Kindred Group plc

Good morning, everyone, and welcome to our earnings call this morning for Q4 and year end of 2023. My name is Nils Anden.

I'm the CEO of the Kindred Group. Today, we are going to run through some of the highlights for the quarter, do a short business overview, talk a little bit about the Kindred sportsbook platform.

Then I will hand over to Patrick Kortman, our Interim CFO, to run through the financials for the quarter. And I will end up with a summary.

If we look at Q4 and 2023 as a whole, some of the highlights is, of course, very nice to see that we came in at an underlying EBITDA for the full year of GBP 204.5 million, which was in line with our 2023 financial guidance of at least GBP 200 million in underlying EBITDA. We saw a continued strong performance across our core markets here in Europe, and particularly solid growth in the casino segment.

And for Q4, it's very nice to see the proof of our scalability as a business, as our underlying EBITDA reached GBP 56.8 million, which is an increase of 45% compared to the same quarter in 2022. This would have come in at GBP 62.9 million, excluding North America.

It's also very nice to see the continued strong performance by Relax Gaming, which delivered an underlying EBITDA contribution of GBP7.4 million in the fourth quarter. After the end of Q4, we have also received a public cash offer of SEK 130 per share from FDJ.

This was unanimously recommended by the Board, and also received roughly 28% of irrevocables from key shareholders. If we go a little bit more in detail on the performance in Q4, we had continued strong performance in several key markets.

I think it's worth highlighting, particularly our 2 largest markets, Netherlands and U.K. continued to grow above market rates.

Revenue in total came in at just shy of GBP 313 million, which was 4% growth in constant currency. We also had an all-time high in absolute numbers of the locally regulated gross winnings, which came in at just shy of GBP 250 million for the fourth quarter.

This equated to 82% of gross winnings' revenue. As mentioned, our underlying EBITDA landed at just shy of GBP 57 million, which was a 45% increase.

The underlying EBITDA margin increased with 5 percentage points to 18%, and this was 21% excluding North America. We had a very positive free cash flow generation in Q4, with positive movements in our net working capital, and delivered a total of GBP 46.8 million in free cash flow.

Active customers for the quarter came in at 1.68 million, which was a decline of 8% compared to the same quarter in 2022. However, we had a sequential growth of 8% compared to Q3 2023.

The year-on-year decline is predominantly attributed to the fact that we had the World Cup in Q4 in 2022, which we know drives a lot of activity from a broader segment. At the end of Q4, the net cash was GBP 27.4 million.

If we look a little bit closer at the business, we can see that our scalability continues to help and improve as revenue increases and some of the cost optimization that we initiated during last year is really yielding results. As mentioned, we had an all-time high in absolute revenues from our locally regulated markets, and they are also the markets that are growing absolute quickest within our portfolio.

The total growth for our locally regulated markets was 16% for the full year of 2023, which can be compared to an underlying market growth of around 7% in those markets. As mentioned, we have proactively been working with the scalability for the group over the last couple of years, and this continues to improve and has to improve as we see our betting duties are increasing and have to be absorbed through efficient optimization of our underlying cost structure.

As mentioned, we had solid activity and we had a strong growth in number of active customers, particularly in the casino & games segment. The comparable is affected by the World Cup, which took place in Q4 last year, but we're very pleased to say that our casino & games active customer grew with 7% compared to Q4 in 2022.

We also saw a slight increase in ARPU, with about 11% increase compared to Q4 2022. We know this is predominantly driven by variations in margin across the quarters.

If we look at the product segments, we had a slight decline in gross winnings revenue from the sports betting segment. This was again driven by slightly lower level of activities compared to the same period last year, which again contained the World Cup.

We also saw some of the impact of the regulatory headwinds we've seen, particularly in Belgium and Sweden that influenced the group totals. If we look at the proportion of revenues coming from our proprietary racing product, they contributed to roughly 4% of the total sports betting gross winnings revenue in Q4.

As mentioned, we saw strong performance within the casino & games segment with an increase of 7%. This was driven predominantly by increased activity, particularly driven by the Netherlands and the U.K., our 2 largest markets.

Overall growth was supported by launch of both new game slots providers, but also a range of exclusive games that we managed to get out during Q4. Poker and other products grew with 17%, which was growth across pretty much all of the product segments that are contained within that category.

