Strategy Update

24 July 2015

Ladbrokes plc

Building a Better Ladbrokes - aggressive plan to grow our recreational customer base and build scale

Ladbrokes announces a three year, marketing led, plan to:

· aggressively grow our UK Digital recreational sportsbetting customer base, through more intense brand and direct marketing, to build digital scale and accelerate growth

· increase footfall in UK Retail, through increased sponsorship, marketing, investment in SSBTs and selective improvements to fabric, to improve OTC revenue and address performance

· deliver multi-channel revenue growth from our UK Retail and Digital customer base through investing in retail staff training and incentivisation, relevant offers and systems

· accelerate Ladbrokes Australia's revenue growth further through more intensive marketing and increasing headcount plans to grow market share

Specific objectives to demonstrate delivery by 2017(1):

Establishing a sustainable dividend policy

· Reflecting the investment programme, FY15 operating profit now expected to be c.£20m lower than the Board's previous expectation

· FY15 dividend 3p per share (1p interim); medium term dividend cover targeted at 2.0x underlying EPS

· Target gearing ratio of 2.5-3.0x net debt to EBITDA for FY15 returning to c.1.5-2.0x in the medium term

· Investment programme fully financed and supported by strong balance sheet

Jim Mullen, Chief Executive commented:

"Today I am announcing an aggressive three year investment programme to build our UK Retail, Digital and Australian recreational customer base. I also intend to restore our passion and pride of being at the heart of sportsbetting in our culture and all that we do. 

In the UK our focus will be on offering market-leading product in Digital, whilst on the high street, a focused reinvigoration of our shops and our people will re-establish Ladbrokes as the go-to sportsbetting experts. We see significant untapped opportunity for Ladbrokes to become a truly multichannel sportsbetting business where only 11% of retail customers currently also bet with us online. Our Australian business is a jewel - growing rapidly in an enthusiastic sportsbetting market and we intend to continue to support, and learn from, their innovation and growth.

Current trading shows how results have continued to favour our customers but the underlying customer metrics, on which we have built our strategy, provide strong support for this plan.

We will implement this programme responsibly with care for the interests of our staff and customers but this programme is urgent, overdue and essential if we are to build a more sustainable and valuable Ladbrokes. This plan is not without its challenges or impacts, particularly upon dividends in the short term, however I am confident that this time, it is deliverable."

Half year trading update

Trading for the half year ended 30 June 2015 demonstrates continued progress and the need for investment to accelerate progress

· UK Retail: OTC staking -5.2% (-2.5% ex World Cup); gross win margin 16.0% -0.4ppts; OTC net revenue -6.5%; Machines +8.4%

· Digital: Ladbrokes.com plus Exchanges net revenue -6.7% (Sportsbook -26.3% with staking +20.1% and margin at 5.2% -2.7ppts; Gaming +16.1%). Ladbrokes Australia +86.8%

· European Retail net revenue -2.1% (+1.7% ex World Cup). Ireland -9.2%; Belgium +8.6%

· Anticipate H1 2015 pre-tax exceptional items of c.£75-85m, mainly relating to impairment of the UK and Northern Ireland retail estate and Republic of Ireland Examinership. These charges are substantially non-cash

· Half year trading data represents the directors' best estimate of results for H1 2015, is unaudited and remains subject to review by the auditors

Enquiries +44 (0) 208 515 5513

Jim Mullen, Chief Executive

Ian Bull, Chief Financial Officer

Richard Snow, Director of Investor Relations

Donal McCabe, Group Communications Director

Presentation

We will be hosting an analyst presentation at the UBS, Ground Floor Conference Centre, 1 Finsbury Avenue, London EC2M 2PP from 8:30am (BST) today. A live webcast of the presentation, with slides, will be available at http://www.ladbrokesplc.com/investors and an audio feed is available by dialling +44 (0)203 427 1904 - pass code: 7832228. A recording of the webcast will be available, at the same location, on the same day. 

For further information on Ladbrokes plc, please visit our corporate website at www.ladbrokesplc.com.

LADBROKES - KEY STRENGTHS AND OPPORTUNITIES

Ladbrokes Brand Strength and Cash Generative Retail Business

Ladbrokes enjoys strong brand recognition in its key markets, a leading and strongly cash generative UK Retail bookmaking operation and a significantly improved Digital offer with innovative products for both Ladbrokes.com and Ladbrokes Australia which are delivering strong growth in the key mobile segment.

