Board of Director's Annual Report

Summary of financial results for 2018

Norsk Tipping is delivering on its role in society by offering its customers attractive games in a responsible setting, and has achieved an even better result than in 2017, which was also a record year. The company offers attractive games to more than two million customers and distributes its profits, amounting to NOK 5.5 billion, back into the community.

The conclusions of the Norwegian parliament following its consideration of the parliamentary report “Alt å vinne - ein ansvarleg og aktiv pengespelpolitikk” (Everything to gain – a responsible and proactive gaming policy), provide clear guidelines in support of the company’s future focus. The parliamentary debate provided greater clarification of the objectives of Norway’s gaming policy, in which a focus on responsible gaming is assigned the greatest weight. The report is based on the principle that the regulation of gaming activities involving Norsk Tipping as a monopoly company provides for a greater degree of responsible gaming than a licence-based model, and that this consideration supports the continuation of the state monopoly model.

The fact that profits from gaming are as far as possible used to fund charitable causes remains a secondary consideration. This acknowledges Norsk Tipping’s role in society and provides key guidelines going forward.

In 2018 Norsk Tipping modified its visual identity by changing the company logo and introducing other design elements to its profile as presented on both physical and digital media. The new company logo is a descendant of the former version, but is perceived as being more contemporary. It increases Norsk Tipping’s scope for visual communication, both for individual products and the company as a whole.

In the second half of the year the company implemented a comprehensive restructuring of its organisation. The change was the result of the company’s need for improved interaction and greater process agility, with the aim of placing it in the best position to achieve its strategic objectives. Prior to these changes, company employees were deeply involved in the process of assessing the current situation and future needs.

In order to meet our objective that gambling should be carried out in safe and secure settings under state supervision, it is crucial that the regulated market remains the gambler’s preferred choice. In 2018 the company achieved a milestone in that for the first time more than two million customers played at least one of Norsk Tipping’s games. Twenty-eight per cent of our customers are under 40 years of age. This demonstrates that the company is delivering on its ambition to inspire a new generation, and boosts the positive trend by which the majority of gamblers in Norway play on Norsk Tipping’s games.

The company's total operational revenues increased from NOK 35 billion in 2017 to NOK 38 billion in 2018. As a result of different prize distributions and high levels of reinvested winnings for some of the company's games, financial results are assessed in terms of gross gaming revenues (gaming revenues minus winnings), which is a better measure of the scale of gaming activities. Gross gaming revenues increased from NOK 7.8 billion in 2017 to NOK 8.1 billion in 2018, representing an increase of 3.9 per cent. Together with the effect of reduced costs, this resulted in a growth in profits from NOK 5.25 billion to NOK 5.52 billion, an increase of 5.2 per cent on the previous year.

In 2018, the lottery games accounted for the greatest increase in terms of gross gaming revenues, exhibiting growth of NOK 230 million on the previous year. There is no doubt that players are attracted to big prize pots. We also continued to experience growth in online games, which is an area where we are facing strong competition from the unregulated market. Norsk Tipping’s products are distinct from those offered by the unregulated market which uses what we call the “no thanks list” – a series of aggressive measures that the company deliberately elects not to use. Such measures are incompatible with our aim of preventing the negative consequences of gambling. Norsk Tipping is also distinct from the unregulated market in that it operates with mandatory stake and loss restrictions, designed to promote responsible gaming, that limit the losses that an individual player can incur.

Lottery games account for the largest proportion of sales and represent 64% of the company's gross gaming revenues for 2018. The lottery games are regarded as carrying a lower risk of gambling problems than other games categories. A broad portfolio of lottery games is thus an important means of promoting the highest possible levels of responsible gaming. Lotteries are also attractive among players younger than 40. In 2018, more than 90 per cent of these players took part in lotteries.

Percentage growth in 2018 for online games was also significant, although the rate of growth is slowing somewhat. In 2018, revenues from this category increased by 16 per cent, compared with 37 per cent in 2017. The unregulated market engages in extensive marketing activity linked to online games whereas, in contrast, Norsk Tipping restricts its marketing in this category in order to protect vulnerable groups. Norsk Tipping’s growth in sales in this area indicates that the company is succeeding in diverting gambling activity from this segment into the regulated market, although the company does not enjoy a dominant share of total sales in this category. The authorities have signalled the introduction of additional measures with the aim of restricting the opportunities that the unregulated market has to offer its gaming products in Norway. This will contribute towards reinforcing the aforementioned channelling effect.

In recent years, a steadily increasing share of revenues from the company’s games has migrated from our sales agents and onto digital media. This trend has continued during 2018 and indicates that the systems that enable gaming via digital channels are becoming increasingly important in maintaining customer contact and promoting sales.