At the end of the Q4, we managed to deliver a sports betting margin close to long-term average. I think it's fair to say that the quarter started out very poorly in terms of margin.

As you can see on the scatter chart on the right, October was one of the lowest months we've had over the last 3 years, but it comes up and down, and I think it's fair to say that the majority of the months. This is a new chart, so please take some time to digest it.

We see now going forward and historically are trending above the 9.7%, which is our rolling long-term average. But as a whole, the margin for the quarter reached 9.9%, even though we had a very tough start to the quarter.

In terms of the regions, Western Europe increased by 6%. This was driven by the continued strength in Netherlands and the U.K., of course.

We have, as we have communicated throughout the year, continued regulatory headwinds in Belgium, where we also in Q4 saw a weak sports betting margin that impacted that performance. But as we've also mentioned earlier, now, in 2024, we are coming up to more normalized comparables for Belgium.

So, we are bullish on our growth opportunities in Belgium going forward. Fair to say Netherlands and the U.K.

are continuing to perform really strongly. Netherlands grew by 19% in local currency, and U.K.

continued to perform well above the market growth rate and grew by 17% in Q4.In the Nordics, we saw a slight decrease of around 7%, driven by the continued decline in Sweden, based on the operational changes we did, in line with the Swedish regulator throughout 2023. A little bit similar situation as in Belgium.

We are now in 2024 coming up to more comparable normalized levels. And again, we are very bullish on our outlook in Sweden as well.

We also saw, of course, the impact -- continued impact of the changes we'd done in the Norwegian market, where we currently are only passively accepting Norwegian customers. If we look across the other markets and regions, Central, Eastern and Southern Europe grew by 5%, especially driven by a very strong performance from the casino & games segments in Romania.

In the other markets, gross winnings increased by 6%. This was predominantly driven by North America, where we had an impacted performance in Q4 2022, where we saw a large win by a customer on the World Series of baseball.

As we communicated already in Q4, we are currently performing a controlled exit of our North American operations. This is continuing according to plan, and we aim to have that completed from an operational standpoint by the end of Q2 this year.

We have also given a little bit more color on the figures around this close down, and the expected one-off negative cash flow impact is estimated to be around GBP 15 million. As a whole, in Q4 2023, gross winnings reached around GBP 7.7 million.

This is an increase of 83%, but as mentioned, last year's or 2022 Q4 results were impacted by a large customer win. The underlying EBITDA for North American operations was a loss of GBP 6.1 million.

Again, a big improvement compared to Q4 2022, which was, of course, impacted both by higher marketing spend and the loss from that significant customer win on the World Series. We are very happy to say that our dedicated focus on our journey towards zero is continuing.

And the number for Q4 came in at 3.1%, and I think if you look at that graph, the trend line is very positive. And this is something we're continuing to work hard on and drive as a totality in this organization.

So, share of gross winnings revenue from high-risk players in Q4 came in at 3.1%, but we are very pleased to say that the improvement effects after interventions is now up to 87.4% in Q4. This can be compared to Q4 2022 where they stood at 82.1%.So, we're very pleased to see that the work we are doing is really paying off and it comes everything around shortening time from detection to intervention and our continued investments into scalable tools that are visible for the consumers and used in the right way.

I also want to call out that Kindred is organizing a Sustainable Gambling Conference on the 20th of March in London. So, please see further information around that on kindredplc.com.

As mentioned in the highlights, Relax is really going from strength to strength. In Q4, we saw a total revenue growth of 33%, while the underlying EBITDA contribution grew with 72%.

And we see this growth coming from both broader distribution in terms of markets and operators, but also some very successful game launches. We saw all-time high revenue in October after the launch of the highly expected and highly-rated Money Train 4, which has been one of the key features and games that Relax have launched.

In Q4, Relax launched 10 games, including 4 exclusive games for Kindred, which we value very highly. As mentioned, the underlying EBITDA came in at GBP 7.4 million, which represents a 49% margin of Relax total revenue.

As mentioned, it's driven by broad distribution both in terms of markets and operators. I'm very pleased to say that Relax launched into New Jersey in December 2023.If we look at the ongoing development of our in-house sportsbook, we're very happy to say that we are now live in production in the test market.

