Kindred Group plc

Kindred's interim report for the first quarter of 2024. I am here today with Patrick Kortman, our CFO, and we are coming live from Stockholm. Let's kick into it. We have a fairly standard outline today for the report, some business highlights, and then an overview of the performance in Q1, product segment update, regional update, and then an update on our North American exit, update on Relax and KSP and sustainability. Then I will hand over to Patrick for the financial update for the first quarter, and then come back with a summary. And we will, of course, as normal, have a Q&A session at the end. So, reflecting a little bit on the first quarter in 2024, it was a very solid quarter, strong performance across especially our locally regulated markets, primarily driven by very strong growth in Netherlands, the UK and Romania. We're also very pleased to report that we have an all-time high in locally regulated gross earnings revenue, both in absolute terms and also as a percentage of group GWR, which came in at 84% in the first quarter. We're also very pleased that we have managed to increase our underlying EBITDA by 20%, reaching almost 60 million pounds for the first quarter. This is a testament to the cost reduction initiatives that were launched in the fall of 2023. Our strategic growth projects and the North American exit is moving forward according to plan, and we're very pleased with development so far. If we look at a little bit more in terms of the actual results for the first quarter, our revenue came in at just shy of £308 million. This was flat in reported currencies, but a 3% increase in constant currency. When we look at the locally regulated revenue, they came in at just shy of 250 million pounds, which was a 5% growth across these markets, excluding North America, and an 8% growth in constant currency. And again, primarily driven by NL, UK, and Romania. The underlying EBITDA, as mentioned, came in of 59.3 million, which was a 20% increase compared to the Q1 of 2023. This is really an effect of the cost control focus in the company combined with the cost reduction measures that were started towards the tail end of 2023. The underlying EBTA margin increased three percentage points to 19%, which would have been 20% excluding North America, which is, of course, in line with what we have previously communicated that we will see an uptick in our underlying EBTA margin going forward. Free cash flow came in at 23.7 million, which was a decrease compared to last year, primarily affected by changes in net working capital. Active customers came in just shy of 1.7 million, which was a growth of 3% compared to last year. And net cash at the end of the quarter was at 48.3 million pounds. And we see that we are continuing to build up a cash position. As we have previously communicated, we do not have a plan to do a dividend this year, given the situation with the bid announced by FTJ on the company. If we look at the business a little bit more in detail, for the first quarter of the year, as mentioned, the locally regulated gross winnings revenue came in at an all-time high, both in absolute terms and share of gross winnings revenue. And we now stand at 84% of locally regulated revenue as part of the group. On the right hand graph here, as mentioned, we can see that our scalability continues to improve and even though we see an ever increasing betting duty, we are able to absorb this and we will see a continued underlying EBTA margin increase. If we look at the active numbers, we are seeing a pretty decent growth. This was 3% up compared to Q1 2023. This would have been 4% excluding North America. As we continue to exit North America, we see activity dropping in that territory, as one could imagine. The increase in number of actives in casino was very positive with 6% while sports betting activity remained relatively stable. This increase is predominantly driven by the market mix. We know that UK and Netherlands are the leaders in growth for our markets and they have a higher share of casino revenues compared to the group average. The RPU for the first quarter decreased by approximately 3% versus Q1 2023. But as we have mentioned in the past, the way that we look at this business is that we really want to drive the active growth and have a fairly stable development on our RPU over time. If we look at the product segment, the sports betting segment decreased by 3 percent. This was primarily driven by lower turnover compared to last year. This was, of course, influenced by the fact that we had roughly 9 percent fewer top European Football League fixtures in Q1 this year compared to Q1 last year, given there was an international break. And in Q1 last year, the World Cup had just ended. In terms of casino and games, as mentioned, we saw a gross winning increase by 3% on the back of increased activity and strong performance, especially in Netherlands and the UK. This is driven by a very strong selection of product offering within the segment and a continued focus on rolling out exclusive games through Relax. Poker and other products decreased by 8%. Both poker and bingo saw a slightly lower gross winnings level compared to last year. The sports betting margin for the quarter after free bets came in at 10.3%. This is slightly higher than our long-term average and slightly higher than last year. As mentioned, we do see a slightly increasing trend over time. For us, it is due to a changing market mix where there are some markets that have an inherently higher margin given customer behaviors. or regulation, for example, France and Netherlands. But we also see a continued trend of higher share multiple bets that do offer