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Edited Transcript of LEO.ST earnings conference call or presentation 14-Feb-20 8:00am GMT

Q4 2019 LeoVegas AB (publ) Earnings Call

STOCKHOLM Feb 25, 2020 (Thomson StreetEvents) -- Edited Transcript of LeoVegas AB (publ) earnings conference call or presentation Friday, February 14, 2020 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Gustaf Hagman

LeoVegas AB (publ) - Co-Founder, President & CEO

* Stefan Nelson

LeoVegas AB (publ) - CFO

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Conference Call Participants

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* Hjalmar Ahlberg

Kepler Cheuvreux, Research Division - Equity Research Analyst

* Lars-Ola Hellstrom

Pareto Securities, Research Division - Analyst

* Martin Arnell

DNB Markets, Research Division - Analyst

* Mikael Laséen

Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the LeoVegas Q4 Report 2019. (Operator Instructions) I also must advise you that this conference is being recorded today.

And I would now like to hand the conference over to your first speaker today, Gustaf Hagman. Thank you. Please go ahead, sir.

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Gustaf Hagman, LeoVegas AB (publ) - Co-Founder, President & CEO [2]

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Thank you, and good morning, everyone, and a warm welcome to our quarterly presentation for the fourth quarter of 2019 but also the full year of 2019. And together with me today, as always, our group CFO, Stefan Nelson. Good morning, Stefan.

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Stefan Nelson, LeoVegas AB (publ) - CFO [3]

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Good morning, Gustaf.

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Gustaf Hagman, LeoVegas AB (publ) - Co-Founder, President & CEO [4]

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And let's get going with the Q4 2019 highlights. Our revenues during the fourth quarter amounted to EUR 87.1 million, and that's an increase of 3%, but excluding U.K., we had about 11% growth. And we had about 55% locally regulated revenues. Our depositing customers were 361,613, and that's a 7.5% higher than last year. New depositing customers were 143,631.

We had an EBITDA of EUR 14.5 million, corresponding to a margin of 16.7%. And our adjusted EBITDA, excluding the nonrecurring items, were EUR 9.2 million, and that's a margin of 10.6%. And on a happy note, our returning depositing customers were on an all-time high during the quarter. So Stefan will talk a little bit more about that later in the presentation.

Let's have a look at the full year of 2019. 2019 was a record year, with the highest revenues ever for the group and amounted to EUR 356 million, an increase of 9% compared to 2018. And we had about 51% in locally regulated revenues. Our depositing customers were 867,938, an increase of 7%, and new depositing customers reached also an all-time high with 590,754 million.

And our EBITDA was EUR 49.5 million, corresponding to a margin of 13.9%. And all in all, we are proud of what we achieved during 2019, despite the difficult external environment. But again, we will never be satisfied until we have reached our end goal and our ambition to be king of casino.

And here are our quarterly revenues since the launch of LeoVegas back in 2012, so quarterly revenues. The beginning of Q4 was still affected from the payment challenges that we have in Germany. And as you might recall as well from our Q3 report, we had an extraordinary low gaming margin in the beginning of -- well, during October.

However, the quarter ended up quite well, with Germany recovering month-to-month and with December being our strongest month ever for the group. And LeoVegas has grown year-on-year every quarter since the company started. That's a true growth company. .

So let's have a look at our product mix during the quarter. Casino Classic, which is basically our slot games, 72%; Live Casino; 19%; and Sport, 9%. Live Casino increased from 17% to 19%, so it's quite a strong development for the live sector and these percentages are by gross gaming revenues.

And business updates. Actions in 2019 then. Well, during 2019, we worked hard to reduce complexity in the group and to be more efficient and adapt to the changes taking place in the gaming industry. In parallel with this, we have enhanced the traction of our product through new functionality and greater personalization.

We launched new brands. We focused more on casino, and we expanded into new markets. Towards the end of the year, we intensified the integration of our previous acquisitions, Royal Panda and Rocket X, which is expected to contribute to cost savings and increased efficiency throughout the year.

U.K. and efficiency initiatives. Well, I think of last year as a year of efficiency and scalability, and here are some of the larger initiatives that we took last year and are driving into 2020 as well. So we are migrating our Rocket X U.K. business to our own platform as we speak, and we are closing the brand, Royal Panda, in the U.K. and let our Royal Panda teamwork with other expansion markets instead. And the revenues for the remaining operations in the U.K., excluding then Royal Panda, grew 15% in Q4 compared to Q3 with good profitability.

I think these 2 U.K. initiatives will increase our efficiency and also make the regulatory complexity in the U.K. a lot easier for us to handle going forward, and I think this is very important. And instead of having 3 different platforms, we will have 1 platform going forward in the U.K.

And at the same time, we're calling off a planned relocation to new offices in Malta. This is also due to changed market conditions and us being a lot more efficient as a group.

Just to give you an example, during 2019, our personnel decreased from about 900 in the beginning of the year to below 800 people at the end of the year. And all in all, these initiatives gives us estimated annual savings of EUR 3.7 million, but also EUR 6.1 million in restructuring costs that we took during Q4 related to these strategic initiatives.