We have invested in our products and platforms over recent years and delivered improving customer metrics, in particular in Digital. Financial results, however, have been significantly affected by new taxes and regulation and recent results driven volatility reflects our lack of scale in recreational customers. Ladbrokes is now in a position where it must invest more aggressively in customer recruitment to enable it to compete on a more sustainable basis moving forward. 

Action Plan to Accelerate Growth

The three year investment plan we are announcing today is aimed at reinvigorating Ladbrokes' core businesses, Ladbrokes.com, UK Retail and Ladbrokes Australia in order to accelerate the development of our scale with recreational - or regular lower-staking - customers. In addition, in the UK, we are developing a multi-channel offer which will capitalise on our strength in UK Retail and maximise the value of our existing and future customer relationships.

Focused Investment to Secure Future Growth

This plan requires increased investment to create a more sustainable, growing business capable of delivering attractive returns for shareholders. This will inevitably impact profits in the short term but will create a business with a larger customer base and higher contribution from Digital products. 

Investment will be focused on our largest opportunities - Ladbrokes.com, UK Retail and Ladbrokes Australia. We will continue to pursue our existing organic development in other international markets to continue the diversification of our business.

BUILDING A BETTER LADBROKES

1. Building on our strength in UK Retail

· Ongoing financial pressure in retail

Ladbrokes UK Retail business retains a strong position on the high street with a leading gaming machine offer and continues to be the cash engine of the Group. In recent years, however, we have seen its relative financial performance weaken, primarily as a result of declines in sportsbetting revenue. 

The financial pressures on high street bookmakers have grown in recent years, with increased competition, higher taxes and increased regulation. Despite taking measures to improve efficiency, Ladbrokes will close c.60 shops this year and expects the industry to experience net closures of betting shops in the coming years. Despite this industry trend, sportsbetting in retail remains attractive to customers across all age groups. We may also make small numbers of targeted openings where we see local opportunities.

· Growing OTC and sustaining UK Retail

We will focus on improving the OTC business and, therefore, sustaining cash generation from our shop estate over the medium term.

· Focus on clear brand proposition and sportsbetting culture

Key to this will be establishing our core brand proposition so that we are clearly differentiated in the minds of consumers. An executive search is underway to appoint a new Chief Marketing Officer (CMO) with a brief to develop a consistent brand proposition. This will be promoted through a stronger marketing programme, utilising all marketing channels and sponsorship arrangements. There will be a strong focus on football, where we have underperformed competitors in growing staking levels in this higher margin product, along with maintaining our core racing product. There will also be an increased focus on recapturing Ladbrokes sportsbetting culture with all new recruits requiring a keen sports interest and improved regular staff briefings for existing colleagues.

· Investing in the shop environment to improve footfall

Our shop environment is an important factor in driving footfall. We have refined our shop estate over the past two years and, with only c.6% shops loss making (adjusted for Machine Games Duty at 25%), the vast majority of our estate is profitable at an EBITDA level. However, c.40% of our estate has had no investment for 10 years and we believe that this level of underinvestment is impacting footfall, particularly in competitive areas. We intend to invest c.£25-30m in improving our estate over the next three years focusing on where investment would improve performance in local markets and enhance the customer experience.

· Developing an effective multi-channel approach

We believe there is significant scope for actively cross promoting our Digital and Retail suite of products with a fully wifi enabled estate and only around 11% of our regular monthly Retail customers (c.1 million) betting with Ladbrokes.com. We intend to increase this proportion through a number of initiatives including: training and incentivising betting shop staff to become Ladbrokes' product advocates across all channels; by measuring Retail performance based on wider revenue generation than purely in shop; and by increasing the frequency of cross product offers.

· Extending our SSBT offer ensuring national coverage

Ladbrokes aims to become the UK's leading bookmaker for machine-based sportsbetting. We will grow our SSBT estate to c.6,700 by the end of 2015 an increase of c.5,000 on Q1 incurring capital expenditure of c.£8m. We have successfully grown high margin staking across our existing SSBT estate and expect SSBTs to gradually improve our gross win margins over time. SSBTs also allow our customers to bet in-play providing an option to monetise our Sky content offering in relevant shops.

· Demonstrating success

We will continue to drive gaming machine revenue, with an emphasis on lower stake (£2) games. Machine revenue per shop per week over time is expected to grow with consumer discretionary spend growth patterns unless further adverse regulatory changes are imposed. We will continue to focus on Retail head office costs and expect to make savings which will cover around a quarter of the cost of increased brand advertising.

Taking into account our initiatives, we are targeting revenue per shop in 2017 to be higher than in 2014 and for operating profit(3) ("EBIT") per shop in 2017 to be higher than in 2014 after adjusting for the increase in Machine Games Duty imposed on 1 March 2015 and assuming that no new adverse regulation or taxes are imposed on our UK Retail business.