We have had continued solid progress on all the milestones that we've set up, where we had earlier communicated that we wanted to be live in production in a designated test market by Q1 this year. We have a full range of functionality already live in production, and the focus in 2024 is, of course.

start getting customers on to the KSP, which we will be doing from mid-February, where we will invite customers in to test the product and then throughout 2024 continue to deliver and ensure that the product experience is excellent and slowly but surely start rolling out in selected markets. If we look at some of the strategic rationales behind developing KSP, they still remain true.

It's about driving growth and scalability. The growth opportunity is really in our core markets by ensuring end-to-end product control that gives us enhanced rewards, toolkits to target the right players at the right time with the right promotion.

But it's also about being able to deliver a much higher degree of competitive differentiation, especially in a few of our core markets where we see a consolidation in terms of the product portfolio from our competitors. Last point to call out on that, I think it's a very important one.

It also gives us full control of price positioning, which enables really targeted local pricing in all our core markets. Of course, it also has a robust financial rationale, which gives us scalable OpEx as we look forward.

It's a favorable, effective commission and also gives us an opportunity to go out and get preferential supplier agreements with a lot of these big data suppliers that are required to operate a state-of-the-art sportsbook today. As mentioned earlier, we estimate a positive cash flow contribution in 2025, following last year's investment peak if you look at sportsbook as a totality.

With that, I'm going to hand over to Patrick Kortman to go through some of the key financials for the quarter.

Thank you, Nils, and good morning, everybody, also from my behalf. So, I'll run through the main financials for the quarter and starting off with the revenue.

Very pleasing to see a strong growth over the year. We reached above GBP 1.2 billion, which is a 13% increase year-over-year.

The Q4 was a solid quarter driven by strong performance in a number of markets as Nils have already highlighted before here. The revenues for the fourth quarter reached EUR 312.9 million.

That's actually the best quarter in revenues since Q2 2021. It represents a 2% increase year-over-year in reported currencies and 4% in constant currencies.

During 2023 for the full year, Relax Gaming represented approximately 3% of the total revenues. We continue the significant focus on cost optimization, and we also start now to see the improvements coming through in the numbers.

And that can be seen throughout the P&L. And if we start from the left-hand side with the cost of sales, we can see a significant increase or improvement in the cost of sales relative to the revenues.

For the full year, we had a 1.9 percentage point decline in cost of sales. This is, to a large extent, driven by Relax, but also efficiencies throughout our portfolio of suppliers, both game suppliers and payment solution providers.

In marketing costs, we continued to invest in marketing in Q4. We actually had the highest marketing investments in Q4 over the year.

But we still -- we start to see now improved scalability and efficiency on the investments made. And if you look at in absolute term numbers, we had a slight decline year-over-year in Q4, and that's predominantly driven by reduced marketing spend in North America.

In the salary line, we have seen an increase in the salaries, both in absolute terms but also in relative terms. But as of now, we expect the cost reduction initiatives that were announced in November 2023 to start bearing fruit.

We expect the salaries as a percentage of revenues to come down during 2024. And that's also expected to come down in absolute terms.

And other OpEx, we have seen a stable development in the cost in absolute terms and decline in relative terms as the business has continued to grow. I'm very pleased that we have reached the guidance that we gave for 2023 of at least GBP 200 million and coming in at GBP 204.5 million for the full year in underlying EBITDA.

This would have been around GBP 228 million when excluding North America, which represented an EBITDA margin of 19%. For the fourth quarter, we reached an underlying EBITDA of GBP 46.8 million, which is an EBITDA margin of 18%.

And excluding North America, the underlying EBITDA would have reached GBP 62.9 million with an underlying EBITDA margin of 21%. And the fourth quarter EBITDA, that represent an increase of 45% year-over-year.

For the full year, Relax Gaming represented 11% of the total EBITDA for the group. We continue to see headwinds.

On the FX side, this had a negative impact on the gross wins of -- or gross winnings revenue of approximately 2%. However, on an underlying EBITDA basis, we had a slightly positive impact from the FX.

But then again, on the profit after tax, it was slightly negative. We have had a good start to the year, and now with the sports calendar gradually building up.

For the first 35 days, we have seen an average daily gross winnings revenue, which is actually -- so it's the B2C element only, reaching GBP 3.21 million. And this is for the first 35 days.