Sustainable growth and compliance. Our investments in sustainability have been particularly meaningful, where LeoVegas is one of the leading operators with our technology and data-driven approach towards compliance.

For example, today, we have about 70 people who works exclusively with responsible gaming in the compliance, close to 10% of the group's personnel. And we believe that our data-driven approach will give us a competitive advantage in regulated markets going forward.

Okay. A couple of market comments here. Let's start with the Nordics. And the Nordic stands for 45% of the group revenues, with EUR 36.9 million in revenues. Sweden then, Sweden continues to perform strongly for the group, with a record strong December. And LeoVegas continued to gain market share in the Swedish market, and we are the #1 casino brand in Sweden.

Our recently launched -- we launched GoGoCasino during the year, and GoGoCasino has really exceeded our expectations and are performing very well, which also confirms that our approach towards multi-brand works very well. In 2020, we expect more market consolidation, and we also hope for more enforcements by the regulator in Sweden towards operators without a license. But in general, I'm satisfied about the development and the performance in Sweden.

Other Nordics, stable development in the other Nordic countries. Rest of Europe. Rest of Europe stands for 42% of the group revenues, which is EUR 35.2 million. In the U.K., our remaining then U.K. business, LeoVegas and the Rocket X brands, delivered sequential growth in Q4 with a 15%. And LeoVegas strongly believes in long term in the U.K. market potential.

In Germany, as mentioned previously, Q4 remains affected by the closure of an important payment provider, but Germany recovered gradually throughout the quarter. And also, we follow the legal development in Germany closely. In general, I believe that a marketing regulator is a long-term opportunity for us.

Rest of world. Rest of world stands for 13% of the group, with revenues of EUR 11 million. And we focus to scale up the markets that were launched during 2018 and '19, and we're also looking into more market entries during 2020 as well as potential launch of additional brands.

I'm very happy to announce our new COO, Mårten Forste. And Mårten started to work operationally with us last week, so a warm welcome to you, Mårten. And Mårten has been a member of the Board since the beginning of LeoVegas back in 2012, and he's also been the Chairman of the Board since 2017.

So he knows our operations and culture very, very well. And Mårten has over 20 years of experience on fast-growing tech companies, including, like match.com. But he also worked with [expect.com], which were an early pioneer in the gaming industry. So a lot of gaming knowledge. And finally, the nomination committee will present a recommendation for a new Chairman in the connection with the AGM notice later on.

So financial targets and dividend. Well, due to changed market conditions, we are removing our short-term financial targets that was set at a time when our industry looked differently and not as complex as it is today, but also due to our strategy to launch owned brands and not to feel the pressure to make acquisitions. Well, of course, we are still looking for M&As but not having the pressure.

LeoVegas remains a growth company, but with a slight shift to focus on sustainable profitability. And we are reiterating our long-term financial targets to have an organic growth that outperforms the online gaming market, and that is 15% EBITDA margin, assuming 100% regulated markets.

And regarding the dividend, SEK 1.4 will be proposed to the AGM for decision, and that's an increase of 17% compared to last year. The increased dividend are possible due to our strong financial position.

Current trading, the start of Q1 2020 then. So January ended up with EUR 30.1 million in revenues, and that's a growth of 5% compared to January last year.

And with that, I leave to you, Stefan, to run our business KPIs.

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Stefan Nelson, LeoVegas AB (publ) - CFO [5]

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Thank you, Gustaf. Turning to Page 18 to start off. And we'll start with our most important growth driver, which is our depositing customer base. And in Q4, our new depositing customers were slightly down year-on-year, but increased 6% versus Q3. And meanwhile, our returning depositing customers increased by 14% year-on-year and with 5% compared to Q3 to a new all-time high. And in total, our depositing customer base, both new and recurring, increased 7% year-on-year and 5% in the quarter.

Next page. If we take a look at our player value, our average deposit per depositing customer in Q4 decreased 4% year-on-year and 2% versus Q3, while our average NGR per depositing customer decreased more than the deposits, down 6% year-on-year and 9% quarter-on-quarter. And the difference between the deposits and the NGR per player primarily reflects the lower game margin that Gustaf mentioned in Q4.

Long term, we continue to see the trend of a lower share of high-value players, while the geographical mix and game margins, of course, drives short-term fluctuations in player base value.

Look at next page and coming into the game margins. The game margins in Q4 decreased to 3.62% versus 3.70% in the previous quarter, and the 3.62% is also below the historical average of about 3.7%, especially in October, we had unusually low game margins. And both casino Sports margins were below the historical average in Q4. Casino margins were actually at the lowest level in 2 years.

We don't see any trend of a lower margin. This goes up and down, depending on big winners, sports results, et cetera. The lower game margins also affected our Hold levels in Q4, which were down to 29% from 31% in Q3, and this is also below the long-term average levels, and this is primarily due to October.

Next page, then. Looking at the results of these KPIs. And this results in a deposit level of EUR 285 million in the quarter and that's increased to 3% from last year and also 3% up from Q3 and Q4 is almost at the all-time high we saw in Q2.