a support for an upward trajectory over time on the underlying sports betting margin. If we look at the regions, we can clearly see that Western Europe was the main growth driver in Q1. This was driven by continued strength in Netherlands and the UK, and it could have been even higher. However, we saw below average sports betting margin in France that softened the overall performance for this region. Netherlands grew by 24% in local currency and UK continued to perform really well at the growth rate of 20%, which we are of course very pleased with since these are our two largest markets. In the Nordics, a bit of a different tale. We saw a decrease of 15% with unsatisfactory performance, we would say, notably in Sweden. However, we also like to mention that We had a weaker sports betting margin than the group average in the quarter for the Nordic markets, and this of course had a material adverse impact. Just mentioning Sweden and what we discussed previously around RPU and actives, we're still very pleased to see that the actives in Sweden actually increased with 5% in Q1, compared to Q1 last year, which is of course a testament to the work and what we deem as a strategy going forward. In terms of Central Eastern and Southern Europe, gross earnings revenue declined by 8%. However, Romania continues to grow really healthily, but we do see an impact across some of our dot-com markets and also the fact that we have had less focus on markets like Italy and Estonia over the last year, which is, of course, impacting our growth trajectory in those markets. In other, gross winning revenue decreased 22%, driven, of course, by a significant drop in North America, since we are slowly but surely exiting the North American markets, and as mentioned later in the report, have already exited three states as of today. So, perfect segue. The closure of our North American operations remains on track and we are expecting to be operationally exited by the end of Q2 2024, as previously communicated. We've also seen the impact now of the fact that we have been able to scale back investments following the exit announcement in November. In Q1, though, we reached a gross earnings revenue of almost £6 million, but that then had representing a decrease of 25% in constant currency. But as you can see on the marketing line, we are now able to drastically reduce the investments in North America, which also meant that the underlying EBITDA loss came in at only £1 million for the first quarter in 2024. Relax is continuing to show good development and good performance. We had a revenue growth of 6% to 13 million pounds in Q1. The sequential decrease that you can see here is partly due to seasonality. Q4 is the strongest quarter for casino generally, but also that the dream drop jackpot timings impacted the overall revenue. If they fall too early, we don't build the same level of engagement and excitement around the jackpots. In terms of gross contribution, the Q1 came in at 10.5 million, which was slightly up from the same period last year. An underlying EBTA contribution of just shy of 5 million pounds, representing a 36% margin of the total revenues for RELAX. We have also seen a slight increase in cost as the team in Relax is building for the support for the continued growth for the business. And we also want to call out that we had three exclusive game launches for Kindred in the quarter, which we are, of course, as mentioned earlier, continuing to scale up throughout this year and next year. So, KSP, the picture on the screen is actually the first bet that was placed with KSP, which was a multiple. Unfortunately, the customer did not win that first bet, but it is a true representation of the first bet that was made by a customer on the KSP platform. As mentioned, we launched it in our first test markets during Q1, and we have seen significant progress during this first couple of months live in production. We have selected customers playing on the platform, and we have been very pleased with the performance to date, which also means that we will accelerate the rollout to some of our smaller non-strategic markets already pre the Euros. to ensure that we get the necessary volume and number of customers through the platform to be able to test really well and gather customer feedback on the product. The project remains firmly on track with both performance targets and metrics ahead of schedule as we stand today. In terms of the next phase, we have, of course, a multitude of ongoing features and functionalities that are being developed for further brands and for further markets once we start looking at rolling out into some of the bigger markets post the Euros and early next year. In terms of our journey towards zero, we reported a share of gross winnings revenue from high risk players at 3.2% in Q1, but also very pleasing to see that the improvement effect after intervention came in at 87.1%, which is, in our opinion, a very high figure. We will, of course, continue to work very diligently on this, and if you extrapolate where we are today, we continue to see a downward trajectory over time. I also want to highlight the Sustainable Gambling Conference that we ran in London this spring, which was a really great occasion for people across the industry and stakeholders around the industry everything from regulators, operators, treatment centers and lived experience to participate and discuss how we jointly as an industry and stakeholders around the industry can continue to support not only our ambition, but also how the industry works with this in a diligent fashion. With that, I'm going to hand over to Patrick to run through the financials for the first quarter.

