Board of directors’ annual report

2016 has been characterised by record profits, customer growth, and consolidation of the company’s social-responsibility platform in the form of the introduction of total loss limits.

In recent years, an expansion in Norsk Tipping's game portfolio has resulted in year-by-year sales increases. There were no major new game launches in 2016, but sales have nevertheless increased as a result of bigger first-prize pots for existing games. The company's total operational revenues increased from NOK 29.7 billion in 2015 to NOK 32 billion in 2016.

The games vary widely in character. 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 7.2 billion in 2015 to NOK 7.7 billion in 2016, representing an increase of 6 per cent. Profits rose from NOK 4.5 to 5 billion, an increase in 12 per cent on the previous year.

Lottery gaming accounts for the largest share of sales, and represents 65 per cent of the company's gross gaming revenues for 2016. This is an increase of 62 per cent on 2015. Growth is linked to changes in the VikingLotto game, which have resulted in more attractive prizes.

This has promoted greater interest among our customers, and increased sales. Lottery gaming is the company's largest gaming activity measured in terms of gross revenues, and it is important that it remains attractive to our customers. Overall development is considered to be positive, and may be an indication that the company is succeeding in channelling people’s desires for gaming towards a regulated system aimed at counteracting the negative impacts of gambling.

Sales linked to online gaming continue to grow, and increased by 19 per cent compared with 2015. In spite of the fact that Norsk Tipping has exclusive rights to offer online gaming in Norway, the company in fact faces strong competition in the market for online casino and sports betting, and a significant market share in these activities is held by non-regulated providers.

The company offers a wide portfolio of games that includes lotteries, scratch games, sports betting, video terminal games such as 'Multix' and 'Belago', and online gaming. This means that conditions are very much in place to enable the company optimally to fulfil its role by offering a wide selection of gaming products that meet the majority of our customers' needs.

The digitalisation of our everyday lives has a considerable influence on Norsk Tipping. Modern and user-friendly digital systems delivering gaming opportunities to PCs, tablets and mobile phones are becoming increasingly more important in satisfying our customers’ gaming desires.

However, it is still the case that more than 50 per cent of the company's turnover is supported by physical sales, and Norsk Tipping has thus carried out an upgrade of its systems and remodelling of the interiors of its agents’ sales outlets. The remodelling gives the outlets a contemporary look and enables our agents to replace paper-based advertising and information with electronic systems and computer screens, which provide a better means of communicating relevant content.

In 2016, Norsk Tipping reported sales of NOK 13.9 billion via digital distribution channels. A major part of these sales were derived from online games launched in 2014 (Instaspill). For other games, sales via digital distribution channels amounted to NOK 6.2 billion, representing an increase in 25 per cent on 2015.

The growth in sales from digital distribution channels contributes towards greater cost efficiencies for the company, but also places increasing demands on media capacity and functionality. Advancing the development of digital distribution channels is an area of focus for the company in 2017.

The so-called Grasrotandelen (Grassroots) fund provides players with an opportunity to influence how Norsk Tipping's profits are distributed. Funds distributed directly by players are growing in step with increased sales, and as a result of continued growth in player numbers linked to the Grasrotandelen. In 2016, players distributed NOK 447 million to clubs and associations via the Grasrotandelen, and at year-end, more than a million customers were linked to the fund.

In October 2016, Åsne Havnelid took up her appointment as CEO, replacing Torbjørn Almlid, who had held the position since 2009. The Board wished to express its thanks to Almlid for his contribution towards the development of Norsk Tipping during an exciting period for the company.

Norsk Tipping's operations are rooted in the company's ability to counteract undesirable gaming behaviour. The company has dedicated much focus towards providing attractive gaming opportunities for its customers, within a responsible and secure setting. This approach permeates both the organisation as a whole and the products and services the company offers.

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. This is an extra precaution designed to limit losses for the most vulnerable players. Following the introduction of these new limits, the company’s proportion of sales involving players at high risk of developing problematic gaming behaviour has reduced.

Norsk Tipping is working with research centres in the field of gaming and gaming behaviour with the aim of obtaining a better knowledge of the factors that may influence problematic gaming behaviour. The company aims to be among the leading companies in the world in the field of responsible gaming.

Both the Board and owners are placing major emphasis on how the company can best fulfil its role in Norwegian society. The company’s main focus is not profit maximisation, but the optimal efficiency of its operations.

The company monitors the proportion of its gross gaming revenues that go to good causes, and the aim is to increase this share in the future. A cost efficiency programme was introduced in 2015, and has been continued during 2016, involving new initiatives and areas of focus. The company has identified many areas with potential for cost efficiency measures, and the impacts of these are among the reasons why in 2016 costs measured as a share of gross gaming revenues have been lower than in previous years.

At the close of 2016 the company's accounts revealed a total balance of NOK 5.95 billion and an equity ratio of 6.1 per cent. This can be compared with corresponding figures of NOK 5.2 billion and 4.1 per cent for 2015. As of 31 December 2016, 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.

On the basis of the extraordinarily good annual profits, NOK 150 million has been transferred to other equity. This consolidation of equity opens the door for a more stable and predictable transfer of profits to good causes in the future.

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 will remain the situation for the foreseeable future, even if potential amendments to regulation of the gaming sector are introduced.