Meanwhile, NGR increased by 1% versus last year, but was instead down 4% from Q3, which, again, reflects the lower game margins in the quarter. And I would say that the NGR and deposit trends reflects primarily our steadily growing customer base, while the average player value is lower than the historical average.

This takes us towards marketing. And our marketing spend in Q4 increased versus Q3 to about EUR 30 million. This is the big jump versus Q3, but this is still below the levels we spent in Q4 last year and Q4 is, of course, a high season in our industry. We are quite happy with our customer acquisition cost, which increased slightly quarter-on-quarter but decreased 5% year-on-year.

And we continued to focus on generating solid and high return on investment on our data-driven marketing efforts. Our marketing mix is gradually shifting more and more towards digital and trackable channels. And this is a shift we expect will continue going forward.

So if we jump into our financials and, not least, our profitability on Page 24. The reported EBITDA in Q4 was EUR 14.5 million, as Gustaf mentioned, reflecting an EBITDA margin of nearly 17%, while our adjusted EBITDA, which shows the underlying performance, was at EUR 9.2 million for the period, at a margin of 10.6%, and this reflects a 13% growth in adjusted EBITDA year-on-year.

Importantly, of course, the reported EBITDA includes nonrecurring items relating to the sale of Authentic Gaming, where we had a capital gain of about EUR 11.4 million, but also restructuring costs for the U.K. and other efficiency measures of EUR 6.1 million in the quarter.

Next page. If we look at the EBITDA buildup between Q3 and Q4, I think you've seen this chart in previous quarters. Looking at the delta between the quarters and what's building up our profit, the gaming duties increased by almost EUR 1 million compared to Q3 and this relates to a record-high share of regulated revenues in Q4. In Q4 alone, we paid over EUR 30 million in gaming taxes in our regulated markets.

We had a lower cost of sales, both in relative and absolute terms, and this, I would say, reflects the work we're doing with always striving after improved commercials with our various suppliers. Our marketing spend, as mentioned, increased by more than EUR 2 million, reflecting high season campaigns in several key markets, including Sweden and this is the main delta in profitability in Q4 versus Q3.

If we look at our OpEx, our personnel cost increased slightly from Q3, while our other operational expenses decreased, and this shows the results of various efficiency measures. And that, in total, is just at EUR 9.2 million in adjusted EBITDA.

Next page. Looking through the P&L from EBITDA down to net income. And as mentioned, the reported number includes the capital gains from Authentic Gaming as well as the restructuring cost for U.K. and other efficiency efforts. The adjusted EBIT, which was EUR 6.5 million in the period, excludes -- apart from the nonrecurring items, it also includes normal amortizations relating to previous acquisitions and also the gain of sale of assets and restructuring cost.

If we look at the reported EBIT of minus EUR 2.5 million, that includes the impairment loss we took of EUR 10.2 million relating to the investment in Royal Panda, which we issued the press release of a couple of weeks ago. Finally, adjusted net income when including in the nonrecurring items and amortizations landed at EUR 6.1 million for the period.

So my final slide and the final waterfall chart in this presentation shows our cash flow generation in the quarter. And the cash flow from operating activities before changes in working capital was solid and amounted to EUR 10.4 million, and this is driven primarily by our underlying EBITDA results.

The changes in working capital resulted in an outflow of EUR 5.8 million for the period, and this could be explained as a normalization after we had a very positive number in Q3. And as you know, working capital shifts from quarter-to-quarter, depending on various timing effects.

In Q4, we paid down another EUR 10 million of our term loan. We also paid our semiannual dividend of EUR 5.8 million during the period. And this, in total, leaves us in a good financial position, where we had a cash at the end of the quarter of EUR 50.7 million, including trade balances, while we had a remaining debt at close to EUR 70 million.

So net debt is now down at about EUR 20 million when including player counts. So we see that we are in solid financial state going into 2020.

With that, I leave the word back to you, Gustaf.

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Gustaf Hagman, LeoVegas AB (publ) - Co-Founder, President & CEO [6]

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Well, thanks, Stefan. Sounds good. Let's have a look at the summary then. And the Q4 revenues then amounted to EUR 87.1 million, with a 3% growth. But as I mentioned previously, if we exclude the U.K., that would be -- have been 11%. And the adjusted EBITDA was EUR 9.2 million, with a 10 -- that's a 10.6% margin.

Full year adjusted EBITDA was up 7% compared to 2018, despite the close to EUR 50 million in gaming taxes during 2019, which is an increase of EUR 20 million in gaming tax for 2019 compared to 2018. But I think that's quite an achievement that we managed to grow our EBITDA, despite EUR 20 million in interest tax during the year. And I really think that tells us that LeoVegas managed to handling regulated countries and markets quite well.

Then our initiatives in the U.K. market with one platform for all brands will enable future growth, and it'll be a lot easier for us to handle. And when excluding the closed Royal Panda brand in the remaining -- the remaining brands then grew by 15% sequentially in the U.K. And overall, a very strong performance in Sweden, and LeoVegas is gaining market share.

