Interim results 2011

INTERIM RESULTS FOR THE

HALF YEAR ENDED 30 JUNE 2011

Ladbrokes plc ("the Group") today announces its results for the half year ended 30 June 2011.

Financial Highlights

·; Group net revenue(1) and operating profit(1)(2) up 2.8% and 16.9% respectively excluding the impact of the World Cup(3) and one off VAT credit in 2010

·; Group net revenue(1) of £487.8 million (2010: £492.1 million) and operating profit (1)(2)

£97.6 million (2010: £103.6 million)

·; UK Retail machines gross win up 15.0% with gross win per terminal week of £821 (Q2 2011: £850)

·; Net revenue growth after adjusting for the World Cup of 6.6% and 19.1% in Digital and Sportsbook respectively

·; Group net debt of £449.4 million reduced by £42.6 million from £492.0 million at 31 December 2010

·; Dividend of 3.90p up 1.3%

Key Operating Highlights

·; Machines rollout completed early with accelerating growth in gross win per terminal in Q2

·; Continued strong control of costs across the Group

·; OTC amounts staked in UK Retail (excluding the World Cup) up 0.4% despite a challenging economic background

·; New contract with Microgaming offers improved opportunities for growth through increased flexibility of content and better terms

·; Roll out of a more flexible and intuitive website on track

·; New proprietary pricing and trading tools, to enhance control of margin, now in use

·; New trading platform launched and due to offer prices on football markets from start of the English Premier League

(1) Excluding High Rollers

(2) Profit before tax, finance costs, non-trading items and amortisation of customer relationships

(3) World Cup numbers do not include any estimate for substitution

Richard Glynn, Chief Executive, commented:

"In the face of challenging economic conditions it is pleasing to see good levels of underlying growth in both the UK Retail and Digital businesses.

We are making good progress in executing our strategy, taking immediate and practical steps to improve the business and also working towards achieving our technology milestones.

In UK Retail we are confident of delivering continued strong growth from machines whilst further demonstrating robust cost control and the ability to drive operating efficiencies.

We have taken significant steps to becoming more competitive online. Our new contract with Microgaming offers us more flexibility to work with other suppliers, thereby improving content, whilst continued enhancements to our website make it more functional, easier to use and engaging for customers.

We continue to focus on operational execution, investment in technology and the reinvigoration of our brand. We are on track to deliver a differentiated, personalised and more consistent offer across all platforms and are confident that the actions we are taking will revitalise the business."

Summary of Results

Chief Executive's Review

Our strategic review in August 2010 laid out the key drivers to success:

Retail Excellence

Machine performance has benefitted from the efficient rollout of the new Global Draw terminals. Continuing operational focus has helped minimise the expected adoption lag and has driven enhanced performance. Gross win per terminal week was £821 in H1 reaching £850 in the second quarter. Machine gross win was 15.0% up in H1.

Our focus on machines will now move to improving the mix of games with new and exclusive content driving customer demand. We will also adopt improved yield management analysis to enhance utilisation and adjust machine formats to allow for local market conditions, tailoring the 'menu to the venue'.

OTC remains relatively resilient despite a difficult consumer environment and adverse sporting results in Q2, particularly in May. Amounts staked in the period were marginally ahead of last year with gross win margin flat when excluding the impact of the World Cup.

Cost control remains strong and guidance for the full year remains unchanged at 3.5% on a like for like basis.

Digital Capability

We continue to work towards a more competitive digital offering through a combination of investment in our eCommerce platform, better functionality, improved ease of use and broader content.

A good example of this is our renegotiated contract with Microgaming which we announced in June. New terms and greater flexibility increase the opportunities for growth for both parties. The ability to contract with other major software suppliers means we can now offer customers a wider range of products. We continue to make good progress in working with all of our key suppliers to evolve more commercial and flexible relationships.

During the period good progress has been made in developing our eCommerce platform.