2. Growing the recreational customer base in Ladbrokes.com

· Product development

Ladbrokes.com is delivering growth in recreational customer numbers and amounts staked in its mobile and tablet services. This is a result of its transition in December 2013 to the Playtech Mobenga platform along with its partnership with Chelsea Apps Factory to deliver a more effective, innovative and competitive product. Ladbrokes aims to build on this by transitioning its Desktop products to the Mobenga platform in time for the new EPL season to give our customers a consistent experience and to enable faster innovation across all digital channels. In Q3, we will also complete the transition to the next level of Playtech's customer management system (IMS), a key enabler for cross selling and customer acquisition. This will ensure that the Ladbrokes Israel team can most effectively invest our increased marketing budget and continue to drive growth in sportsbook and higher player value in gaming. This will result in us investing c.£10-15m more capital expenditure in product development, multi-channel systems and cyber security and to increase our operational expenditure as we increase headcount to support these initiatives and growth.

· Increased marketing investment

With the UK digital market continuing to grow rapidly (industry estimates c.10-15% per annum revenue growth (excluding National Lottery) for the next three years), it is essential that Ladbrokes increases its marketing investment above current levels in order to grow its customer base, benefit from continued market growth and build on recent success with its products. From the second half of 2015 we intend to increase marketing as a percentage of net revenue to over 30% for the remainder of 2015 and expect to maintain marketing intensity over 25% through 2017. We also intend to increase our spending on brand marketing. 

· Developing a multi-channel offer

Our position as a leader in UK OTC sportsbetting combined with a strong innovative digital offer gives us a clear opportunity to grow our customer base through a strong multi-channel product offer. We will invest in Retail staff training and incentivisation together with relevant technology to assist cross-selling products to digital and OTC customers. Our approach to the multi-channel opportunity, which will deliver additional customer revenue growth from our UK Retail customer base, is described in more detail below. We expect to incur c. £5m as capital expenditure supporting this initiative.

· Demonstrating success

We will demonstrate delivery of our plans through growth in Sportsbook and Gaming actives and staking. We intend to grow our Ladbrokes.com actives to 1.3m by 2017. Over the medium term we aim to consistently deliver revenue growth above the rate of market growth.

3. Maximising the Ladbrokes Australia opportunity

· Strong growth in revenue, targeting ongoing market share growth

Following the formation of Ladbrokes Australia and subsequent acquisitions of bookmaker.com.au and betstar.com.au, financial performance, in particular revenue growth, has been strong.

Australia remains an attractive sportsbetting market with high comparative spend per capita and strong growth expectations.

Our Australian team has developed into a proven and effective market challenger. They have driven growth through a continuous programme of product innovation and an effective marketing programme. The Ladbrokes brand is also widely recognised by Australian sportsbetting customers.

We intend to continue our challenger strategy led by a strong pipeline of new and enhanced products and effective marketing across all media. We intend to grow market share in Australia aggressively through increased marketing intensity and sponsorship/customer programmes focusing on growing our recreational customer base and also significantly investing in headcount to support revenue growth, product development and customer services.

· Demonstrating success

We will measure the effectiveness of our strategy by reference to revenue growth, actives and market share. We intend to at least double our Australian net revenue between FY14 and FY17.

4. Specific objectives for FY 2017(1)

5. Corporate responsibility

The betting industry has been subject to intense media and political scrutiny in recent years and Ladbrokes has played a key role in ensuring the industry sets high standards of corporate responsibility - particularly in the area of responsible gambling. We intend to maintain our momentum and leadership in this area.

6. Leadership team in place

Following his appointment in April 2015, Jim Mullen has appointed an executive committee comprising the senior executive team which reports to Jim and which is responsible for implementing our strategy across the Group. This wider team has been selected predominantly from the internal Ladbrokes team and has been widened to include the heads of trading and technology which are central to a successful sportsbetting business. One new role will be that of a Chief Marketing Officer for which an external search is already underway.

7. Cost efficiency

As the Group's resources are limited, it is essential that we identify any opportunity we have to fund our investments other than purely through lower dividends and higher debt. However, significant internal restructuring has taken place at Ladbrokes over the past three years with the centralisation of key functions and significant redundancies. The opportunity for material cost savings, therefore, is not significant but, as part of the wider Business Review, we have identified savings of c.£5-7m per annum which would be delivered from FY16 onwards and will be focused on non customer facing areas of our business.