And then our short-term financial targets were removed, but we are reiterating our long-term financial target. And the Board are proposing a dividend for SEK 1.4, and that's an increase of 17% for the AGM then, to be decided at the AGM. And January revenues ended up from EUR 30.1 million, and that's a 5% growth compared to last year.

And with that, I leave to -- and open up -- I would like to open up for the Q&A then.

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Questions and Answers

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Operator [1]

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(Operator Instructions). And we have a question that came through, sir. Your first question comes from the line of Martin Arnell.

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Martin Arnell, DNB Markets, Research Division - Analyst [2]

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So my first question is on the trading so far in 2020. What's behind that 5% growth number in January?

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Gustaf Hagman, LeoVegas AB (publ) - Co-Founder, President & CEO [3]

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I won't -- sorry, Martin. We will not actually comment specifically on that. It's -- we think it's a quite good developments in January. And we feel a good trend, with December ending up on the highest revenue ever for the group. And moving into 2020, we are quite confident about the future here.

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Martin Arnell, DNB Markets, Research Division - Analyst [4]

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And just to be clear, I mean, you -- it's mostly casino in your business here. So is it the sports betting margin in that, that's above normal? Or is it game win margin related or more underlying? That's my question.

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Stefan Nelson, LeoVegas AB (publ) - CFO [5]

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Well, as you said, Martin -- it's Stefan, by the way. As you commented yourself, Sports is basically below 10% in Q4. So I think that Sports does not really have that big an impact when margins vary.

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Martin Arnell, DNB Markets, Research Division - Analyst [6]

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So you see that 5% that's sort of underlying improvement or...

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Stefan Nelson, LeoVegas AB (publ) - CFO [7]

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We haven't had any other comments this quarter. I think -- we have not seen any specific game margin developments as we did in our last trading update in October. So yes, this is an underlying development.

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Martin Arnell, DNB Markets, Research Division - Analyst [8]

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Okay. And moving on to the CAC trends. It's been quite stable as you showed in the slide there. What do you think about the outlook for CAC in the first half of the year?

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Stefan Nelson, LeoVegas AB (publ) - CFO [9]

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We don't really give that kind of guidance. And as you know, we do different sort of customer acquisition, more and more digital, as I commented on before, and then from time to time, we obviously invest in bigger campaigns.

So it's -- I don't think it's a good idea to comment on the short-term CAC development. However, in the long term, we are, obviously, very ambitious in our efforts to lower our CAC gradually, which I think will be a necessity for the entire industry given tax increases overall complexity and a lower player value. So that is a necessity and something for our partners to...

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Martin Arnell, DNB Markets, Research Division - Analyst [10]

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Okay. Is there anything you can say about your strategy ahead of the football Euros, given what you have learned from similar events in the past?

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Gustaf Hagman, LeoVegas AB (publ) - Co-Founder, President & CEO [11]

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Well, yes, that's a good question. So obviously, the Euros coming up here. And the thing is that, we will -- as we are a king of casino, we will continue to do marketing for our casino and not really moving into Sports that much. But of course, we will make sure that we have a really good offering. That's in the nature.

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Martin Arnell, DNB Markets, Research Division - Analyst [12]

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Okay. And on this livecasino.com site, what's the progress on that one?

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Gustaf Hagman, LeoVegas AB (publ) - Co-Founder, President & CEO [13]

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Well, yes, it looks really promising, actually. I've seen the first mockups and everything. And it's -- it will be launched during Q1, for sure. And it's -- I have a pretty good expectation -- good hopes and expectations for livecasino.com.

It's a worldwide site and attracts Live Casino players everywhere. And as a lot of the reporting companies and also some of the suppliers are talking about, the live casino sector is really growing fast. So it's -- I think it's spot on in the market as well.

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Martin Arnell, DNB Markets, Research Division - Analyst [14]

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Will you market that site globally? Or is it any specific markets that you will start in, et cetera?

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Gustaf Hagman, LeoVegas AB (publ) - Co-Founder, President & CEO [15]

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It will be much more globally marketed through more -- through affiliates, primarily, but -- as a test for the start of the launch of it. But then, of course, naturally, we will move into the regulated markets. Since LeoVegas has 8 locally live -- well, local licenses, so I expect Live Casino to be launched in regulated markets fairly soon as well. It really (inaudible).

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Operator [16]

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(Operator Instructions) And we'll now take our next question. This comes from the line of Mikael Laseen.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [17]

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I have a few questions. First of all, can you talk about the transition to your own internal platform, moving 2 companies into the Rhino platform, when that will happen and how it will be done?

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Gustaf Hagman, LeoVegas AB (publ) - Co-Founder, President & CEO [18]

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Sure. Yes. So we launched GoGoCasino last year on the Rhino platform. And that was like a test for just looking into the multi-brand and studying to see how Rhino, which is the name of our own platform, is working when it comes to migration and more brands on the same platform.

And since it's worked very, very well, and it's a strong platform, and as some of my recently joined management colleagues are saying, the strongest and best platform in the gaming industry, why don't we take the opportunity to then migrate the other brands into the Rhino platform, as we have done and doing now with the Rocket X brands in the U.K.