As part of an initial refresh of our Sportsbook and ahead of a full re-launch early in 2012, we have introduced a sophisticated search facility which reduces the time it takes customers to find the bet they want, whilst enabling them to place a wager directly from ranked search results.

Mobile remains a priority with 18% of digital customers transacting through a mobile device in the past six months (7% in the same period in 2010). In the period we have delivered a Grand National app, extended our Sportsbook app to Android smartphones as well as being the first to offer live streaming of horseracing through a partnership with Racing UK. Further initiatives in H2 will include an extension of horseracing streaming to cover 100% of UK races and a new strategic partnership with O2.

We have overhauled our approach to online marketing, redesigning our affiliate programme, improving the optimisation of natural search results and moving to a new agency for pay per click, which has reduced fees and provided improved visibility of data.

Our strategy to recruit new players through the Sportsbook and migrating them across other products is showing early signs of success, with Sportsbook net revenue and new player sign ups growing by 19.1% and 37.6% respectively, after adjusting for the impact of the World Cup. The change in acquisition approach and a lower level of marketing spend in H1 has also yielded a 20.5% reduction in our adjusted CPA (Cost Per Acquisition).

Pricing, Trading and Liability Management

The development of our new trading platform is well underway. Successful trials during the finals of Wimbledon saw us provide over 60% more Bet in Play markets than our nearest rival for the Ladies Final. The next platform release will see us further automate the delivery of football thereby enabling a significant increase in the total number of Bet in Play events we are able to trade.

In addition to providing scale through an increase in events traded, the fully developed platform will increase productivity, simplify processes and provide superior liability management capability.

During the period we have invested in our algorithmic and trading teams and built several proprietary tools which increase the level of automation in trading, increasing efficiency and helping traders to better manage margin.

Customer and Brand

We said in February that the Ladbrokes brand needed to be reinvigorated in order to resonate with customers, building upon its inherent strengths of awareness and trust. In the coming week we will launch a new TV advertising campaign which is the first step in a coordinated campaign to make the brand more exciting, engage better with customers and help us grow market share.

We are on track to enhance our capabilities in BI/CRM (Business Intelligence/Customer Relationship Management), which is critical to identifying, retaining and growing the lifetime value of customers. We have aggregated customer data from numerous sources across the business and are well progressed in the selection process for a partner with whom we will move forward from Q4 of this year.

Regulatory Leadership

In the last few weeks the Government announced its intention to review both the licensing and taxation of offshore gambling. Ladbrokes will engage fully in the consultation process, ensuring the Treasury is aware of all the options and impacts of tax and regulation on a sector which employs 40,000 people and contributes £3 billion a year to the UK economy. We continue to contribute actively to the process of Levy modernisation and expect a formal consultation to take place later this year. 

Trading and outlook

In July 2011 Group net revenue (excluding High Rollers) rose 13.6% year on year, after adjusting for the impact of the World Cup. In UK Retail OTC amounts staked (excluding the World Cup) were broadly flat with machine gross win per terminal week growing by 15.3%.

High Rollers in July 2011 generated a £0.5 million profit.

We continue to make good progress and are on track with the delivery of operational and technology milestones. Whilst remaining mindful of tough economic conditions and continuing uncertainty affecting consumer disposable incomes, we remain in line with Board expectations for the full year.

Enquiries to:

Richard Glynn, Chief Executive

Ian Bull, Chief Financial Officer

Matt Sharff, Head of Investor Relations

Ciaran O'Brien, Head of Public Relations

Switchboard +44 (0) 20 8515 5726

Notes to editors:

The Company will be hosting an analyst presentation at the DB Auditorium (Winchester House, 75 London Wall, EC2N 2DB) at 9am this morning. This will be available to listen into by dialling +44 (0)207 138 0817 and using passcode 5479657.

Alternatively a live webcast of the presentation, with slides, will be available at the 'Investor Centre' on www.ladbrokesplc.com. A recording of the webcast will be available, at the same location, from 12pm (UK time) the same day. Similarly a replay phone facility will be available, for 7 days, on +44 (0)20 7111 1244 using passcode: 5479657#.

