Entain Plc (ENT) Earnings Call Transcript

Good afternoon, ladies and gentlemen, and welcome to this GVC Conference Call. Speaking to you this afternoon, we have GVC's CEO, Kenny Alexander; and also GVC's CFO, Rob Wood. Before I hand you over, can we just remind you that this call is being recorded. [Operator Instructions] And now I would like to hand you over to Kenny Alexander. Please begin your presentation.

Hi, there, good afternoon all. Obviously, we've just put out an announcement about the additional investment, both ourselves and MGM have put into our U.S. joint venture. I've always said that -- I've said it from the day we did the deal with MGM, that this would be potentially one of the best deals we've done in terms of value creation. And as of today, I remain as convinced that this opportunity is huge. We have an aspiration to be a market leader. And it is quite clear the way the market is opening up by the amount of investment that is required in marketing, et cetera, that we will require additional investment in order to achieve the aspiration of being the market leader. Now Adam Greenblatt, he went over to the U.S., and he's -- him and his team have done an excellent job over the last couple of years. The business over there is a properly independent company from GVC and MGM, with proper management team, good technology provided by GVC and all of the big assets and strengths that come from partnering up with MGM. But now is the time to inject more capital to set MGM firmly on the path to market leadership. And we've taken our [ spend ] investment now to $450 million. And just to preempt, without some of the questions, people will look at what DraftKings, ammunition they've got, their recent -- raising money and FanDuel, do we have enough to be the market leader? Possible. And if not, then we'll put more money in. The fault line is this is an additional investments to get us, keep us competitive and make that aspiration realistic. But if we really need to put more money in, then we're quite prepared to do so. And we've got the balance sheet of MGM in order to facilitate that. This all depends -- it supports by MGM on its 4 key strategic enablers as set out in the press release, we would like to pick up on. There was a market access, access to 19 states which addressed 50% of the population and expect to be present in 11 by the year-end and a leading market share in gaming in New Jersey and iGaming in New Jersey. And we aim to replicate that in sports, in pretty quick order. In terms of the customer reach, we've really yet to deleverage of the Yahoo! player base of over 64 million per monthly users, which will start soon. We're particularly excited about what we can do with M life, with the retail properties and the M life program. And obviously, omni-channel, which we've executed very well in the U.K. and in other European territories, we're hoping to do that with the M life asset -- and the BetMGM assets, obviously, in Vegas and elsewhere in the U.S. In terms of our market-leading technology that MGM has access to 2,000 technologies, without doubt a collection of the brightest minds and technology in our industry. We're continually developing improvements and new products every day. And GVC does over 200 improvements every single week to our product. It also gives BetMGM access to our skills in gaming, sports products as well as our industry-leading marketing skills. And we're already the #1 operator in New Jersey in gaming, iGaming, and that is testament to our marketing skills in terms of casino and also to the product that we have. So therefore, BetMGM has a number of unique attributes and ultimately, is in a very strong position, and we're absolutely committed to do whatever it takes to be the market leader. And I think it's fair to say we've done -- this will be -- this [ path ] on the U.S. will take place over a number of years. We've done well to date with a good position. The stakes are getting up higher. Other people have got ammunition in order to really go to grab market share, and we've put this investment in here as a sign. The kid gloves are coming off and our aspiration to be the market leader is real, and we shall aim to display it over the coming years. And if they require more investments, we'll put in what it takes in order to achieve that. And now I will hand you over to Rob, CFO, and he can give you a better flavor around the numbers.

Thanks, Kenneth. Just a little bit more detail from me. So firstly, around timing of this additional commitment for 2020, I'm expecting the equity injections per parent to be somewhere around $50 million to $60 million. Something like that. So that's a little bit higher than the guidance we gave earlier this year of around $40 million. And then for the next 2 years, I think you can expect around $75 million per annum, per parent. So if you add those numbers to the $25 million that had already been injected as at 2019 year-end, you'll get to the total per parent of $225 million. Just on accounting, GVC will carry on showing those equity contributions via the cash flow. And from a P&L perspective because it's a JV, we'll be reporting the loss below EBITDA. In terms of what might that loss look like in 2020, obviously, an exceptional year with COVID-19. Our best forecast at the moment is probably somewhere around the GBP 40 million mark for GVC, whereas in March, we guided to GBP 20 million to GBP 30 million. So in both cases, both equity injections and loss for 2020, we're expecting a small increase to both of those numbers. But obviously, we're delighted with that increased investment given that there really isn't a better investment opportunity out there in terms of ROI, and of course, we remain 100% committed to the U.S. market for exactly that reason. So that's it by way of introductory comments. Let's go straight over to Q&A, please.