So essentially, all of those 12, 13, 14 brands will be migrated. And we've done one of the brands, and it looks really promising, and it will be concluded during Q1 as well.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [19]

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Okay. And Royal Panda will still be on their own?

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Gustaf Hagman, LeoVegas AB (publ) - Co-Founder, President & CEO [20]

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They will continue on their own platform. We said that's an expansion group and expansion brand and expansion platform. And eventually, we will see what happens. It's up to the team for the tide -- to decide that later on.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [21]

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Okay. Got it. And what type of benefits can the customers expect, the Rocket X customer expect when they have -- when they operate on that platform?

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Gustaf Hagman, LeoVegas AB (publ) - Co-Founder, President & CEO [22]

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Okay. Yes. So if we look at...

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [23]

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The [EPS] of the -- for the customer improvements also.

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Gustaf Hagman, LeoVegas AB (publ) - Co-Founder, President & CEO [24]

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Yes. For sure. Definitely, I would say. There is, for instance, a lot more gaming providers integrated to the Rhino platform and also on the payment side, a lot more to choose from when it comes to payment providers. So I expect that the customer journey and the customer experience to be enhanced, to be a better one. And of course, we're putting a lot of efforts into the Rhino platform. So the user journey will be better.

And then also, the Rhino platform is ported up to Google Cloud, which makes it a lot faster. So it's a really, really one of the fastest platforms out there, which also is important for our customers in the customer journey and the experience for the customers.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [25]

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Okay. Interesting. And another thing regarding the platform. You have operated 3 platforms and now you will have 2. How has that affected your operations, mainly in the U.K., I guess, in 2018 and '19? So from an efficiency perspective and sort of running the operations in the U.K. and what will happen now when you have one platform?

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Gustaf Hagman, LeoVegas AB (publ) - Co-Founder, President & CEO [26]

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Yes. Well, it wouldn't be a lot easier for us to handle the complexity around compliance, for instance. When you have 3 different platforms, you have to cross-check players with all those 3 platforms, which creates a hassle, actually, and a lot of manual work. So that will be removed.

And it will be a lot more easier to handle one platform going forward with updates and so on when it comes to new policies introduced by gaming -- well, by the U.K. gaming GC, in this case, as we're talking about the U.K. It would be easier for us to implement. Instead of implementing measures on 3 platforms, we're just going to do it on 1 platform. So I think there are a lot of benefits operating on one platform, specifically in the U.K. but, of course, also in other regulated markets.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [27]

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And what about the cost to operate a third-party platform? You're taking charges for that now. But going forward, how will that affect the cost structure?

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Stefan Nelson, LeoVegas AB (publ) - CFO [28]

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That's a very good question, and you are correct. We are paying for that right now. But we will not in the future.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [29]

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Okay. Sounds like a good idea to move.

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Stefan Nelson, LeoVegas AB (publ) - CFO [30]

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I'm not going to give you any sort of numbers here. But you are correct in your assumption. Of course, it will be more efficient from a cost perspective as well, yes.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [31]

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Okay. Good. And just curious about the Q1 trading comment. Royal Panda was still in that number, I assume. They operated in January and they are not...

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Gustaf Hagman, LeoVegas AB (publ) - Co-Founder, President & CEO [32]

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Yes. Very little. Can we comment on that? Stefan, maybe...

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Stefan Nelson, LeoVegas AB (publ) - CFO [33]

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Yes. No. Royal Panda was still in the number in January but very, very limited.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [34]

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So yes. Basically, 0 then in January?

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Stefan Nelson, LeoVegas AB (publ) - CFO [35]

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Yes, more or less.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [36]

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Okay. Good. And my final question is about the new countries that you're targeting, Japan, maybe other countries in Asia, South America and Spain. Can you please give an update on those?

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Gustaf Hagman, LeoVegas AB (publ) - Co-Founder, President & CEO [37]

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Well, yes. It's very, very early days. We are learning a lot. And last year, as you mentioned, we launched 5 countries last year, Japan, Brazil, Spain, being the larger ones, whereas Spain is a regulated country and then Chile and Peru as well, but we're learning a lot in these countries. It's early days, I would say. And they are not really to contribute today to something.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [38]

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Okay. Yes. Fair enough. Just one final, if I may. Working capital, any reason to expect any changes there over time? Of course, it fluctuates quarter-by-quarter, but over time, what should we expect?

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Stefan Nelson, LeoVegas AB (publ) - CFO [39]

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That's a good question. I agree. It's been a bit more volatile than I would kind of like. Q3 was very positive for us in terms of cash flow and then it normalized back. And if you look at the full year, it's pretty stable. And I think, going forward, we're, of course, working hard to improve our working capital. But I think that a good base case is that it should be pretty unchanged. I think that's the kind of working assumption.

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Operator [40]

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We'll now take our next question. And this comes from the line of Hjalmar Ahlberg.

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Hjalmar Ahlberg, Kepler Cheuvreux, Research Division - Equity Research Analyst [41]

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Maybe first a question on the U.K. You said that you were growing 15% on your remaining brands there. Can you say anything about the trend that's coming up from a pretty much flat earlier? Or has the trend been growing if you look back a few quarters ago?