For further information on Ladbrokes plc, please visit our corporate website at www.ladbrokesplc.com. High-resolutionimages are available to download from the media centre section under the heading 'image library'. Executive images are also available at www.vismedia.co.uk in the Ladbrokes section.

Unaudited interim results for the half year ended 30 June 2011

(1) Profit before tax, finance costs, non-trading items and amortisation of customer relationships.

(2) Before non-trading items and discontinued operations. Non-trading items are profits or losses on disposal or impairment of

non-current assets or businesses, unrealised gains and losses on derivative financial instruments, corporate transaction costs and

business restructuring costs.

 (3) The proposed interim dividend for the half year ended 30 June 2011 is 3.90p (30 June 2010: 3.85p).

Business Review

UK Retail

Though we remain cautious on the outlook for the UK economy, OTC activity continues to be relatively resilient. Amounts staked are up 0.4% in H1 after adjusting for the impact of last year's World Cup.

OTC gross win for the period declined by 4.4% to £202.2 million with OTC gross win margin of 16.0% versus 16.3% in 2010 (16.0% excluding the World Cup). The impact of a particularly poor Cheltenham festival in March was largely offset by improved results from Aintree, Epsom and Royal Ascot.

In May we completed the rollout of the new Global Draw terminals to all shops in the retail estate. Operational improvements, together with continuity of product between the old and new machines, have helped us to successfully mitigate any adoption lag. Machine gross win increased 15.0% during the period with gross win per terminal reaching £821 for the half (2010: £723) and £850 in Q2.

Operating costs, which exclude gross profits tax, increased £7.5 million or 3.3% in the half year to £233.9 million. Guidance for the full year remains at 3.5% on a like for like basis.

At 30 June 2011, there were 2,097 shops (31 December 2010: 2,098) in Great Britain. During the period, there were 13 openings, 14 shop closures, 14 relocations and 35 shop refurbishments. With a full pipeline of projects we still expect to open 50 new licences and close 20 over the full year.

Other European Retail - Ireland

OTC amounts staked grew by 5.3% across Ireland. Despite tough economic conditions, amounts staked in the Republic of Ireland grew 6.9% reflecting our strategy to reinvigorate the brand and work to grow market share on a localised basis.

Total gross win in Ireland of £39.8 million was down 3.4%, driven mainly by tough horse margins at the major festivals, with increased numbers of Irish winners at Cheltenham and Royal Ascot in particular.

Operating costs were up £0.4 million (1.3%) and overall operating profit fell to £3.8 million.

At 30 June 2011 there were 216 shops in the Republic of Ireland and 78 shops in Northern Ireland. During H1 we acquired ten shops from Bruce Bookmakers in the Republic of Ireland, opened one new licence and closed three.

Other European Retail - Belgium

On 1 January 2011 Flanders and Wallonia moved from a turnover tax to a 15% gross profits tax and Brussels followed with the same gross profits tax rate from 1 April 2011. This change was passed on to the customer in full and in line with our expectations we have seen amounts staked increase steadily throughout the period, net revenue decline and gross profit increase, driven by the reduction in duty.

Costs have increased by £2.0 million driven by higher content charges and increased commissions on the higher levels of amounts staked.

Operating profit of £2.5 million is down 13.8%.

Other European Retail - Spain

The Spanish business has been impacted by the introduction of a national smoking ban which came into effect on 2 January 2011, unfavourable domestic football results and tough economic conditions. Despite this, amounts staked have grown by 14.6% (22.9% excluding the World Cup).

Sportium remains the market leader in Madrid and a focus on the next generation of Self Service Betting Terminals, to be delivered in H2 2011, will further improve our offer.

Trading commenced in Aragon on 27 April 2011, with 20 units open within the first two weeks and we will expand this further in H2. Navarra and Valencia have both issued decrees and we expect to make licence applications and to commence trading thereafter.