RESULTS FOR HALF YEAR ENDED 30 JUNE 2015 AND IMPACT OF INVESTMENT PROGRAMME(4)

For the half year ended 30 June 2015, Group net revenue was up 1.3% to £585.4m (H1 2014: £577.8m) and up 4.2% excluding revenue from the 2014 World Cup with results continuing to favour our customers and margins remaining lower than last year most notably in the Sportsbook. 

Headline operating profit(4)(5) was £38.9m down 31.5% on H1 2014 reflecting the impact of newly introduced/increased rate on existing taxes on the Group and weakness in Sportsbook margins despite a better than expected performance in UK Retail machines and Digital Gaming. Cost trends were broadly in line with our expectations across the Group.

UK Retail net revenue was up 1.2% (+3.2% ex World Cup) with strong growth in machines net revenue (+8.4%) offsetting a decline in OTC net revenue of 6.5% (-2.5% ex World Cup). OTC staking declined by 5.2% with Q2 product trends broadly in line with those seen in Q1. Gross win margins improved in Q2 with more favourable sporting results than in Q1 but still remain below last year's levels and were 16.0% in the first half, down 0.4 ppts.

Digital net revenue increased by 6.9% (+12.4% ex World Cup) with strong growth in Australia (+86.8%) and a further improvement in the rate of Gaming net revenue growth in Q2. In Ladbrokes.com and Exchanges, net revenue declined by 6.7% reflecting weak sportsbook margins with sportsbook actives increasing by 2.3% (13.0% excluding the impact of the 2014 World Cup). Gaming net revenue grew 16.1% with Q2 at +19.1%, faster than Q1 which showed growth of 13.0%. Sportsbook staking increased by 20.1%; (mobile +64.9%). Sportsbook margins were lower at 5.2%; (-2.7 ppts year on year) with Q2 margins improving on Q1 but still at levels well below last year.

In European Retail, net revenue declined 2.1% with Ladbrokes Belgium increasing by 8.6% and Ireland net revenue declining by 9.2%. Our business in the Republic of Ireland remains in Examinership. We have been selected by the Examiner as the preferred partner to create a viable business with a smaller estate. We expect this process to conclude in Q3 2015.

Excluding the impact of the investment programme announced today and assuming that sporting results and margins return to historic averages, the directors expect an outcome for the current financial year in line with their previous expectations. 

Taking into account the investment programme, the directors estimate that operating profit(4)(5) would be c.£20m lower and, therefore, operating profit(4)(5) for the 2015 financial year is now expected to be lower than our expectations earlier in the year. Our plans also envisage investment running somewhat ahead of returns in FY16.

For the half year ended 30 June 2015, pre-tax exceptional items of c.£75-85m are expected, substantially relating to impairment of the UK and Northern Ireland retail estate and the Examinership process in the Republic of Ireland. These charges are substantially non-cash.

At 30 June 2015, net debt was £414m and capex for the half year was £27m.

FUNDING OUR INVESTMENT PROGRAMME, CAPITAL STRUCTURE AND DIVIDEND POLICY

Ladbrokes plc has total debt facilities provided by both institutional and retail debt capital markets and banks of around £730m. Average debt maturity is c.3.5 years.

Based on current market forecasts, the investment programme is expected to result in gearing (net debt/EBITDA) being well ahead of the Group's stated 1.5-2.0x policy. The Board believes that it is appropriate to allow gearing to rise during the investment programme and that we have sufficient headroom and sources of finance including bank facilities to deliver our investment programme. Subject to completion, the c.9.99% equity placing announced today to support the Group's balance sheet following the proposed merger with the Coral Group would reduce gearing by c.0.5x net debt to EBITDA. Over the medium term, we expect that the Group will return to gearing ratios of 1.5-2.0x net debt to EBITDA by 2017. In addition, we have committed to £10-15m of aggregated cost savings.

Taking into account the impact of the Group's investment programme, the Board no longer considers it appropriate to maintain dividends at 8.9p per share for the current financial year. The Board now intends to declare a total dividend of 3p per share for FY15, including an interim dividend of 1p for FY15. The reduced dividend will be reinvested to finance the investment programme.

The Board intends that future dividend payments will remain at this level until dividend per share, determined on a two times underlying EPS policy, would result in a higher payment to shareholders. This policy is intended to ensure that dividends are sustainable during the investment programme and that dividends will return to progressive growth in the medium term.