In 2018, sales linked to traditional gaming products on digital media amounted to NOK 8.4 billion, compared with NOK 6.9 billion in 2017. This constitutes growth of 21 per cent, compared with 11 per cent in the previous year. The growth in sales from digital media contributes towards greater cost efficiencies for the company in the form of reduced sales commissions, but also places increasing demands on the capacity and functionality of the digital systems. Advancing developments in digital media technology will thus continue to be an important area of focus for the company.

The Grasrotandelen (Grassroots Share) provides players with an opportunity to influence how some of Norsk Tipping's profits are distributed. Changes to the workings of the Grassroots Share system came into force from 1 January 2018. The biggest change is that the pay-out share was increased from 5 to 7 per cent, which resulted in a major increase in pay-outs. In 2018, players distributed NOK 648 million to clubs and associations via the Grassroots Share, compared with NOK 455 million in 2017.

The company relies on predictable and stable operations in order to remain accessible to its customers. For this reason, it gives us great pleasure to report that the company experienced no major system downtime in 2018. The volumes of traffic linked to the company’s distribution channels in connection with stake submission deadlines and draws are very significant, and this places great demands on system functionality and stability. Stable operations provide security both for the company and its customers, and are important for maintaining confidence in Norsk Tipping and in our good name.

Responsible gaming

An important aspect of Norsk Tipping’s role in society is prevention of the negative consequences of gambling in Norway. For this reason, the company has an ambition to become a world leader in the promotion of responsible gaming. In 2018 Norsk Tipping made even greater strides in consolidating its efforts to prevent gambling addiction by increasing the internal resources it dedicates to this field, and by investing more funds into research into the impact of the measures introduced by the company.

In October 2016 Norsk Tipping launched a new and ground-breaking loss limit system. In doing so, it became the first gaming company in the world to adopt loss limits for all its gaming products. All customers who play risk-based games are required to set their own maximum loss limits. This provides players with increased awareness and a better opportunity to govern their gaming behaviour. As well as everyone having to set their own personal limits, there is also a maximum limit for how much any individual player can lose in the course of a month. Research shows that players are positive to the loss limits concept and that it results in reduced losses for high volume players.

Proactive telephone conversations represent a key preventive measure, in which Norsk Tipping is a world leader. These conversations take the form of telephone conversations with players who exhibit high-risk gambling behaviours or who have incurred significant losses. During the conversation, a customer will be informed about the level of his or her stakes during the previous year, and about possible measures that he or she can take to limit their gambling activity. If a player expresses a wish to reduce the level of his or her gambling, specific measures can be agreed. If it emerges from the conversation that the customer has gambling problems, he or she will be given information about services offering help and treatment. The company currently employs three people who are dedicated full-time to conducting these conversations. Research shows that the proactive conversations have a positive effect and, in 2018, Norsk Tipping received the World Lotteries Associations Responsible Gaming Flagship Award for its work in developing these proactive conversations.

Costs

Both the Board and owners are directing greater focus on how the company can best fulfil its role in Norwegian society. This entails not only aiming to maximise profits, but also to carry out its operations cost-effectively.

Profits distributed to good causes in 2018 constituted 68 per cent of Norsk Tipping’s gross gaming revenues. This is an important key figure in terms of company expenditure over time, and the current trend is that a steadily increasing share of gross gaming revenues is being distributed to good causes. Total costs, measured in nominal currency, remain relatively stable, with a small increase in 2018 as a result of one-time expenditures linked to changes made to the company’s visual identity. The main reason for improved cost-efficiency is that the company has succeeded in enabling access for those customers who wish to play games using digital media. These media trigger lower levels of commission expenditure than traditional physical media. In 2018, revenues from gaming commissions were NOK 55 million lower than in the previous year.

There has been a growth of NOK 128 million under the item ‘other operating expenditures’ compared with the previous year. Of this, one-time expenditures linked to the change in visual identity amounted to NOK 70 million, such that underlying growth came to NOK 58 million, representing an increase of 4.6 per cent. Innovation and development, together with increased levels of marketing activity, have resulted in higher levels of expenditure in 2018 than in 2017.

Balance

At the close of 2018 the company's accounts revealed a total balance of NOK 5.7 billion and an equity ratio of 6.4 per cent. This can be compared with corresponding figures of NOK 6.3 billion and 5.7 per cent for 2017. As of 31 December 2018, the company's unrestricted equity amounted to NOK 214 million.