As at 30 June 2011 there were 134 corners (99 Madrid, 35 Aragon) and 17 standalone shops (Madrid only).

Digital

The main focus within Digital has been on leveraging our inherent strength as a sportsbook brand. An acquisition strategy to recruit new players through Sportsbook can be seen in the growth of new player sign ups which are up 37.6% and in net revenue which grew 19.1%, both after excluding the impact of the World Cup. Bet In Play amounts staked grew by 7.7% in H1 and now deliver 49% of non-racing activity, up from 42% in H1 2010.

Overall, net revenue was marginally ahead in the half (6.6% excluding effect of the World Cup) with growth in Casino and Bingo offset by further declines in Poker. Net revenue growth in the period was also impacted by our previously announced decision to exit from unprofitable territories outside the UK. The UK now represents 79% of Digital revenue and showed year on year growth of 7.5%.

Our continued focus on the retention and reward of our most valuable customers is evident within Casino and Bingo where player yields are up 24.4% and 38.5% respectively, also reflecting improved player engagement and a strong contribution from our higher value customers.

Declining actives in both Casino (down 12.6%) and Bingo (down 18.2%) are a direct result of lower advertising support, with marketing spend weighted towards more profitable player recruitment.

Optimising customer acquisition routes, away from high CPA products towards Sportsbook is also reflected in improved efficiency with a 20.5% reduction in our adjusted CPA.

Net revenue for Games was flat at £8.5 million with a broadly constant number of actives and yield.

Poker net revenue fell 30.8% during the period to £7.4 million. The number of actives in the first half fell by 21.3% with customer yields down 11.3%.

The mobile channel continues to deliver strong revenue growth, with net revenue up 209% to £6.8 million and the number of customers growing by 153%. During the period 18% of the total Digital customer base (7% in H1 2010) transacted using this service.

Operating costs of £54.7 million fell 3.2% compared to H1 2010, mainly reflecting a lower level of marketing spend. Marketing investment was 17% of net revenue in the period compared to 24% in H1 2010, due in part to the impact of the World Cup. We expect the rate of marketing investment to be slightly higher in H2.

Core Telephone Betting 

In the Core Telephone Betting business amounts staked of £150.0 million has grown 9.2% in the period.

Gross win margin of 2.7% (2010: 6.6%) was impacted by a poor run on our higher staking customers, notably around major festivals and the Champions League final.

Operating costs of £6.7 million were 15.2% below 2010 with the closure of our Liverpool call centre in 2010 being the main saving.

A loss of £3.3 million was made in the period (2010: £0.3 million).

High Rollers

High Rollers generated an operating loss of £4.0 million (2010: £8.9 million profit).

Financial review

Revenue 

Revenue from continuing operations decreased by £17.1 million (3.4%) to £483.1 million (H1 2010: £500.2 million). Excluding High Rollers, revenue decreased by £4.3 million (0.9%) to £487.8 million (H1 2010: £492.1 million). Excluding High Rollers and the World Cup, revenue from continuing operations increased £13.3 million (2.8%). The increase is mainly attributable to improved machines performance in UK Retail, Sportsbook and Casino in Digital partially offset by a decline in Other European Retail, Poker in Digital and Core Telephone Betting.

Profit before finance costs, tax, non-trading items and amortisation of customer relationships

Profit before finance costs, tax, non-trading items and amortisation of customer relationships decreased by £18.9 million (16.8%) to £93.6 million (H1 2010: £112.5 million). Excluding High Rollers, profit before finance costs, tax, non-trading items and amortisation of customer relationships decreased by £6.0 million (5.8%) to £97.6 million (H1 2010: £103.6 million). Excluding High Rollers, the benefit of the World Cup and one off VAT credit in 2010, profit before finance costs, tax, non-trading items and amortisation of customer relationships increased by £14.1 million (16.9%) reflecting increased profit in UK Retail and Digital partially offset by decreased profit in Other European Retail, increased losses in Core Telephone Betting and increased corporate costs.