[Operator Instructions] Our first question is from the line of Stuart Gordon from Berenberg.

A couple of questions from me. You said in the release that ROAR is on track for $130 million of revenue in 2020, the bulk from iGaming. Just wondering what your assumptions are behind the resumption of sports in the U.S. through the second half of this year and into 2021, just to better understand how you see the trajectory of the sports business? And the second one is, obviously, this makes ROAR incredibly well capitalized and you said there would be more to come, but at what point would you consider raising external debt rather than just shares of equity?

Okay. I'll take the first one and Rob can take the second one. I think in terms of the sports programs, look -- I don't know. We don't have any firm information, but our best feel for the moment is that it's going to start opening up reasonably soon in a similar fashion to what we're seeing in Europe, where now we've got pretty much all the main European football leagues open and that's determined by [ COVID and ] closed doors. Quite frankly, that doesn't really bother us. So like until then, if NFL season start, I think obviously, it will start. I think is going to start late. I think it's going to be behind closed doors. But in terms of generating volume, I don't think that really affects us, the fact it's empty stadiums instead full stadiums. So that -- can't give you anything firm. Just really, I think the NFL season will definitely start, maybe delayed. And the other sports, I think, will follow shortly during the coming months. I think it's fair to say it will probably be behind doors for some period of time. As I said, that really, in terms of the business model, doesn't really bother us. I mean, what we're seeing in our business at the moment and over here is as long as the sports are on, people are going to bet pretty much comparable volumes with what they would -- if there were stadiums filled. And on the raising money, I'll hand you to Rob, by the way of it.

Okay. Stuart, the simple answer is there's no requirement for external funding. We have 2 very well capitalized, profitable, cash-generative parents with strong balance sheets, and we have the means to invest as much as is required going forward. As I mentioned earlier, the ROI on the investment is second to nothing. And therefore, we absolutely have the desire and the logic for investment, and we will continue to invest whatever is needed, as Kenny has alluded to. So in terms of external, no requirement to do that.

Okay.

It's a bit of a no-brainer really. I mean, if you looked at the -- let's say the DraftKings valuation, if we just cut to the chase, quite frankly, if you look at that valuation, we are a competitor with DraftKings. We expect to overassess [ of your view ] in DraftKings. I don't know as far as that today. I don't know, $12 billion, $13 billion, whatever the amount will be. I don't know, is there no evaluation for our share in JV. I think it is obviously in $12 billion or $13 billion. The fact that undoubtedly, as Rob has said, and I probably said it at the start myself, there is no bigger catalyst for shareholder -- creation of shareholder value than the U.S. JV for GVC. I think MGM, I think pretty much see it the same for them, actually.

Our next question is from the line of Kiranjot Grewal from the Bank of America.

I've got 2 questions. Firstly, could you perhaps talk a little bit more about your customer capture strategy? Have you used an M life loyalty scheme before? And actually going forward, how do you expect to use that? Or are you planning to sort of match pays on bonuses and free bets? And secondly, we've seen a lot of the big sporting brands do really well in their sell-through into iGaming in the U.S. Are you similarly doing well on sell-through? Or are you seeing a lot more success through customers coming customers coming [ near that? ] And is that really because that MGM brand is having -- is much more associated with casino? Just a bit more color on that, please.

Okay. In terms of the leveraging of the M life database, that is something that we have -- we really have only skimmed the surface of it up to now. Initial results are encouraging. We will definitely be exploiting that more during the rest of this year. In fact, it's a big, big database of people who are obviously keen to gamble in some capacity. And we do have the expertise in cross-selling from players, from -- who have enjoyed our retail experience. We do in the U.K. and we do in Italy, et cetera, onto a digital platform, and we will use those skill sets to exploit the M life database in the rest of the year. In terms of our success in iGaming, is it because of the MGM brand, and is it associated with casinos and locations such as that? I don't think so. I mean, I think the reason that we've seen such good results so far is a testament to our product, which I think is market-leading. And I think it's also a testament to our marketing expertise around casino and poker, which I consider market-leading. And some of the skill sets we've got in the JV are the skill sets that we've used to exploit in Europe, for example, where we completely transformed bwins, casino revenues where we've significantly upgraded the revenues on the Ladbrokes and Coral brands. I think it's a combination of very good technology, very good products and very good people and very good experience within the GVC organization exploiting the casino opportunity. I expect us to get similar results on sports betting in due course. I don't think the BetMGM brand is any hindrance whatsoever really in sports revenues. And did you have some other question about bonus? I didn't quite pick it up.

Oh, that was to do with the first question. It was whether you're going to try and put -- capture customers through offering a lot of extensive free bets or bonuses? Or whether it's going to be more of a focus on the M life scheme? I suppose that will change how fast you become profitable.