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Gustaf Hagman, LeoVegas AB (publ) - Co-Founder, President & CEO [42]

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You go and comment.

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Stefan Nelson, LeoVegas AB (publ) - CFO [43]

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Thank you, Hjalmar. It's a bit hard to hear you, but I think you were asking about the trend for the U.K. brand, the remaining ones sent from the U.K. And yes, as you said, the trend in Q4 was definitely positive that we feel that this momentum has been gradually building up.

So we have better confidence for the U.K. than in a long time. Then of course, it's a market with pitfalls, and we have a migration ongoing. So that could, obviously, have a short-term effect while we're migrating big player databases. But overall, we feel that we're starting to get back to a good momentum in the U.K.

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Hjalmar Ahlberg, Kepler Cheuvreux, Research Division - Equity Research Analyst [44]

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And there's also been a discussion now on potentially limiting stakes in online in the U.K. Have you [studied] that? And what kind of risk would you see on the revenue side if it comes through?

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Gustaf Hagman, LeoVegas AB (publ) - Co-Founder, President & CEO [45]

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Well, yes, Hjalmar. It's Gustaf here. That's an old discussion, actually, and I think it was picked up by a lobby group in the U.K. yesterday or a couple of days ago. And it's -- there's several things that are going on in the U.K.

Nothing is for sure. But I know that the U.K. Gaming Commission, which we are quite close with in our talks with, they are evaluating a couple of things. But they also don't want to drive the black market in the U.K., so to speak. So they are -- they need to protect the licensed operators. So I think it's too early to talk about those restrictions online today. So I wouldn't put much into that as of now.

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Hjalmar Ahlberg, Kepler Cheuvreux, Research Division - Equity Research Analyst [46]

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Okay. And Germany is now improving after the change of payment providers there. But there's still some discussions on the regulation there. Have you see a risk of disruption now when you take another [of their] regulation on the [calculation]?

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Gustaf Hagman, LeoVegas AB (publ) - Co-Founder, President & CEO [47]

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Yes. So Hjalmar, I'm repeating your question here a little bit because it's hard to hear you, but you were asking about the German regulation and what's happening in Germany. And that's true. It's a lot of things happening in Germany. Though, all in all, we believe it's a positive momentum, where the different states in Germany have come together so that they will have a joint legislation, hopefully, already, in 2021.

But as we know from this industry, things might change and be pushed back. So let's see what happens. But in general, we believe in the regulated market. So in general, we think that the portfolio is fine for the German market.

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Operator [48]

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We'll now take our next question. This comes from the line of Lars Hellstrom.

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [49]

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I just want to follow-up a clarification about the organic growth in Q4, ex U.K., of 11%. Is that based on all revenue?

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Stefan Nelson, LeoVegas AB (publ) - CFO [50]

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If I understand your question right, yes, 11% is with all of U.K.

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [51]

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Yes. Because I noticed that the spread total revenue to NGR is the highest ever. So I guess the -- some of the remaining LeoVentures' asset is performing quite well, like Casino Grounds, and et cetera. Or is there any special effect here at play in terms of revenue?

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Stefan Nelson, LeoVegas AB (publ) - CFO [52]

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No. But you're right that our ventures businesses are growing pretty rapidly. So that has an effect and one thing that should be added is that also 6% of that, even though small, is not included in our NGR because we don't fully own it. And that's all (inaudible)

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [53]

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And the difference, total revenue to NGR, is that a going rate going forward?

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Stefan Nelson, LeoVegas AB (publ) - CFO [54]

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I think it's probably slightly higher in Q4 than it usually -- than it should be or than it usually is. It goes up and down. Sometimes, it's probably lower than it should be looking from our end. And it has to do with the amount of jackpot provisions, bonus balances, provisions, et cetera. There are other effects that go a bit up and down. It's not extraordinary, but it's on the high side of this quarter.

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [55]

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Okay. And another question here on Nordics' NGR. It's basically -- it's almost flat year-on-year. And Sweden is growing strongly, which indicates that other markets is contracting. Can you give us some flavor where you see a weaker momentum in some other Nordics countries? You're small in Norway. So is it Denmark?

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Stefan Nelson, LeoVegas AB (publ) - CFO [56]

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I can answer that. So I think you're right with Norway. Even if it's a smaller market, obviously, I think we're feeling the same impact as the other operators are feeling. And we're fairly satisfied with our other markets in the Nordics, even though the growth is a bit slower than it has been before, but there's no kind of concerns over a decline there, but it's a bit of a slower rate in Q4.

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [57]

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So we had the sequential growth in Finland and Denmark in Q4?

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Stefan Nelson, LeoVegas AB (publ) - CFO [58]

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We don't comment on specific markets in that granularity, as you know. But I think you should read a bit between the lines of what I said.

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [59]

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Yes. In terms of NDC intake, it hasn't been super easy to lift it to the next level over the last few quarters. How do you see it going forward? Do you see better prospect to scale up in the fee intake?