Corporate costs

Before non-trading items, total corporate costs rose £1.0 million to £10.8 million. The increase largely reflects non-cash costs relating to long term share incentive schemes.

Amortisation of customer relationships

In the half year ended 30 June 2011 there is a £1.3 million amortisation charge within Digital in respect of customer relationships (2010: £nil). We expect this charge to be £2.6 million for the full year 2011.  

Finance costs

The net finance costs of £15.7 million were £2.1 million lower than last year (H1 2010: £17.8 million) mainly reflecting lower average net debt. In 2010, there was also interest income of £20.0 million in respect of an interest rebate following the HMRC tax settlement.

Profit before tax

The decrease in trading profits as well as a higher overall finance cost, due to the one off interest rebate in 2010 described above, has resulted in a 33.2% decrease in first half profit for continuing operations before taxation and non-trading items to £76.6 million (H1 2010: £114.7 million).

Non-trading items before tax

£4.3 million of non-trading losses before tax include a £1.1 million loss on the closure of shops and disposal of assets within UK and Other European Retail, £1.3 million relating to corporate transactions and £1.9 million relating to business restructuring costs.

Following the termination of the Group's interest rate swaps in April 2010, the remaining £0.5 million of losses deferred in equity have been recycled to the income statement as a non-trading finance cost.

Taxation

The Group taxation charge for continuing operations before non-trading items of £11.7 million represents an effective tax rate of 15.3% (H1 2010: 19.0%, excluding the 2010 corporation tax settlement described below). The effective tax rate of 15.3% is a best estimate of the annual tax rate for 2011.

In 2010 the Group reached a settlement with HMRC which covered substantially all outstanding items in respect of the tax years through to 31 December 2007. The settlement resulted in the recognition in the 2010 income statement of a £261.9 million tax credit in relation to prior years.

Dividend

The Board today announces an interim dividend of 3.90 pence per share. The dividend will be payable on 1 December 2011 to shareholders on the register on 12 August 2011.

Earnings per share (EPS) - Continuing operations

Underlying

EPS (before non-trading items, High Rollers and excluding the benefit of the corporation tax settlement in the comparative period) decreased 2.6% to 7.5 pence (H1 2010: 7.7 pence), reflecting the decreased profit before tax and higher weighted average number of shares.

Total

EPS (before non-trading items) decreased 81.7% to 7.2 pence (H1 2010: 39.3 pence), reflecting the benefit of the corporation tax settlement in H1 2010. EPS (including the impact of non-trading items) was 6.7 pence (H1 2010: 38.5 pence). Fully diluted EPS (including the impact of non-trading items) was 6.6 pence (H1 2010: 38.4 pence) after adjustment for outstanding share options.

Earnings per share (EPS) - Group

Underlying

EPS (before non-trading items, High Rollers and excluding the benefit of the corporation tax settlement in the comparative period) increased 11.9% to 7.5 pence (H1 2010: 6.7 pence), reflecting the losses from discontinued operations in H1 2010.

Total

EPS (before non-trading items) decreased 81.3% to 7.2 pence (H1 2010: 38.4 pence), reflecting the benefit of the corporation tax settlement in H1 2010. EPS (including the impact of non-trading items) was 6.7 pence (H1 2010: 35.7 pence). Fully diluted EPS (including the impact of non-trading items) was 6.6 pence (H1 2010: 35.5 pence) after adjustment for outstanding share options.

Cash flow, capital expenditure and borrowings

Cash generated by operations was £130.3 million. After net finance costs of £11.1 million, income taxes paid of £12.7 million and £27.6 million on capital expenditure and intangible additions, cash inflow was £78.9 million.

At 30 June 2011, gross borrowings of £464.5 million less cash and cash equivalents of £15.1 million have resulted in a net debt of £449.4 million.