Gaming revenues represent the company's most important source of cash flow. Following deductions for prizes, gaming revenues have increased by NOK 0.4 billion compared with 2015. In 2016, net cash flow from operational activities amounted to NOK 5.4 billion, compared with NOK 4.7 billion in 2015, representing an increase of 16 per cent. Expenditures linked to the purchase of fixed assets are higher than in 2015. This can be explained primarily by the fact that in 2016 the company made considerable investments in the remodelling of the interiors of its agents’ sales outlets.

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 company also operates with a credit risk linked to settlements with its 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 agent-related receivables in 2016. 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 4.9 billion. The company believes that the levels of uncertainty linked to its financial status in 2016 are relatively low.

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.

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 biggest project carried out in 2016 has involved the development and introduction of total loss limits for our customers. This project has been very demanding on the company’s resources. Moreover, dependencies on technical resources have restricted activities in other areas. The company has also maintained continuous activity linked to the further development of digital sales systems that can be accessed online and via mobile telephones.

Minor modifications to the products Eurojackpot and VikingLotto have had a positive impact due to the introduction of more attractive prizes. These are examples of how even minor improvements in existing products can lead to positive results. The company has also launched new systems for organising cooperative syndicates via our agents.

In 2016, the company established a collaborative development project involving several other European gaming companies with the aim of reaping the benefits of economies of scale in areas such as digital development and innovation, operations and experience exchange.

The current operational and regulatory framework under which Norsk Tipping operates provides a solid platform for further development. In December 2016 the Norwegian government published a White Paper addressing gaming policy, in which it presented its arguments for continuing with the current gaming policy model by which both Norsk Tipping and the horse race betting company Norsk Rikstoto will retain their respective monopolies. In the White Paper, the government concludes that now is not the time to introduce a licensing system permitting operations by overseas gaming companies.

The content of the White Paper represents a value-based choice in the best interests of Norwegian society, and lays a sound foundation for the future development of Norsk Tipping. At the same time it reduces uncertainties that have been linked to regulation in this area following evaluations of several aspects of the gaming sector in recent years.

Norsk Tipping will continue to expand development of its products and systems in line with the company's role in society to provide access to attractive and responsible gaming activities from which the profits go to support good causes.

Norsk Tipping considers it important that the company contributes towards a sustainable society in which consideration is given to how wealth is generated in the long-term.

In 2016, the company identified the key aspects of its social responsibilities in the fields of ethics and anti-corruption, fraud, transparency, dialogue with its stakeholders, and the prevention of problems linked to gaming. The company also carried out a status review of its work linked to social responsibility in the wake of the Norwegian government’s report on state corporate ownership published in 2013-2014.

In combination with Norsk Tipping’s social responsibility governance system, and in the context of international standards, this laid the foundation for a new social responsibility policy. The policy and its appurtenant guidelines set out a framework for how ethical, environmental and social considerations will be integrated into the company’s operations. The overall aim of the policy is to enable Norsk Tipping to assume responsibility for the impact it has on people, the environment, and society at large.

In 2017 the company shall work to implement this policy throughout the organisation.

Norsk Tipping is defined as an inclusive working life (IA) company and aims to encourage an inclusive and diverse corporate culture. The company aims to achieve a more balanced workforce in terms of the age, gender and cultural background of its employees. This objective is in step with the aims set out in the Norwegian Anti-discrimination, and Anti-discrimination and Accessibility Acts (diskrimineringsloven / diskriminerings- og tilgjengelighetsloven).

Working environment initiatives must be specifically targeted and contribute towards achieving the aims of the 2016-2020 strategy document and annual activity plans. The company also aims to improve its operational efficiency and change competence, and in 2016 has been working to increase levels of digitalisation. This has involved the introduction of a new framework called SAFe, designed to enable efficient and agile work processes linked to IT development work.

Fifty per cent of the company's top management team are women. The proportion of women in management positions is currently 32 per cent, while 37 per cent of the company's total of 408 permanent employees are women.

In 2016, the sickness absence rate was 3.7 per cent. No personal injuries/illnesses requiring absence from work were recorded in 2016.

The single most important factor that impacts on the external environment is the production and distribution of paper-based materials to the company's agents. With a view to reducing the volumes of excess printed matter, the company continuously monitors the volumes of such material it sends to individual agents.

In 2016 the volume of printed gaming-related materials was reduced by 16 per cent compared with 2015. The remodelling of the interiors of our agents’ sales outlets has included the installation of new electronic player interfaces that enable better communication with our customers and also reduce paper consumption.

Norsk Tipping's CO2 emissions for 2016 are estimated to be 382 tonnes, compared with 369 tonnes in 2015. These emissions are linked primarily to business travel, combined with electricity consumption, lighting and heating. 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.

As a result of amendments to the Norwegian Gaming Act (pengespilloven), from 2016 causes related to health and rehabilitation are now included in the Tippenøkkelen distribution formula.

Following discussions with the Ministry of Culture, allocation to the item “Measures to combat gaming problems” was reduced from NOK 15 million in 2015 to NOK 6 million in 2016. The reason for the reduction is that there exist non-utilised reserves outstanding from previous years. Thus overall, allocations for the funding of measures to combat gambling will remain at the same level as in 2015.

The company's unrestricted equity is held in an investment fund and other equity items. Total unrestricted equity as of 31 January 2016 amounts to NOK 214 million.

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