Thank you, Niels, and good morning, everybody. Our next couple of slides run through the financial highlights of the quarter. The total revenues reached 307.7 million in the first quarter. That was slightly ahead of the revenues posted last year in Q1 in constant currency and 3% ahead in reported currency and 3% ahead in constant currency. We are starting to see effect of the ongoing exit from North America, and if you would exclude North America from numbers, we actually saw a 4% increase in constant currency. We had a solid growth actually in our locally regulated markets and growing by 4% in reported currency. This was, however, largely offset by a 16% decline in revenues from non-locally regulated markets. And as Niels discussed earlier, we had a A solid growth in revenues from RELAX with the contribution to the overall revenue mix growing by one million year over year. The cost optimization work and the cost reduction work is now starting to yield results. And as you can see on this slide, we have had improvements on all our metrics. If we start from the left-hand side, on the cost of sales, where we continue to see efficiency improvements, this is really driven by improved terms with our game supplier and payment suppliers. It's driven also by improved improved marketing market mix and also increasing importance of relax. So overall a 70 basis points improvement in the cost of sales metrics year over year. Marketing costs, also that one where we see a 70 basis points improvement compared to Q1 last year. On the marketing side, we saw a 2 million decrease in marketing spend year over year. However, this is sort of driven by a reduction in in marketing spend in North America, where the marketing spend declined 3 million, which of course means that we had a slightly above 1 million increase in marketing spend in the other markets. In salaries and other OPECs, we are seeing a clear efficiency improvement now on the back of the cost reduction program that we initiated in Q3 last year, with both salaries and other OPECs declining as a percentage of revenues, but also in absolute terms. Since Q3, when we announced the cost reduction program, we have now a net headcount reduction of approximately 200, and we see a clear reduction also in other OPECs. We communicated a target to be below 245 million in total OPECs for the year, and we reiterate that target. And the strong focus on costs and reducing costs is now starting to impact also our EBITDA numbers, as can be seen on this slide. And with the increased scalability, we managed to reach the highest underlying EBITDA level since Q3 in 2021, with a 20 percent increase year over year. The 59.3 million in underlying EBITDA represent an underlying EBITDA margin of 19%. And if you exclude North America, the underlying EBITDA would have reached 60.3 million with a margin of 20%. And this is clearly now going in the right direction towards our financial targets. And we also reiterate our full year guidance of 250 million. With the strengthening of the sterling pounds against our main currencies, we saw a negative revenue impact of approximately 3%. And in absolute terms, this means a negative impact of 8.6 million on the revenue line. While we have a positive effect, on the other hand, on the cost of sales and OPEX, that was, however, not large enough to offset the impact on the revenues, and thereby we had also a negative impact on the underlying ETA of 1.6 million from FX movements. We have seen a solid start to Q2. And of course, this is a very short period of time, only 21 days. And it's been driven to some degree by strong sports betting margins. For these first 21 days, we had an average daily revenue of 3.48 million, which is a 6% increase compared to the daily average revenue for the full quarter, Q2 23. And in constant currency, this would have been 8%. As mentioned earlier, the exit from North America is starting to have a larger impact on the comparative numbers, and excluding North America, the increase was 8% in reported currency and 9% in constant currency. The sports betting margin for the above period was 11.3%. That's actually the same sports betting margin as we reported for the full Q2 2023. And, of course, slightly above the long-term average of 9.8%. Again, a good start to the quarter, but also reminding that this is for only 21 days. So with that, I will hand over to Nils for a summary of the quarter, and then we'll open up for the Q&A.