Revenue recognition - reconciliation to gross win

The Group reports the gains and losses on all betting and gaming activities as revenue in accordance with IAS 39, which is measured at the fair value of the consideration received or receivable from customers less fair value adjustment for free bets, promotions and bonuses. Gross win includes free bets, promotions and bonuses, as well as VAT payable on machine income.

A reconciliation of gross win to revenue for continuing operations is shown below.

The table below sets out the gross win for each division.

The table below sets out the net revenue for each division.

Principal risks and uncertainties

Key risks are reviewed by the Operations Board and the Board of Ladbrokes plc on a regular basis and where appropriate, actions are taken to mitigate the key risks that are identified.

The principal risks and uncertainties which could impact the Group for the remainder of the current financial year remain unchanged from those detailed on pages 24 to and 26 of the Group's Annual Report and Accounts 2010 and are as follows:

Strategy

Achieving the Group's strategy will deliver long-term growth for the benefit of all stakeholders whilst minimising some of the key risks that Ladbrokes faces. Failure to achieve the strategy has the potential to affect the business and its performance.

General risks faced by Ladbrokes that are comparable to those faced by most other businesses:

Marketplace

Changes in the economic environment and consumer leisure spend.

Financial

The availability of debt financing, the cost of borrowing, taxation and the pension fund liability.

Operational

The recruitment and retention of key talent and the execution of international expansion.

Specific risks which are either unique to Ladbrokes or apply to the industry it operates in:

Marketplace

Competition

Ladbrokes faces competition primarily from other land-based bookmakers, online betting exchanges and other online gambling operators. In particular, the online gambling market is characterised by intense and substantial competition and by relatively low barriers to entry for new participants. In addition, Ladbrokes faces competition from market participants who benefit from greater liquidity as a result of accepting bets and wagers from jurisdictions in which Ladbrokes does not operate (because of legal reasons or otherwise).

Betting and gaming industry

Taxes, laws, regulations and licensing

Regulatory, legislative and fiscal regimes for betting and gaming in key markets around the world can change, sometimes at short notice. Such changes could benefit or have an adverse effect on Ladbrokes and additional costs might be incurred in order to comply with any new laws or regulations.

Increased cost of product

Ladbrokes is subject to certain financing arrangements intended to support industries from which it profits. Examples are the horseracing and the voluntary greyhound racing levies which respectively support the British horseracing and greyhound industries. In addition, Ladbrokes enters into contracts for the distribution of television pictures, audio and other data that are broadcast into Ladbrokes' betting shops.

Operational and bookmaking

Bookmaking

Ladbrokes may experience significant losses as a result of a failure to determine accurately the odds in relation to any particular event and/or any failure of its risk management processes.

Sporting schedules and cancellations

There are certain high profile sporting events which attract significant betting activity e.g. the Grand National and the FIFA Football World Cup. Cancellation or curtailment of such events, for example due to adverse weather conditions, or the failure of certain sporting teams to qualify for sporting events, can adversely impact Ladbrokes' results.

High fixed cost base

Ladbrokes has a relatively high fixed cost base as a proportion of its total costs, consisting primarily of employee and rental costs associated with its betting shop estate. This means that falls in revenue could have a significantly adverse effect on Ladbrokes' profitability unless the Group reduces its costs substantially in the short to medium term.

Loss of key locations

Ladbrokes has a number of key sites, in particular Imperial House at Rayners Lane in London, its head office and main operations centre, and its premises in Europort in Gibraltar where the online gaming operations are based.

Information technology and communications

Technology changes

The market for online gambling products and services is characterised by technological developments, new product and service introductions and evolving industry standards. Failure by Ladbrokes to use leading technologies effectively, develop its technological expertise, enhance its products and services and improve the performance, features and reliability of its technology and advanced information systems, could have a material adverse effect on its competitive position.

Technology failure

Ladbrokes' operations are highly dependent on technology and advanced information systems and there is a risk that such technology or systems could fail. In particular, any damage to, or failure of online systems and servers, electronic point of sale systems and electronic display systems could result in interruptions to financial controls and customer service systems.

