Independent First Tier Tax Tribunal in January 2011. We are currently waiting for a Tribunal date to be set and now anticipate that this date is not likely to be until the first half of 2012.

 

Indian joint venture

 

The decision to enter India, one of the world's biggest countries with a rapidly expanding economy, is expected to start to realise its potential shortly as our Indian joint venture's arrangements with Playwin, India's largest lottery business, gathers momentum.  As a consequence of emerging regulation, our primary focus during 2011 has been working with our partner to extend their activities into the provision of pool games, initially on cricket and football.  Playwin's parent company, the Essel Group, has been awarded a provisional online gaming licence in the state of Sikkim and we anticipate a trial launch of the cricket pools into the state in the near future and would expect the roll out of products across India in due course as regulations allow.

 

Regulatory framework

 

Sportech operates in markets where there are clearly defined regulatory rules and guidelines, to which we strictly adhere. There is no doubt that this policy of stringent operational integrity assisted the Group when it received Regulatory Approval in certain states of the USA and in the Netherlands to complete the acquisitions of Sportech Racing in 2010.

 

Since completion, we have continued to be active with our regulatory activities and we have received over 20 state licences in the USA from various Racing Commissions, Casino Control Commissions or Gaming Commissions in states that include Connecticut, New Jersey, California, Florida, New York and Illinois.

 

Sportech notes the UK's Government recently announced intentions to review its approach to offshore gambling and the proposal to license, and potentially tax, at the point of consumption and not at the point of supply. As a Group whose core business is the Football Pools, based in the UK and paying UK Gaming Duty, we welcome the review.

 

Board and employees

 

During the period, the Board composition was addressed and alongside my appointment as Chairman, we were pleased to make two further appointments to the Board: Peter Williams joined as Senior Independent Non-executive Director and Mor Weizer joined as a Non-executive Director. In addition, as announced separately today, we have appointed David McKeith as a Non-executive Director and Chairman of the Audit Committee.  David joins the Board with immediate effect.

 

The Board is proud of the commitment and dedication shown by its employees in order to achieve the Group's strategic objectives.

 

Principal risks and uncertainties for the remainder of the year

 

The principal risks and uncertainties for the Group remain the same as those detailed on pages 24 and 25 of the 2010 Sportech PLC Annual Report and Accounts.

 

Related party transactions

 

Related party transactions are detailed in note 16 of the condensed consolidated interim financial statements.

 

Outlook

 

Sportech is established as one of the leading pools and tote betting groups in the regulated and emerging gaming markets globally.  It is well positioned to capitalise on the growth opportunities in these markets and the Group's performance during the first half of 2011 demonstrates that there is significant potential for the business. 

 

We are making solid progress with the development of our Football Pools business.  Sportech Racing is performing well and the migration of the e-Gaming wallet to a single Playtech platform is on course.  Trading for the second half of the year continues in line with management expectations and we look forward to the future with confidence.

 

 

 

 

Roger Withers

Chairman

 

 

 

Ian Penrose

Chief Executive

 

25 August 2011

 

 

Interim consolidated income statement

For the six months ended 30 June 2011

		Six months	Six months	Year
		ended	ended	ended
		30 June	30 June	31 December
		2011	2010	2010
		(Unaudited)	(Unaudited)	(Audited)
	Note	£m	£m	£m
Revenue	4	57.4	28.6	71.2
Cost of sales		(30.9)	(6.4)	(25.1)
Gross profit		26.5	22.2	46.1
Distribution costs		(0.4)	(0.4)	(1.0)
Administrative expenses		(19.6)	(23.7)	(43.5)
Operating profit before amortisation of acquired intangibles and exceptional costs		9.8	8.6	17.4
Amortisation of acquired intangibles		(3.0)	(3.0)	(5.9)
Exceptional costs	5	(0.3)	(7.5)	(9.9)
Operating profit/(loss)	4	6.5	(1.9)	1.6
Finance costs	6	(2.5)	(2.8)	(5.6)
Finance income	6	0.1	-	0.1
Other finance charges	6	(0.2)	(1.2)	(1.4)
Net finance costs	6	(2.6)	(4.0)	(6.9)
Share of loss after tax of joint venture	10	(0.2)	-	(0.6)
Profit/(loss) before taxation		3.7	(5.9)	(5.9)
Adjusted profit before taxation*		7.4	5.8	11.9
Taxation	7	(1.4)	0.1	(0.4)
Profit/(loss) for the period from continuing operations attributable to equity shareholders		2.3	(5.8)	(6.3)
Earnings/(loss) per share from continuing operations
Basic	8	1.2p	(4.0p)	(3.9p)
Diluted	8	1.1p	(4.0p)	(3.9p)
Adjusted earnings per share from continuing operations
Basic	8	2.6p	2.9p	5.4p
Diluted	8	2.5p	2.9p	5.2p

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