Thank you, Patrick. So, just wrapping up here, we would say that the Q1 in 2024 was a solid start to what we call a transformational year, both in terms of where the business is heading, but also the fact that we have a bid on the company from FTJ. Just summing up the main points from Q1, what we're most pleased about is of course that we had an all-time high in locally regulated markets, both in terms of absolute numbers and as share of gross winnings revenue. This was due to a continued growth of 5% in the locally regulated markets. In terms of the underlying EBTA, we're very pleased to, as Patrick mentioned, have the highest underlying EBTA for a quarter since 2021, which was driven by the cost reduction initiatives and the constant control of costs that we have across the business. We also, as Patrick mentioned, reiterate the guidance for 2024 of £250 million. In terms of the strategic projects, they are moving forward according to plans. The KSP has been successfully operational and we will continue to onboard customers during Q2. We're also very pleased to say that we have just launched Otto Casino in Sweden, which is our first pay and play brand, which really plugs a gap in our product portfolio in Sweden. Relax also continues to show strong performance with 6% total revenue growth, and we're very confident in our ability to continue to drive scalable growth for Relax. In terms of forward-looking, we have, I would say, a very solid underlying business operation at the moment. We're performing well as a company, and we have our eyes set on a very busy summer. We have the Euros, of course. We also have the Olympics in Paris, and we have Copa de America. We have had a strong start to Q2, and we continue to have a very firm focus on growth as a company moving forward. With that, more than happy to open up for questions from the call.

If you wish to ask a question, please dial pound key five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key six on your telephone keypad. The next question comes from Oscar Ronquist from ABG Sundal Collier. Please go ahead.

Thank you. Good morning. Thanks for taking my questions. So just the first one would be on the Netherlands or actually both of my questions will be on the Netherlands. So first of all, just the expected deposit limits if you have any comments and also so that you reiterated your 250 million pound guidance which you I think initially communicated in during Q3 or in connection with the Q3 report which was actually before it was sort of you know announced from the KSI KSA so I just wondered if anything has happened in terms of your expectations and if you're still I mean, are you expecting a minor impact from the deposit limits or are you not expecting it at all in the guidance?

Thanks. Thank you, Oskar. Good question. The latest from the KSA, which came last week, is that they are delaying the implementations of some of the measures that were proposed just before Christmas last year. We are still awaiting the kind of the full confirmation, both in terms of the timelines for these implementations, but also I think more importantly, from our perspective, the details how these are to be implemented. I think from our perspective, it's too early to say yet what the potential impact will be, because it's ultimately down to the details of the legislation, but of course also in terms of the timings of when these measures will be implemented. So from our perspective, a little bit too early to go out and comment on it as of yet.

Got it. Thank you. So just, I mean, to clarify, it's not really sort of incorporated in the 250 million guidance. So it could be, you know, if you were to see an effect from it, it could be, you know, on the negative side in that sort of sense. And if it wasn't implemented, it would be sort of neutral to your guidance. Is that how to read it?

Yeah, it all depends on how, when, and if, and that's not what we can comment on, but this data, we don't know what it will look like in a potential future scenario, but always with our budgeting and guidances, we, of course, take height for certain unknowns in the business.