Data disclosure

Ladbrokes processes sensitive personal customer data (including name, address, age, bank details and betting and gaming history) as part of its business and therefore must comply with strict data protection and privacy laws in all jurisdictions in which the Group operates. Ladbrokes is exposed to the risk that this data could be wrongfully appropriated, lost or disclosed, or processed in breach of data protection regulation. This could also result in prosecutions and the loss of the goodwill of its customers and deter new customers.

Failure in the supply chain

Ladbrokes is dependent on a number of third parties for the operation of its business. The withdrawal or removal from the market of one or more of these major third party suppliers, or failure of third party suppliers to comply with contractual obligations could adversely affect our operations.

Unaudited financial statements

Interim consolidated income statement

(1) Non-trading items are profits or losses on disposal or impairment of non-current assets or businesses, unrealised gains and losses on derivative financial instruments, corporate transaction costs and business restructuring costs. Details of the non-trading items are given in note 4 and of discontinued operations in note 6 to the financial statements.

(2) Amounts staked does not represent the Group's statutory revenue and comprises the total amounts staked by customers on betting and gaming activities.

(3) In the prior period finance income includes £20.0 million interest income on the tax settlement.

(4) The dividends paid in the half years ended 30 June 2011 and 30 June 2010 were £33.8 million (3.75 pence per share) and £nil respectively. An interim dividend of 3.90 pence per share (2010: 3.85p) was declared by the directors on 4 August 2011. These financial statements do not reflect this dividend payable.

Interim consolidated statement of comprehensive income

Interim consolidated balance sheet

Interim consolidated statement of changes in equity

Interim consolidated statement of cash flows

(1) See note 11 for a reconciliation between profit before tax and finance costs and net cash flows from operating activities.

Notes to the financial statements

1. Corporate information

Ladbrokes plc ("the Company") is a limited company incorporated and domiciled in the United Kingdom whose shares are publicly traded. The principle activities of the Company and its subsidiaries ("the Group") are described in Note 3.

The interim consolidated financial statements of the Group for the half year ended 30 June 2011 were authorised for issue in accordance with a resolution of the directors on 4 August 2011.

2. Basis of preparation

(a) The directors consider that the Group has adequate resources to continue in operational existence for the foreseeable future and that it is therefore appropriate to adopt the going concern basis in preparing its financial statements.

(b) The Group's annual financial statements for the year ended 31 December 2010 were prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union. The interim condensed consolidated financial statements for the half year ended 30 June 2011 have been prepared in accordance with IAS 34 Interim Financial Reporting. The interim condensed consolidated financial statements do not include all the information and disclosures required in the annual financial statements, and should be read in conjunction with the Group's annual financial statements at 31 December 2010.

The accounting policies adopted in the preparation of the interim financial statements are consistent with those followed in the preparation of the Group's annual financial statements for the year ended 31 December 2010 except for commencing to amortise the customer relationships intangible asset and the adoption of new standards and interpretations as noted below.

There have been a number of new and amended standards and interpretations effective in the period, including IAS 24 Related Party Disclosures (Revised), IAS 32 Financial Instruments: Presentation (Amendment), IFRIC 14 Prepayments of a Minimum Funding Requirement (Amendment), IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments and the Improvements to IFRS (issued 2010), none of which have had a significant impact on the results or financial position of the Group.

In addition, the Group is currently assessing the impact of other new and amended standards and interpretations that are not yet effective, including IAS 12 Income Taxes (Amendment) - Deferred Taxes: Recovery of Underlying Assets, IFRS 7 Financial Instruments (Amendment) and IFRS 9 Financial Instruments - Classification and Measurement.

The interim financial information was approved by a duly appointed and authorised committee of the Board of Directors on 4 August 2011 and is unaudited. The auditors have carried out a review and their report is set out on page 32.