This represents a 3% decline versus the average daily revenue for the full Q1 2023. And on a constant currency basis, it's in line with last year's comparatives.

Casino and other products is slightly up. That's actually difficult to see from the graph, but we have seen a slight decline in sports betting side.

And this is predominantly driven by lower sports betting margins, which came in at 9.5%, which is below the long-term average of 9.7% and especially the 9.9% that we reported for the full quarter -- full first quarter 2023. I think it's worth highlighting here that, of course, during the beginning of this quarter, we have had a winter break in the Premier League, and the Champions League and Europa League.

Knockout Stages starts only next week. So, we expect to see an increased activity.

We're now going into the latter part of the quarter. So, very exciting weeks and months ahead of us.

And with that, I welcome up Nils back on the stage.

Thank you, Patrick. So before we wrap up for potential Q&A, just a short summary, I think, from 2022, 2023 and looking ahead a little bit as well.

2024 for Kindred is really a year of dedicated focus. We know what we need to do.

We need to capitalize on the inherent market growth that exists in our core markets. We lifted the lid a little bit on this in the Q3 presentation, but we firmly believe we have a great opportunity to grow above market rate in our core markets.

This come down to, of course, a range of initiatives, but I think worth calling out a few of those. We see further untapped potential, especially in the casino product vertical.

We will, during 2024, see Kindred launch brand extensions across several of our key markets. We are also investing heavily into casino product launches to drive further exclusive content and product differentiation for us as a company.

If we look then secondly, around some of the work we're doing with our customer cohorts, it's really about ensuring that we can have truly optimized rewards strategies, excellent customer experience, while at the same time, navigating a complex regulatory environment, which needs also an excellent onboarding journey. These are the elements to be able to win in this industry.

With the exit of North America, we also have the potential now to accelerate the smart marketing investments we do into our core markets to further drive growth. And with KSP, further increase our product differentiation across our core markets.

I think it's also worth highlighting that some of the initiatives we announced in Q3 or in the Q3 report is really around operating model optimization. We have reorganized our entire commercial department.

We are reallocating resources to be able to drive core market growth while at the same time, of course, maintaining a very strict cost control so that we can hit the targets we have already communicated around underlying OpEx for 2024.In summary, Q4 and 2023 robust performance in some of our select core markets, and that is expected to continue. We have steady locally regulated growth, even though we've seen some headwinds in select markets.

The underlying EBITDA for 2023 came in, in line with target. So, we exceeded the GBP 200 million in underlying EBITDA, which we're very proud and happy about.

We have reiterated our full-year target for 2024 to reach GBP 250 million in underlying EBITDA. We continued the firm focus on efficiency and cost control, where, again, we have mentioned that we expect our operating expenses for 2024 to be around GBP 245 million.

We also, of course, continue to support and are very proud of the stellar journey that Relax Gaming is on and continue to show encouraging growth. Last, but absolutely not least, Kindred as an organization have a very firm focus going forward on growth initiatives to really deliver above-market growth in our core markets.

And as I mentioned, it comes down to increased focus on the casino vertical, building and enhancing our profitable customer segments, implementing operating model optimization that we have already started and, of course, continuing to build and deliver the Kindred sportsbook. With that, thank you for listening.

And we will now hand over for the Q&A session, and I invite Patrick back up.

Thank you. We'll take couple of questions from the web here to start with, and then we'll see if they're also on the webcast.

Some questions coming in. But the first one, and actually relates to the last bullet you had on the summary slide.

So with the new higher ambitions for 2024, will that require organic growth also of the organization, i.e., will there be needs for recruitments?

So, what we've said is we haven't guided on a number of employees in the organization but rather a total OpEx. And that is how we manage that internally as well.

It all comes down to optimization rather than cutting. I wouldn't be surprised that we start reallocating resources internally to ensure that we can really deliver on these growth rates.

But as mentioned, we reiterate that the underlying OpEx for the group in 2024 will be around that GBP 245 million.

Very good. And then we have one question regarding FDJ's offer, and it relates to regulatory approvals.

And the question goes, what regulatory approvals will be required for the merger with FDJ?

Do you want to take that?

Yes. I would say antitrust clearance is probably the main one, where especially France is in focus.

So that's in short. Thank you.