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Stefan Nelson, LeoVegas AB (publ) - CFO [60]

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Well, we can always scale up the NDC intake. The challenge is to do this with sufficient ROI, and we are a fanatic about getting good returns. I would say we're working a lot more -- we'll always work with that but on players that we feel that we could get good traction with and have long-term lifetime value over months and years.

So we are not desperate in having highest NDC intake in absolute numbers. With that said, as you know, we -- when we see the opportunity, we tend to invest more. We invested a bit more in Q4, also made some strategic investments that we think will pay off during 2020. So I hope that answers your question.

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [61]

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Okay. And about the rest of the world, you said that there is some markets that you expect to scale up in 2020. Can you give us some example of which of the launch market that you are most excited about?

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Stefan Nelson, LeoVegas AB (publ) - CFO [62]

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Well, during the years, we launched Canada, India and last year, we launched Japan, Brazil and a couple of the Latin American and South American countries as well. So I think, overall, that will be -- it's a lot of learnings in those countries. But overall, it will be in a up -- well, we will scale up in those countries.

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [63]

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Okay. And potential new markets? You spoke about that as well.

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Gustaf Hagman, LeoVegas AB (publ) - Co-Founder, President & CEO [64]

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Well, there will be a few new markets this year. But we will also focus more on what we call the greatest gaming experience and the big way to stand. So we will focus a little bit more on current markets and to be really performing well in the markets, as we already have, and also to open new -- open GoGoCasino in more markets.

It's only launched in Sweden so far. But it will be launched in several more markets during the year and Live Casino, as mentioned previously, and then make sure to cater for the Rocket X brands as well, perhaps outside the U.K., for the future as well. That is a lot of things -- lots to do in current markets, I would say.

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [65]

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Yes. Going back to scaling of some of the markets in rest of the world. You had mentioned India and Japan, but right now, it seems like everybody wants to go to India and Japan. So how do you see that you will be able to succeed? And what has been the challenges to scale those market before?

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Gustaf Hagman, LeoVegas AB (publ) - Co-Founder, President & CEO [66]

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Well, as usual, we have our great product with LeoVegas. We have really good payment solutions and a good use of journey and so on. And we are at a scale where we can sort of understand the market very well and be in the market long term and work with affiliates, et cetera. So I think we have a really good chance to stand those competitive -- competition that might move into those markets.

But besides India and Japan, I would say, Canada is a really good driver in the rest of world as well. It's actually the largest country in that mix. So it's -- and that's a good -- really good opportunity. And in Canada, we are looking into a possible regulation, actually, in a few years' time. There are talks around that.

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Lars-Ola Hellstrom, Pareto Securities, Research Division - Analyst [67]

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Yes. Okay. Two final question for Stefan here. First of all, personnel expense took a leap -- step-up in Q4. Is that a normal level going forward, adjusted for annual salary inflation? And the final question, the cost savings program. When will we start to see effect of the expected savings?

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Stefan Nelson, LeoVegas AB (publ) - CFO [68]

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So I'll try to answer them sequentially. So Q4 levels were slightly up versus Q3. I would say it's a bit of seasonality. And you might recall that Q3, personnel costs were extremely low. So in Q4, we're still about EUR 1 million below where we were in Q2, for instance. So with that said, yes, I think this is fairly normal level.

We will have a 2% salary interest, as usual, in January. But I think as we've talked about in prior quarters, we don't see any increase, really, in personnel or in staff in 2020. We intend to scale on what we already have and develop the talent we have in the company. So with that said, I agree that there shouldn't be any big personnel cost growth in the next couple of quarters.

So in regards to the cost efficiency measures, I hope that -- you see, Lars-Ola, that we are kind of grinding quarter-by-quarter and improving ourselves and that's something we continue to work with. Of course, when the brand migration in the U.K. is concluded, I think that we will start getting -- bearing some fruits from that over -- not least, the second half of the year and into 2021.

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Operator [69]

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And your next question comes from the line of Martin Arnell.

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Martin Arnell, DNB Markets, Research Division - Analyst [70]

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I have 2 more questions. The first one is mainly on -- if you summarize 2019 and you were at EBITDA growth, despite the incremental gaming tax in Sweden, what would you say was sort of the main mitigating factor to the Swedish tax and that actually made you increase your earnings?

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Gustaf Hagman, LeoVegas AB (publ) - Co-Founder, President & CEO [71]

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Well, I can start off a little bit. And last year, we worked a lot on efficiency, meaning that we are -- well, we are being more -- being much better in our internal routines and processes, et cetera. And the way we also negotiated a lot of that supplier agreements and overall, trying to take down all the costs just for mitigating the taxes.

And to me, I think it's evident that we have succeeded in doing that, because, as you're saying, despite EUR 20 million more -- EUR 20 million increased gaming tax, we still managed to increase our revenues and EBITDA during the year. You want to say -- add something to that, Stefan?

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Stefan Nelson, LeoVegas AB (publ) - CFO [72]

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I agree. There's kind of no quick fix. I think we've been working on all cost items. I think we're especially happy with being able to push down our fixed cost base or other operating expenses a lot, and we've also become more efficient in our marketing. Our marketing is, more or less flat, where it's slightly down in '19 versus '18. So I think -- yes.