The financial information set out in this document in respect of the year ended 31 December 2010 does not constitute the Group's statutory accounts for the year ended 31 December 2010. The auditor's report on the statutory accounts for the year ended 31 December 2010 was unqualified and did not contain a statement under section 498 (2) or (3) of the Companies Act 2006. Statutory accounts for the year ended 31 December 2010 have been delivered to the Registrar of Companies.

(c) To assist in understanding the underlying performance, the Group has defined the following items of income and expense as non-trading in nature:

- profits or losses on disposal or impairment of non-current assets or businesses;

- unrealised gains and losses on derivatives and financial instruments;

- corporate transaction costs; and

- business restructuring costs.

The non-trading items have been included within the appropriate classifications in the consolidated income statement.

3. Segment information

Management has determined the Group's operating segments based on the reports reviewed by the Board of Directors to make strategic decisions.

The Group's continuing businesses are reported and measured according to the nature of the services provided and the Group's operating segments are aggregated into five reportable segments. The Group's reportable segments are:

- UK Retail: comprises betting activities in the shop estate in Great Britain.

- Other European Retail: comprises all activities connected with the Ireland (North and South), Belgium and Spain shop estates.

- Digital: comprises betting and gaming activities from online and mobile operations.

- Core Telephone Betting: comprises activities relating to bets taken on the telephone, excluding High Rollers.

- High Rollers: comprises activities relating to bets taken on the telephone from High Rollers.

The Board assesses the performance of operating segments based on a measure of profit before amortisation of customer relationships, interest and tax. This measurement basis excludes the effect of non-trading income and expenditure from the operating segments.

(1) Included within the profit before taxation and before and after non-trading items in the Digital segment is £1.3 million of amortisation relating to customer relationships which is excluded from the non-statutory operating profit measure.

3. Segment information (continued)

4. Non-trading items

Non-trading items relating to discontinued operations are shown in note 6.

5. Taxation

The total tax charge on continuing operations was £11.1 million (half year ended 30 June 2010: credit of £242.5 million).

The Chancellor, in the Budget on 23 March 2011, announced a further reduction in the main rate of corporation tax of 1% to 26%, in addition to the reductions announced in 2010. This legislation was substantively enacted on 29 March 2011. There will be progressive annual reductions of a further 1% until a rate of 23% is reached with effect from 1 April 2014. The deferred tax assets and liabilities at the balance sheet date are calculated at the substantively enacted rate of 26%. Whilst detailed calculations have not been prepared at this stage, it is estimated that the impact of the remaining annual corporation tax rate reductions would be to reduce the deferred tax liabilities by approximately £11 million and to reduce the deferred tax assets by approximately £7 million.

6. Discontinued operations

Profit/(loss) from discontinued operations comprises the following:

7. Dividends paid and proposed

An interim dividend of 3.90 pence per share (2010: 3.85 pence) was declared by the directors at their meeting on 4 August 2011. These financial statements do not reflect this dividend payable. The 2010 final dividend of 3.75 pence (£33.8 million) was paid in the half year ended 30 June 2011.

8. Earnings per share

Basic earnings per share has been calculated by dividing the profit attributable to shareholders of the Company of £60.9 million (30 June 2010: £321.8 million) by the weighted average number of shares in issue during the half year of 907.5 million (30 June 2010: 902.1 million).

The calculation of adjusted earnings per share before non-trading items is included as it provides a better understanding of the underlying performance of the Group. Non-trading items are defined in note 2 and disclosed in notes 4 and 6. 

9. Property, plant and equipment

During the half year ended 30 June 2011, the Group acquired assets with a cost of £17.4 million (half year ended 30 June 2010: £12.8 million).

Assets with a net book value of £0.9 million were disposed of by the Group during the half year ended 30 June 2011 (half year ended 30 June 2010: £0.4 million).

At 30 June 2011 the Group had entered into contractual commitments for the acquisition of property, plant and equipment amounting to £1.1 million (31 December 2010: £1.2 million).

10. Net debt

The Group's net debt is as follows:

11. Note to the statement of cash flows