Got it. The next one, I don't know if, I saw that FDJ commented on it, but just on the Netherlands, the proposal from the parliament also, I think it was voted through the motion 10 and motion 14, with one of them being a proposed high risk gambling ban in the Netherlands, which, I mean, these are my words, but I don't know, it may affect, you know, slot machines and maybe some types of live casino games so do you have any comments on sort of your expectations on that and potential implications on the bid thanks

So I think it's fair to say that we follow this closely as well. First of all, it's a motion. So it's ultimately up to the government what they want to do with it. There are a range of motions introduced in the Netherlands on an ongoing basis, I think almost 5,000 a year. Our reading on it is of course we have to see what the government decides to do with this motion. I think some comfort that we take on it is that one the ministry had objections to this motion and three out of the four parties that will most likely form the new government in Netherlands voted against this motion. I think holistically, if you take a step back, I think the main ambition of the gambling reform in the Netherlands was to drive channelization, of course, increase tax revenues, but also ensure that there is a good level of player protection in the market. I think this motion goes pretty much directly against those main objectives of the gambling reform. But we will have to wait and see what the government says on this. But it's too early for us to say at this stage, I would say.

Perfect. Thank you. I just came up with one follow-up question on the net allowance. Can you say anything? I think on the Capital Markets Day, showed us some slides on the contribution margin for each country where I think the Netherlands wasn't really included. So, you know, just looking at the tax rate of around 30% and, I mean, the maybe lower marketing spend as a percentage of sales. I mean, in rough terms, could you maybe elaborate a little bit on the sort of contribution margins that you have in the Netherlands?

Yeah, we haven't shared that number specifically, but it's fair to say that Netherlands has a higher contribution margin than the group average today, and this has to do with the strong growth that we have seen in Netherlands, at the same time as there are restrictions on marketing in the country, which of course means that we get the high leverage on the marketing spend in the Netherlands.

Understood. That was all for me. Thank you very much. Thank you.

Thank you.

The next question comes from Martin Arnell from DNB Markets. Please go ahead.

Good morning, guys.

Good morning.

Morning. So my first question is on the op-ed trend, which looks amazing in this quarter. It's down quite a bit also from last year, and I know you've been working with initiatives, but you've done that for quite a while now. When we're entering the football Euros and in the months before, how do you expect, you know, will you keep the strict OPEX focus that you have now?

Yeah, the short question is yes. This is not really related to the football or the Euros. It's kind of a more broader initiative. We have, of course, when it comes to marketing side, we will invest behind our core markets and the growth in them. 60.6 million in OPEX for the quarter, which is down significantly compared to last year when it was about 67 million. I think it's fair to remember also that last year in Q1, there was a one-off cost of around 3 million burning the Q1 OPEX levels. So the kind of drop looks a little bit more dramatical than it actually is. Going forward, as I said earlier during the call here, we still expect to be below 245 million. But when you look at the coming quarters, there are certain costs that are by nature more a question of timing when they will come. And we might have a slightly higher quarterly level in the OPEC side over the coming quarters than we had now in Q1 due to this.

Okay. And can you say anything, you know, what do you expect in terms of the top line growth in the coming quarters around this big event, assuming normal sports markets?

Assuming normal sports margin, yeah, that's the main part of that, right? I think we have a very busy summer. That will definitely drive top line growth. I think we should also remember that now in Q2, for example, there's a fairly extensive period where there's very, very quiet sports calendar. you know we we will continue to see growth for the business but we haven't communicated an exact number for the year but uh fair to say that this is a busier year than last year for sure in terms of the sports calendar okay thanks and my final question just to follow up on the proposal in in in the netherlands about the potential ban on high risk

products where they could include slots. I know it's a proposal and could take forever until we know exactly what's going to come out of this, but could you just share some color on your discussions you've had with FDJ after this proposal and remind us what they've said about it. Thank you.

Yeah, absolutely. I think the reading is similar to us in the sense that, you know, there's two questions here. One, will this go through? I mean, it's ultimately up to the government to decide what they do with this motion. Secondly, we know that there are a majority of the governmental parties, the parties that will most likely form the government that voted against this. So, you know, putting a likelihood on this is, of course, very difficult. And then, you know, in terms of their perspective, I don't want to put words in their mouth, but, you know, they, of course, have a long-term perspective on Kindred as a business. And if this comes through, there might be some effects on a short to mid-term. But our position in Netherlands is so strong that I think they're very confident on our long-term outlook in the Netherlands, irrespective of this.

Okay. Thank you, guys.