Lower dividend payments and the cumulative savings, net of costs, from the cost savings programme generates c.£150-155m for reinvestment on the investment programme to end of 2017. This is being spent in increased digital operating expenditure (c.£85m over FY15-FY17) and increased marketing intensity; increased UK retail marketing expenditure and a £45-55m increase in capex across UK Retail and Digital as described above. Based upon our current expectations, the investment programme impacts operating free cash flow in each of the next three years with the largest impact being in FY 2016.

QUARTERLY TRENDS TABLE(4)

Notes:

(1) Assuming no imposition of new material adverse taxes or regulations, excludes High Rollers.

(2) Excludes revenue from greyhound tracks.

(3) Excludes greyhound tracks, associate income and exceptional items.

(4) Excluding High Rollers. Year on year performance except where stated.

(5) Profit before tax, net finance expense and exceptional items. Stated after amortisation of customer relationships and other acquisition related intangible assets. Includes depreciation and amortisation of £39.1m in 15H1 and £37.4m in 14H1.

(6) In order to provide a relevant comparative, FY14 quarterly EBIT has been adjusted to reflect impact of externally imposed headwinds - UK point of consumption tax, increased Machine Games Duty (from 1 March 2015) and our withdrawal from unregulated digital markets in line with the guidelines of the UK Gambling Commission as if they had applied in FY14.

(7) Includes depreciation and amortisation of £15.8m in 15H1 and £13.6m in 14H1.

IMPORTANT NOTICE:

This announcement has been prepared for the purposes of complying with the applicable law and regulation of the United Kingdom and the information disclosed may not be the same as that which would have been disclosed if this announcement had been prepared in accordance with the laws and regulations of any jurisdiction outside of the United Kingdom.

No person has been authorised to give any information or to make any representations other than those contained in this announcement and, if given or made, such information or representations must not be relied on as having been authorised by Ladbrokes. Subject to the Listing Rules, the Prospectus Rules and the Disclosure and Transparency Rules of the Financial Conduct Authority, the issue of this announcement shall not, in any circumstances, create any implication that there has been no change in the affairs of Ladbrokes since the date of this announcement or that the information in it is correct as at any subsequent date.

This announcement may contain certain forward-looking statements, beliefs or opinions, with respect to the financial condition, results of operations and business of Ladbrokes.

These statements, which contain the words "anticipate", "believe", "intend", "estimate", "expect", "may", "will", "seek", "continue", "aim", "target", "projected", "plan", "goal," "achieve" and words of similar meaning, reflect Ladbrokes' beliefs and expectations and are based on numerous assumptions regarding Ladbrokes' present and future business strategies and the environment Ladbrokes will operate in and are subject to risks and uncertainties that may cause actual results to differ materially. No representation is made that any of these statements or forecasts will come to pass or that any forecast results will be achieved. Forward-looking statements involve inherent known and unknown risks, uncertainties and contingencies because they relate to events and depend on circumstances that may or may not occur in the future and may cause the actual results, performance or achievements of Ladbrokes to be materially different from those expressed or implied by such forward looking statements. Many of these risks and uncertainties relate to factors that are beyond Ladbrokes' ability to control or estimate precisely, such as future market conditions, currency fluctuations, the behaviour of other market participants, the actions of regulators and other factors such as Ladbrokes' ability to continue to obtain financing to meet its liquidity needs, changes in the political, social and regulatory framework in which Ladbrokes operates or in economic or technological trends or conditions. Past performance of Ladbrokes cannot be relied on as a guide to future performance. As a result, you are cautioned not to place undue reliance on such forward-looking statements. The list above is not exhaustive and there are other factors that may cause Ladbrokes' actual results to differ materially from the forward-looking statements contained in this announcement. Forward-looking statements speak only as of their date and Ladbrokes, its parent and subsidiary undertakings, the subsidiary undertakings of such parent undertakings, and any of such person's respective directors, officers, employees, agents, affiliates or advisers expressly disclaim any obligation to supplement, amend, update or revise any of the forward-looking statements made herein, except where it would be required to do so under applicable law.

You are advised to read this announcement for a further discussion of the factors that could affect Ladbrokes' future performance. In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements in this announcement may not occur.

No statement in this announcement is intended as a profit forecast or a profit estimate and no statement in this announcement should be interpreted to mean that earnings per share of Ladbrokes for the current or future financial years would necessarily match or exceed the historical published earnings per share of Ladbrokes.

Certain figures contained in this announcement, including financial information, have been subject to rounding adjustments. Accordingly, in certain instances, the sum or percentage change of the numbers contained in this announcement may not conform exactly with the total figure given.

Except as explicitly stated, neither the content of Ladbrokes' website, nor any website accessible by hyperlinks on Ladbrokes' website is incorporated in, or forms part of, this announcement.