Kindred CEO on 2019’s results, tax hikes and business restructuring

Kindred Group has reported a 5% dip in Q4 revenues to £236.2m with regulation in Sweden and across Europe cited as reasons for the poor results. Despite this, CEO Henrik Tjärnström told EGR that he “remains optimistic for the future” and that 2020 will be a year of growth for the business. Tjärnström discusses a difficult 2019, a hopeful 2020 and how silver linings for Kindred are emerging amid the darkening clouds.

EGR Intel: How much of the group’s lower Q4 performance is based on the tax impact from the French market? Was this anticipated or unexpected?

Henrik Tjärnström (HT): The combined effect of a lower sportsbook margin and the French tax situation was about £14-15m. About half of that total was due to the French tax impact.

It is the nature of a turnover tax system. When there is a period of lower margin and the customer is winning then it leads to increased turnover and, in turn, an increase in taxes without generating that much revenue. In that sense, it is not unexpected.

Now we are changing to a tax on revenue system, there is still a 54.9% tax on revenue, which is a significant tax.

EGR Intel: How has the switch from turnover tax to GGR in France affected the group?

HT: That has already happened and it will be more obvious over time. We don’t anticipate that much of a positive impact but it is still quite a high tax rate.

EGR Intel: What other temporary factors played a part in the group’s lower than expected performance?

HT: None really. The Swedish regulation has been a topic throughout the year and then there are the headwinds in certain markets which arrived in 2019. None of them are unusual in the grand scheme of things, it is just that more than one came in the same year and it exacerbated the impact.

It is not uncommon for us and it is a normal part of business. What we try and do in these situations is to address these challenges and come up with rectifications, implement those and come out in a better position.

EGR Intel: In which ways are you using regulatory headwinds to your competitive advantage?

HT: Smaller operators which don’t have the bandwidth and expertise that we have struggle to address these challenges and as a result they can fade away. That implicitly becomes a competitive advantage for us.

EGR Intel: In Sweden, how do you foresee the regulation having an impact on operators in the market?

HT: We have seen that the expected trend in Sweden was always that we would have a significant margin pressure during Q1 and it probably was a little bit bigger than we anticipated.

We anticipated that the market would grow 20% year-on-year, but it has rather become a shrinking market year-on-year, which came as a bit of a surprise. I think the channelisation has had a role to play in that as well.

We are looking to all the adjustments we can make when it comes to the brand, marketing, communication, products and how the teams works. All the stuff we do, we are looking at how we can tweak it. I am confident that it has had some effect and that the competition is declining all the time which gives us a positive trend. This is perfectly normal when barriers go up that the small operators come under water and the market share will return to larger operators like ourselves.

EGR Intel: How have restrictions in the Dutch market affected your performance?

HT: In the Netherlands, the implementation of restrictions has been gradual since 2012. In February 2019, we had the removal of online payment method iDEAL which was another step in that direction. That has affected our performance and we are working very closely with the regulator and the government so that the system comes live as soon as possible to ensure high channelisation from day one.

EGR Intel: Do you think the tax hike in Denmark from January 2021 will affect Kindred’s presence in Denmark considering Betsson’s Betsafe brand has already pulled out of the market due to the proposed tax hike?

HT: The tax hike is still proposed for January 2021 so we will of course do everything we can to bring our expertise to Denmark when it comes to the implications of a blanket increase on taxes from 20% to 28%.

It will not be good for channelisation and we have not given up on that yet but of course we are evaluating our marketing and brand position in Denmark as a consequence if there is increased margin pressure.

Basically, when the barriers are lifted as is being done in Denmark now then it leads to reduced competition.

This isn’t going to affect our position in the Danish market, it is more about how we now approach the market. We are really committed and seeing good opportunities in Denmark all the time so nothing is changing there.

We are proud our brand @32red has teamed up with @dcfcofficial and @WayneRooney to promote responsible gambling messages. The industry have an important role to play in tackling problem gambling. Watch this: https://t.co/Ou5KB90wgH #WayneRooney #32red #stayincontrol pic.twitter.com/JIOajJv64X

— Kindred Group (@KindredGroup) January 1, 2020

EGR Intel: Would you consider reducing employee headcount if the business’ poor performance continues or costs increase in the future?

HT: I think we have to be very mindful of that but of course we are trying to find a good balance between post-optimisation and growth optimisation. We also have a lot of things that we want to do to give the customers the best possible experience in a secure environment.

We have to keep this in mind that there’s a correlation and we would rather do what we did in 2019 when we put the brakes on growth after Q2 and then we controlled that rather than getting involved in headcount reduction.

It is something we have to evaluate as we go along. In an extreme scenario where we would be affected then of course it would be inevitable.

The US is a good example as we have been looking at rebalancing the headcount. As we have been growing the team in the US up to 35 heads, we have also managed to do that with the headcount in development so that is a very good sign that we can balance the headcount.

It is partly because we have seconded people from Europe into the US business and of course we have natural attrition.

EGR Intel: What will the review of the brand portfolio encompass and the geographic review?

HT: In Spain, for example, we originally decided to focus on other markets at the time from a brand perspective. We have also reduced a number of brands and launched organic brands and that is all part of the natural ecosystem of building a multi-brand portfolio.

EGR Intel: Do you see yourself having to exit any markets?

HT: The best antidote for the developments we saw in 2019 is to return to growth. This is our top focus and we believe we have good opportunities for that.

2020 is of course a big sports year with the Euro Championships and the Olympics, along with the peak season in Q1 and Q4. We are optimistic about the future and expect 2020 to be significantly better than 2019.

EGR Intel: Is Kindred done with bolt-on acquisitions because of a lack of targets? Is it more about organic growth now?

HT: We are looking across the business and are constantly evaluating different opportunities. We have been investing in the US, which is a big project, and we have every reason to believe that it will be a good opportunity for us and our shareholders.

We are also looking at M&A and we’ve had acquisitions as an important part of our growth story and I am convinced that they will continue to be so. It is also a question during 2019 with the regulatory development, so we have been quite selective on what we go with.

EGR Intel: What is your strategy over the next 12 months in terms of growth, new markets etc?

HT: We tend to keep that to ourselves as you would expect. We are clearly working on improvements every day. Whatever we can do to improve UX and the customer experience and the usability. We have been putting a lot of focus on mobile over the last 10 years and that is still very much the case when it comes to developments now.

The US is for sure our new market as we just announced our partnership with Caesars which could take us into six states. Starting with Indiana and Iowa, this is the most logical step of our expansion plan to take us eventually into four states and beyond. We are confident we have a good opportunity over there.

EGR Intel: Do you have any new product releases planned over the next few months?

HT: We are continuing to work on that and when we have something we will launch. We have had 98% payback on certain slots in Sweden and that just highlights what we can achieve when we work closely with our suppliers.