The low equity ratio must be seen in the context of the company's special situation by which the year's activities accumulate a profit that is distributed during the following year. On the date of distribution to profit recipients, equity is consolidated as a result of activity taking place during the following year.

In the short term, there is relatively little uncertainty linked to the company's future finances. Norsk Tipping's status as a 'statutory company' operating within a predictable regulatory framework means that it has adequate equity reserves and a satisfactory financial position in spite of the low equity ratio figure. In the opinion of the Board this situation will continue to apply in the short term.

Cash flow statement

Gaming revenues represent the company's most important source of cash flow. Following deductions for prizes, gaming revenues have increased by NOK 0.3 billion compared with the previous year. In 2018, net cash flow from operational activities amounted to NOK 5.8 billion, compared with NOK 5.6 billion in 2017. At year end, the company’s cash reserves were NOK 0.5 billion lower than at the previous year end. This is due primarily to the payment dates of advance profit pay-outs to profit recipients.

Financial risk

Norsk Tipping conducts certain transactions, and holds a limited amount of reserves, in foreign currencies. This exposes the company to a certain level of financial risk. The largest transactions are linked to winnings associated with games operated in collaboration with state gaming enterprises in other countries. The company also operates with a credit risk linked to settlements with its sales agents. Settlements for the preceding week's sales are paid during the succeeding week by means of automatic withdrawals. Guarantee and deposit arrangements have been established that considerably reduce this credit risk. The company continuously monitors the status of its outstanding receivables, and measures designed to reduce losses in the event of non-payment are implemented immediately. The company has not incurred any significant losses linked to sales agent-related receivables in 2018.

The liquidity situation is satisfactory since the company generates significant disposable funds by means of its day-to-day operations. At the turn of the year, the company's holdings in terms of bank deposits, cash reserves and suchlike amounted to NOK 5 billion. The greater part of this has been transferred to the company's account in the form of sight loans at the Norwegian Central Bank. The company believes that the levels of uncertainty linked to its financial status next year are relatively low.

Going concern assumption

In the opinion of the Board, the annual accounts and annual report provide a true picture of the company's financial status and activities at the close of the year.

Preparation of the annual accounts is based on the going concern assumption. The Board is not aware of any significant factors that have emerged or events that have occurred during the accounting year, or subsequent to the close of the accounting year, that impact on the going concern assumption or the annual accounts.

Research, development and innovation

Norsk Tipping does not carry out its own research and development activities as defined in the Norwegian Accounting Act (regnskapsloven). However, the company continues to involve itself in development activities in several fields linked to innovation and development in connection with its products, systems and services. At any one time it is estimated that more than 30 per cent of the company's employees are working on development projects.

The company is aiming to become a world leader in the promotion of responsible gaming. To achieve this, it has entered into collaborations with a number of research centres with the aim of developing know-how in this field. The results from this research form the basis of advances in measures that the company takes to promote responsible gaming.

In 2017, the company established a new IT development process based on the Scaled Agile Framework (SAFe). This new approach permits a greater proportion of development activities to be completed with the assistance of agile work processes. This contrasts with previous practice which primarily involved the initiation of large projects. This approach accelerates the rate of innovation so that it now takes less time from the identification of a need to the development and implementation of solutions to meet the need.

A large proportion of activities carried out during 2018 was linked to the implementation of the company's new visual identity. This entailed a comprehensive make-over of Norsk Tipping’s image as presented in digital media, combined with the replacement of design elements used to promote the company at many our sales agents’ outlets. The roll-out of changes at sales agents’ outlets will continue during the first six months of 2019.

In 2018, 52.5 per cent of the company's gross gaming revenues were obtained via digital media. The development of a common, integrated system for PCs and mobile phones was launched in 2017 and this process has continued during 2018. In the future, a shared code base for all our digital platforms will enable the company to release resources for the further development and simplification of both operations and future advances.

In 2018, the company entered into several collaborative arrangements with other European gaming enterprises. The aim of these collaborations is to develop new and attractive digital games that the enterprises can launch in their respective markets.

Future prospects

Norsk Tipping is by far Norway’s largest gaming company, with an estimated share of 64 per cent of the entire gaming market. The unregulated market has a share estimated at 16 per cent. Even though Norsk Tipping enjoys a solid position overall, the unregulated market represents significant competition, in particular in the online gambling and live betting segments. In recent years, the authorities have launched new measures with the aim of restricting sales growth in the unregulated market, and the overriding conclusion from the 2017 Parliamentary Report “Everything to gain – a responsible and proactive gaming policy” is that the monopoly model should be continued.

In order that Norsk Tipping shall adhere to its aim to channel people’s desire to gamble in responsible settings under state supervision, it is very important that the company is able to respond to the competition presented by the unregulated market. This will be an important consideration for the company during the coming period.

