Dear Shareholder,
In writing to you for the first time as Chairman of Ladbrokes I am very aware that 2009 represents the toughest year for the Company since 1994/5 when the National Lottery was introduced. I was attracted to joining Ladbrokes not only because of its track record but also because of the growth potential it offers – both in terms of building upon our UK presence and extending the brand as new markets regulate. Ladbrokes is the most recognised betting and gaming brand in the UK and also enjoys a good international reputation. Although 2009 has been a challenging year it does not change my belief in this Company’s potential.
2009 – A challenging year
Twelve months ago, when I joined the Company, it was expected that the industry should be relatively recession resilient compared to other consumer facing businesses. However, as the year progressed, it became apparent that the changes to our customer demographic have made the business more economically sensitive and we have seen a resultant decline in the amounts being staked. In addition to this, sporting results have been in the customers’ favour, with a gross win margin for the UK Retail business and eGaming Sportsbook business of at least one percentage point less than 2008.
Following this significant margin weakness combined with the accumulating effect of financing, trading risks and the overall challenges in forecasting this business, in October, the Board concluded that it was no longer prudent to pursue a strategy of purely organic debt reduction. The rights issue was successfully completed in late October with 95% valid acceptances. I firmly believe that this financial strength will underpin the Company’s future growth.
Importantly, the Group is demonstrating an increased focus on operational excellence. I believe that the wide-ranging programme of operational and strategic initiatives that we have put in place will start to show increasing benefits through the course of this year and beyond.
Strategy
Our customer base and core markets are changing and our long-term strategy continues to evolve and adapt. The three strands of our strategy, UK Retail, eGaming and International remain as before, with the focus upon seamless execution and consistent delivery.
In the following sections I have set out what our short- and long-term priorities are and I am confident that this wide-ranging programme of operational and strategic initiatives will gain traction through the current year. In addition, the actions we have taken to strengthen our balance sheet through the rights issue, have left us with a robust financial position. Consequently, we look forward positively with a heightened sense of momentum.
People
I have spent much time in the different businesses since last January and have been impressed by the strengths and commitment of the people. You will see in our Corporate Responsibility section, the importance that we place on our people.
In November we strengthened the Board with the appointment of Sly Bailey, Chief Executive Officer of Trinity Mirror plc and Darren Shapland, Chief Financial Officer of J Sainsbury plc, as non-executive directors. Both are highly experienced executives with a track record of significant achievements and I believe that their extensive knowledge of retail and media will be of significant benefit as we take the business forward.
Nicholas Jones and Henry Staunton who have been non-executive directors since 2002 and 2006 respectively have decided to retire at the coming Annual General Meeting and we thank them for their significant contribution. Darren Shapland has been appointed a member of the audit committee and will become the committee’s Chairman on Henry Staunton’s retirement.
In January 2010, following almost 20 years with the Company, it was announced that Chris Bell is to step down as Chief Executive. He will not be standing for re-appointment at this year’s Annual General Meeting. Chris and the Board agreed that it was an appropriate time to seek new leadership for the business. Chris’ commitment to Ladbrokes has been invaluable and to ensure continuity he has agreed to stay on in his role and do all to support the Company during the transition. The search process for his successor is ongoing and we shall update the market in due course.
Dividend
In line with the disclosure at the time of the rights issue the Group will not be paying a final dividend (2008: 7.71 pence per share, as adjusted for the bonus element of the rights issue). The total dividend for 2009 is therefore 3.5 pence (2008: 14.15 pence) per share, or 2.98 pence (2008: 12.05 pence) per share as adjusted for the bonus element of the rights issue.
The Board intends to resume a progressive dividend policy, from the 2010 interim dividend onwards, with a target dividend cover of approximately 2.0 times underlying earnings excluding High Rollers.
Summary
In the period from 1 January to 16 February Group net revenue (excluding High Rollers) declined 4.6% against the prior period in 2009, with the severe weather conditions leading to a high level of UK and Irish horse race abandonments and football match postponements. Despite this, lower gross profits tax and operating costs resulted in January’s operating profit being ahead of last year and our internal plan.
In UK Retail OTC amounts staked were down 11.2% with net revenue down 5.8%, reflecting a stronger margin and lower free bets. Average gross win per machine per week was down 4.0% against the comparative period last year. The trial of new machines is well underway and early results are promising. eGaming net revenue was down 0.5% overall with Sportsbook showing 8.0% growth.
Since the start of the year, the High Rollers business has contributed a further £8.6 million of operating profit.
With a strengthened balance sheet we remain confident in our ability to emerge from the economic downturn with a stronger, more focused business with good growth opportunities and we are committed to rising to the challenges that lie ahead.
Peter Erskine
Chairman