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19 Nov 2009 07:00
Sportech PLC ("Sportech" or "the Group")
Interim Management Statement
19 November 2009
Sportech, the UK's leading football gaming business and owner of The New Football Pools, is today publishing its Interim Management Statement relating to the period 1 July 2009 to 18 November 2009 (as required by the UK Listing Authority's Disclosure and Transparency rules).
Overview
In line with its interim statement of 4 August 2009, the Board is pleased to report that the Group continues to build upon the strategic initiatives put in place to develop the business. The Board has maintained the Group's commitment to investing in new products, improving its technological capabilities and expanding distribution.
The Board continues to focus on cash generation and aims to deliver significant further reductions in overall net debt by the end of the financial year. Despite the challenging economic trading conditions facing the Group and the wider gambling industry, the Group expects to trade ahead of last year, albeit not at the growth rates previously anticipated.
In addition, good progress has been made in seeking growth opportunities in overseas markets and the Group is currently pursuing a significant acquisition which if successful would, the Board believes, generate significant long term value for shareholders.
Current Trading
The New Football Pools
Many key objectives have been met and this unique suite of products continues to develop as the highly cash generative core of the business. The Group continues to capitalise on the immense popularity of football by developing its products through its modernisation and revitalisation programme, as well as through the launch of new products and routes to market.
The integration of Vernons is nearing completion. The upgrading of the Group's previously underinvested core technical infrastructure is reaching a conclusion; a process that saw no disruption to customers despite a particularly challenging modernisation process. Trading has been resilient in the traditional direct to home customer market which now accounts for more than 70 per cent. of our weekly Classic Pools customer base, with gross win for the year to date on our core Classic Pools product at similar levels to last year. Customer attrition levels in the collector channel are continuing the recent trend and are running at the lowest levels since 1994. This is particularly pleasing considering the challenging times that many of our customers find themselves in.
This core element of the business continues to generate significant cash, enabling debt levels to be further reduced.
Online has registered its best performance to date in terms of new customer capture, with current active players since the start of the football season more than 40 per cent. ahead of the same period in 2008. This performance reflects the Group's continuing investment into its footballpools.com platform which the Board believes is an important element of its turnaround strategy; modernising its infrastructure and increasing accessibility to its products and services.
Despite the increase in active customers, trading in this online division has been softer than anticipated. The Board had hoped to recruit more customers and had increased the cost base to be ready for the new 2009/10 football season. We are confident that this is a temporary scenario and the continued investment in the online division has been essential to develop the suite of products, display mechanisms and technical third party integration capabilities that will drive increased customer numbers and revenue generation as we increase and broaden distribution channels for our products.
Progress in securing new distribution routes, both via new retail and online markets has been slower than anticipated in this difficult economic climate. However, the Board is pleased to have recently concluded arrangements with the State-owned TOTE Tasmania Pty Ltd and expects that a number of its products will be available to customers of this rapidly growing company in 2010.
E-gaming
The financial performance of the E-gaming division (comprising casino, poker, bingo and instant win) is expected to be ahead of last year, although in common with the E-gaming market generally, the Group's activities have not grown as quickly as anticipated. The Group considers that its investment in the partnerships with both 888 Holdings and GTech G2 has been essential to meet the medium term objectives and potential of the business.
Banking Facilities
At 18 November 2009, the Group has banking facilities of £99.75 million. Net debt stands at £81.5 million, prior to the seasonally high cash generative period to the year end.
As a consequence of the Group's desire to progress both organic and important strategic opportunities, combined with current trading, the Group is in discussions with its lending bank to increase the flexibility of its lending arrangements. Included in this discussion is a request for the amendment of one of the Group's three banking covenants, the leverage covenant. As part of the success of the turnaround strategy, the Group has dramatically reduced its leverage from 5.3x at 31 December 2005 to 3.5x at 30 June 2009 (on a last twelve months basis), and the bank covenant required a further reduction of this leverage of approximately 15 per cent by the year end. The Board believes that there is significant headroom to the two other key financing covenants (being cash flow and interest cover). The Group has had constructive discussions with its banking provider to date and fully believe that a conclusion will be made shortly.
Other Matters
The Group is in the process of reviewing the carrying value of a number of assets that it anticipates will lead to certain one off non cash accounting write offs, principally in respect of goodwill and intangible assets. This is expected to lead to a significant reduction in the taxation cash charge on the Group for 2009 and beyond, which is expected to offset significantly the softer than expected trading currently being experienced.
Earlier this year, the Group submitted to HM Revenue & Customs a claim for in excess of £40 million for the repayment of VAT overpaid in respect of the "Spot the Ball" game from 1979 to 1994. Interest may also be added to the principal sum claimed, if applicable. The Group's advisers remain in dialogue with HM Customs and Excise regarding this process.
Outlook
While general economic conditions remain challenging for Sportech and the gambling sector as a whole, improvements continue to be made in all of the key long term areas of operations and business development. The Group has continued to enhance its range of products, secured additional distribution and significantly enhanced its technological capabilities. The customer offering continues to improve and represents a strong base on which to build.
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For further information, please contact:
Ian R Penrose, Chief Executive
Sportech PLC Tel: 020-7268-2400
David Rydell / Emma Kent / Rosanne Perry
Bell Pottinger Financial Tel: 020-7861-3232
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