Norsk Tipping will thus continue to expand the development of its products and systems in line with its role in society to provide access to attractive and responsible gaming activities from which the profits go to support good causes. Development will take place both on the company’s own initiative and in collaboration with other players in the regulated market who are facing similar challenges.

Social responsibility

Norsk Tipping wishes to contribute towards the development of a positive and sustainable society. The company’s understanding of social responsibility focuses on how the company evaluates both the risks and opportunities linked to its work to contribute towards long-term wealth creation. Its work in this field is based on its social responsibility policy and associated guidelines. In 2017, Norsk Tipping chose to direct greater focus on its work to promote social responsibility.

Responsible gaming is the core concept that drives the company’s work in relation to social responsibility, which also includes a focus on business ethics, anti-corruption measures, human rights and the environment. Norsk Tipping has also identified two new areas of focus – equal opportunity and public health.

In 2018, this work was dedicated mainly to preparing the implementation of new European data protection legislation (the GDPR) and the Norwegian Act relating to money laundering and terrorism financing (hvitvaskingsloven). Company managers also underwent training in the fields of ethics and anti-corruption measures. The company is also establishing a set of guidelines for the follow-up of its suppliers in the field of human rights. This activity will be based on risk assessments of the relevant supplier's market sector and country of origin.

Norsk Tipping has opportunities to make a positive contribution to the development of society by using its position to raise a variety of topics in the public debate and contribute to real change. In 2017, the company began its efforts to raise awareness of equal opportunity in football, and this continued in 2018 with a set of initiatives designed to promote equal opportunity in Norwegian sport in general.

The working environment

Norsk Tipping is defined as an inclusive working life (IA) company and aims to encourage an inclusive and diverse corporate culture. The company is currently assigning priority to further boosting diversity by promoting a more balanced composition of its staff in terms of age, gender and cultural background. This objective is in step with the aims set out in the Norwegian Anti-discrimination, and Anti-discrimination and Accessibility, Acts (likestillings- og diskrimineringsloven).

Working environment initiatives must be specifically targeted and contribute towards achieving the aims set out in both the strategy plan for the period leading up to 2020 and the company’s annual activity plans. The company is also aiming to improve its operational efficiency and change competence. In 2018, the company introduced a system of agile enterprise management. This represents a new approach to the high-level management of the company, by which greater emphasis is given to dynamic management and ongoing task prioritisation based on current needs. This replaces the more traditional management approach for which annual action plans and budgets constituted the main guidelines. This new approach to enterprise management harmonises very well with the philosophy behind the new IT development framework that was introduced in 2017.

The company’s proportion of female managers corresponds well with the percentage of women employed within the company as a whole. Forty-three per cent of the company's top management team are women. The proportion of women in management positions is currently 41 per cent, while 37 per cent of the company's total of 413 permanent employees are women.

In 2018, the sickness absence rate was 3.9 per cent, which is an increase on the 3.1 per cent recorded for 2017. We do not consider these figures to be a cause for concern, but the company is aware that the trend from the previous year is negative. Two incidents of absence from work due to injury were recorded in 2018.

The external environment

The single most important factor that impacts on the external environment is the production and distribution of paper-based materials and their distribution to the company's sales agents. Our increased use of digital media means that the number of paper coupons and other materials linked to our sales agents’ activities is gradually declining. With a view to reducing the volumes of excess printed matter, the company continuously monitors the amount of such material that it sends to individual sales agents. Digital screens are increasingly replacing printed material as a means of providing information at our sales agents’ outlets.

Norsk Tipping's CO2 emissions for 2018 are estimated to be 1073 tonnes. These emissions consist primarily of electricity used on company premises and for IT systems, and in connection with business travel by company employees. The company's premises are connected to a district heating system where energy is sourced primarily from bioenergy and recycled heat. This helps to reduce CO2 emissions resulting from heating. Norsk Tipping is continuing to reduce its energy consumption and make energy use more efficient.

In March, Norsk Tipping received certification under the Miljøfyrtårn (Eco-Lighthouse) scheme. This is an accredited certification awarded in recognition of effective environmental management. Under this certification, Norsk Tipping is committed to working systematically to improve its environmental performance in the fields of the working environment, waste disposal, energy use, purchasing and transport.

Allocation of annual profit

The company's unrestricted equity is held in an investment fund and other equity items. Total unrestricted equity as of 31.12.2018 amounts to NOK 214 million.

The Board's proposal for the allocation of profits is as follows:

The Board, Norsk Tipping AS
Oslo, 7 March 2019