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Gustaf Hagman, LeoVegas AB (publ) - Co-Founder, President & CEO [73]

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I would say, we are grinding, and we are doing everything we can in order to have a low-cost structure in the company.

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Stefan Nelson, LeoVegas AB (publ) - CFO [74]

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Yes. And we worked hard also to change a bit of the mindset of the company to be much more cost-conscious and work hard with our external partners to push down cost. And that work is kind of never ending, of course.

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Martin Arnell, DNB Markets, Research Division - Analyst [75]

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Okay. And the second question I had was actually on your communication about the financial targets. If -- why is these targets that you have now, organic growth above the market, an EBITDA margin of 15%, why is that not a medium-term target?

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Gustaf Hagman, LeoVegas AB (publ) - Co-Founder, President & CEO [76]

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It's a good point, right? Well, it depends on -- we're not really assuming 100% regulated markets in the medium term. It's -- as this industry is evolving, and there is a lot of change that's going on all the time, of course, there is a lot of new countries moving into -- like a regulated -- being related. But at the same time, there's huge countries in Asia, for instance, which are not regulated and I don't see that they will be for the foreseeable time. So that's why we call it the long-term targets.

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Stefan Nelson, LeoVegas AB (publ) - CFO [77]

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I think to add on, of course, we intend to outgrow the market every year. That, I think, goes without saying. And I also think that when we put the target at 15%, it's obviously an assumption that in the long term, all our revenues will be regulated. So if we're not at 100% regulated markets, of course, we should achieve to have a higher margin, but it will take -- we don't want to guide that on next year and 2 years. But that's, obviously, the path we're going towards.

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Martin Arnell, DNB Markets, Research Division - Analyst [78]

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And on that long-term target for EBITDA margin of 15%, where would you expect your marketing sales to end up at the end of the day? Because it's moved -- in the last 5 years, it's moved from 50 -- more than 50% to closer to 30%. Is there a continued sort of down to -- should that trend continue? That's my question.

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Stefan Nelson, LeoVegas AB (publ) - CFO [79]

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Yes. I think long term, our marketing ratio to revenue should be lower than it is today. Absolutely.

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Gustaf Hagman, LeoVegas AB (publ) - Co-Founder, President & CEO [80]

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But if you look at regulated markets, it's lower in those markets. So it's natural that the more regulated revenues you will have, then you will have -- that's mitigated by a lower margin on marketing.

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Stefan Nelson, LeoVegas AB (publ) - CFO [81]

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But of course, as long as we launch new brands and new markets, like Spain, where we are scaling up a bit more in 2020, we will take investment that will not pay off day 1 or even year 1, perhaps. And that, we want to continue to do, because we are a growth company. But again, looking in the long term, definitely lock in, we should see lower marketing costs over time.

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Martin Arnell, DNB Markets, Research Division - Analyst [82]

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Yes. Okay. And just a final one. On your capital allocation, I mean, how do you see the mix here between the alternatives, dividends, buybacks, M&A? Can you share some light into the future? How do you think about that?

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Stefan Nelson, LeoVegas AB (publ) - CFO [83]

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It's a good question, and it's a constant evaluation internally, in the management and Board. I think in this industry in this time, we think that it's also good to have a strong financial position to be able to act on opportunities that may arise. We believe the next couple of years would be crucial in kind of setting the foundation for this industry long-term in Europe. That's why it's a good idea to have a solid balance sheet.

But of course, we're not a bank and if we continue to generate more cash than we spend, that gives other options as well. So that's also the reason why we raised the dividend. And going forward, there are, obviously, other tools we can use if we feel that we have too much cash on the balance sheet.

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Operator [84]

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And no further questions that came through, sir. You may continue.

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Stefan Nelson, LeoVegas AB (publ) - CFO [85]

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So we have one question here from the webcast. It says, the game margin is unusually low in Q4, as you've mentioned. What would Q4 revenue be if margin had been at an average level?

And that's a good question. And it's, of course, hard to kind of put a number on that. I think we can refer back to what we said in Q3 about October, where we would have ended up with about EUR 28 million instead of EUR 26 million, with a normal game margin and that's just for 1 month.

So I think in -- as an analyst and investor, you can obviously do your own math. But again, the game margins will go up and down in the industry. It was exceptionally low in Q4 and another quarter, it might be exceptionally high. But I think it's a correct assumption that with normalized game margin, we would have had a better result in Q4, of course.

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Gustaf Hagman, LeoVegas AB (publ) - Co-Founder, President & CEO [86]

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Yes. Definitely. Okay. I think that was the last question, actually. So we don't have anything more on the line.

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Operator [87]

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Still no questions over the phone line, sir. You may continue.

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Gustaf Hagman, LeoVegas AB (publ) - Co-Founder, President & CEO [88]

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Okay. Then, well, thank you all for listening in and for our in Q4 and full year 2019 presentations. And we wish you all a happy -- good Friday and a happy weekend then.

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Stefan Nelson, LeoVegas AB (publ) - CFO [89]

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Thank you, all.

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Operator [90]

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Thank you. That concludes our conference for today. Thank you all for participating. You may now disconnect.