So with that, open up from questions from the webcast. Operator?

Congratulations, Nils, on the appointment as permanent CEO.

Thank you, Oscar.

So, my question would be on the sportsbook. So now you're planning to start inviting customers mid-February, and it seems like it's pretty much done at the moment.

So, I'm just wondering if you could elaborate a little bit on what's left in the development? And also, if you have any sort of planned rollout during 2024 and 2025 for the sort of bigger markets?

So, when we could expect that cost of sales coming down?

Yes, please?

Yes. I can start.

Yes. So we are, of course, starting to invite customers.

I think it's fair to say that the product that they will engage with is not the finalized product, especially when we look at kind of the bells and whistles around it, right? So, there is still a fair amount of development that needs to be done to ensure that it's really top of class.

This is the first initial tests we're running is just to make sure that everything is working as it should, bet placement, settlement times, everything around the real fundamental logics of the sportsbook. But we still have ways to go, and we have milestones that we need to hit throughout the year.

In terms of your second question, we haven't communicated the exact rollout plan. I think you'll have to wait a little bit for that.

But it is a phased rollout over the next 3 years, where we take market by market by market.

Yes. Sorry, you had a question also about cost of sales.

And, of course, as we start now gradually rolling out across our markets, that will also have a positive impact on the cost of sales. And we will see some benefits already in -- during this year, but especially then in the coming years.

Okay. So just a follow-up.

So, I assume that the development that you're talking about, that there's still some things to do on the technological side. I assume that's before migrating to the KSP in markets such as the U.K.

or the Netherlands, for instance, you would maybe have to have the full product ready? Is that fair to assume?

Or could you start rolling out even if you don't have all of the sort of products that you want to have long term?

No, I think it's fair to say, rolling out in a larger market, of course, requires that the product is as good or better than what we have today.

I hope you can hear me. I'm in the middle of traffic here.

But could you just elaborate a little bit on why you're not growing so far this year?

Sorry. Could you please repeat the question?

The line was a little bit bad.

Yes. Could you elaborate a little bit why you're not growing in the quarter so far year-on-year?

Okay, year-on-year. I think as I mentioned also, we are comparing the numbers against the full Q1 2023.

And during the quarter so far, we have had a winter break in Premier League, which is, of course, an element. The Champions League and Europa League Knockout Phase will start only next week, and that's obviously driving activity.

And also, we have had a weaker sports betting margin compared to the full Q1 2023. So, I think those are the factors.

We have seen a slight increase in the growth in casino and other segments during the first 35 days. But as always, the trading update period is a short snapshot and only gives an indication.

Yes. Okay.

And my second question is on your GBP 250 million target for 2024. How sort of back end loaded should we expect that to be in the second half compared to the first half?

Could you add -- any flavor on that would be helpful?

Normally, we have our strongest quarters in the end of -- in the second half of the year, especially Q4. So, that's normal cyclicality of the business.

Of course, this year, we also have the Euro's during the summer, which we expect to be a boost to the performance. That's a boost during the summer months, but also then with higher -- with the increased actives that we expect them to take with us for the second half of the year.

I think it's also fair to say that the cost initiatives that we are taking are not going to come with full force during the first half of the year. For instance, the close-down in North America will carry the cost for that during the first half, whereas we don't expect to have a, would say, from a loss perspective, a clean sheet in the second half.

So, I think it's fair to say with those that it's going to be more of back-heavy development.

Okay. And then I just had one final question.

You've been around in France for quite some time with your sportsbook. And now you have this bid from -- proposed bid from FDJ.

What are you hearing at the moment when it comes to potential online casino reregulation in France for the future?

Yes. A good question and something we're following closely.

I think there are perhaps more discussions happening now and during 2023 than we've seen historically. But there are no firm proposals.

I think we're still ways away from seeing a sort of tangible proposal if it happens. So, we're hopeful, but I think we're going to have to wait and see what the development looks like around a potential iGaming legislation in France.

I think that was the last question from webcast. So, I'll leave it for final concluding remarks.

Yes. So thank you, everyone, for listening in.

And we are looking forward to a very exciting 2024 for Kindred as a company, and we will check back with you for the Q1 report in end of April. So with that, thank you, everyone, for listening, and have a nice rest of the day.

Bye-bye.