Thank you. Thank you.

The next question comes from Simon Davies from Deutsche Bank. Please go ahead.

Good morning, guys. Three quick ones from me, please. Firstly, UK was very strong performance. Obviously, we've got the implementation of the white paper to look forward to some stage in the second half of the year. Do you think that you've fully implemented the measures that you expect to see come through there in terms of affordability checks and state limits, or could there be some incremental pain to be felt? Secondly, in the Netherlands, strong performance there. Can you give us a rough split in terms of the breakdown of sports versus casino and the growth rates that you're seeing in those two categories? And lastly, can you just talk through phasing of startup costs from the Kindred Sports platform during the course of 2024. Thank you.

I want to take the last question first, and then I can take the other one.

Yeah, so on KSP and the startup costs, so it's not that we would have had a significant increase in the costs over the couple of last quarters. Of course, we are recruiting some additional operational staff for KSP, but most of the tech resources, et cetera, has been in place already for a good period of time.

So should we start to see those costs begin to phase down as we get towards the end of the year?

No, I don't expect those costs to face down. This is still an ongoing project. We are still doing modification works, as discussed, et cetera, and developing the product further. Then it's a question merely of what kind of resources will be needed post a full rollout, and that we, of course, at this point in time, we haven't assumed at least that in the financial targets provided that we would have a significant reduction at least in resources.

Yeah.

Thank you. And the question about Netherlands, that was the product split. So in the Netherlands, I'm shooting a little bit from the hip, but for the market overall, it's 70% or so is iGaming and then 30% roughly sports betting. Our split is... broadly in line with the market, but maybe a little bit more skewed towards sportsbook than the overall market split.

And are you seeing similar rates of growth in each category?

Yeah, we have seen a good development across the categories over the last couple of quarters.

And then in terms of your first question, Simon, in terms of the white paper and the imminent interim code, we're very much looking forward to the publication and the implementation of these as we think that they will really provide a level playing field. We're not particularly concerned around the levels. We think they're good. When it comes to stake limits and affordability, you have to look at them in combination. Strict affordability limits actually means that stake limits should be lowered. So we don't have a reason to believe that that will have a material impact on our business.

Great. Thank you very much. Thank you.

The next question comes from Fadi Marouki. Please go ahead.

Good morning and thanks for taking my question. In your terms of conditions on your website, it states that the user is responsible in ensuring that the use of the services is legal. When Evolution, which is a gambling games provider, was accused in 2021, their response was that the operator is responsible in ensuring that the players are actually allowed to play. To test your systems, while I was on a visit in California in March 2024 last month, where sports betting is illegal, I deposited money and managed to place bets. What are your thoughts about some of your revenue in Q1 is from illegal markets? Also, do you have any technical implementations to limit illegal gambling? Because it sure seems you don't.

Well, first of all, it shouldn't be possible to create an account and deposit from California, so we would be keen to get more information on that. And yes, we have very strict measures in place to ensure that the jurisdictions when you're not allowed to play from, and we have an extensive blacklist of markets, unless you game the system by using VPNs or submitting false information, which will be eventually will pick up, we have very strict measures to ensure this. So that definitely surprises me and I would be happy to get more information on that from you because that should not be possible in a normal scenario.

A follow-up question. I was actually in contact with your support regarding this matter and they forwarded the situation to your legal department, I assume, and their response was actually forwarding it back to the terms of conditions and saying it is the individual's responsibility to ensure that it is legal. And there was nothing in the response saying, okay, we do have any technical implementations. And also, if there were any technical implementations, it seems strange that I was still able to deposit money and gamble because I have them on record. I have the pictures and everything. So how do you explain that?

I think we need to come back to this offline. This is something that we need to look into.

More than happy to look into it.

All right. All right, thank you. So I think with that, that was the last question. So for final remarks, Nils.

Yes. So thank you again for attending the earnings call this morning. And we look forward to coming back to you in July with the Q2 results. And have a lovely day, everyone. Thank you.

Thank you.