No. I think it's a bit of both really. I mean I think we use free bets and things like that. Quite frankly, you can't -- everybody offers free bets, so you can't really build up. You can't win in a market just because you throw the 3 bets around like they're vetted. The only way you can win in a market is if you get the strongest brand, strongest technology, best people, best product, best marketing expertise. Those are the sort of big-ticket items that will win, not how much or how quickly you can throw bonuses around. Sure, we use them but we don't think that's going to win in this market long-term because it certainly hasn't won in other markets where we're the market leader. So there you go.

And for our next question, we will go to the line of Gavin Kelleher, Goodbody Capital Markets.

Just a few from me. Just on the investments, very granular on kind of the timing of this, can you give any sort of flavor? Is this -- will this mainly be marketing? Or is it mainly product which will see the bulk of this? That's my first question, if there's any sort of color you can give us on that. But just on -- you've kind of given us a sense of the scale of the business in revenue terms this year. Could you just give us an idea of how many people are actually in the U.S. JV now? How many kind of FTEs there is in that business at the moment? That's the first 2 for me, please.

Okay. I'll take the first one, and Rob can take the second one. In terms of the first one, the vast majority of it is marketing. We're all about trying to grab market share in a distinct -- in the coming months is possibly kind of in the coming years, et cetera. I think we just have to be realistic. No point pulling it apart. Others have got -- have raised money, others are spending materially more than ourselves. And as I said to someone, if they're going to be spending 3 times more than we are, they either have to be absolutely useless, and we have to be absolute geniuses if anybody wins that battle. And he was a shareholder of ours and I think can fight so we are not absolute geniuses and I'm pretty sure they're not absolutely useless. So we are going to have to go toe-to-toe with them or as close as down it in terms of level of investment. And this amount allows us to be very competitive and no excuses in the coming years in terms of becoming a market leader. And as we've said, if we had to put more money in, on the MGM obviously, and we're quite prepared to do it. So I will -- in terms of the size, the number of employees and everything else, do you want to do that, Rob?

Yes, I can do that. So I know the number is over 200 million now with -- not 200 million, 200 people now with an expectation of around 300 by year-end, which if you think, was more like 30 at the beginning of last year. So rapid expansion, and we would expect that to continue into 2021 as well.

Perfect. Just 1 follow-on question for me on the marketing side, if I may. Just -- I'm not going to ask you for your specific CPAs at the moment. But can you give any sense on how your CPAs have started out? Not in absolute terms but how they've trended so far. And then I presume with -- you're really cranking up M life and the Yahoo! database. I presume CPAs control drafts from there. Is that the best way of thinking about it? Or how should we think about it?

Do you want to take that one, Rob?

Yes, sure. So in terms of trends, they were coming down already pre this COVID period. During this period, as you'd expect, they've dropped significantly given marketing dollar and marketing investment has dropped with the absence of live sports. So it is a bit too early to predict what will happen in the second half of the year. And I think that will be much more important for considering what 2021 and beyond might look like. So I think that's the key message for trend, it is down. You would expect it to be down, and we really need to wait and see what happens in the second half of the year.

We'll take our next question from Richard Stuber of Numis.

Just a quick question. You mentioned you have an 18% market share in iGaming in New Jersey, and you expect sports betting to get to that level. Is that sort of compatible with being sort of the market leader because obviously, FanDuel, DraftKings have a much greater percentage market share. So if you can indicate in terms of what market share you should get in sports, what you should get in gaming and over what period of time. That would be very helpful. And the second question is, it seems like it's a bit of a turn in strategy where before, you were alluding at the profitability of the U.S. JV, now it's much more market share. Is that how we should look into your success or not? Is it the same as market share percentage as opposed to profitability?

Okay. I'll take the second one, Rob, you can do the first for me. Yes. Look, I say I wouldn't say up to now it's been all about profitability. I mean, yes, we see with a closer eye on the bottom right hand number than we will have in the next few years. It's not to say we're going to go crazy, but we just have to be realistic. We signed the JV, nobody really knew. I think the prize is far greater than we even thought when we did the JV. Things have obviously developed, and markets have opened up. We've seen it, what with the levels of investment. We've seen, obviously, [ not a big pop but ] a push, but the value that the market puts on somebody as a potential leader in the U.S. market, are you drafting $12 billion, $13 billion, whatever that is. And the only way you're going to become the market leader in 5 years, and yet, that start of valuation of credit, which will create significant shareholder value is by going head-to-head with these operators in the next few years and grabbing market share. So yes, I mean I'm quite positive about that. Quite frankly, in the immediate future, it's all about grabbing market share and winning that battle. And if you do, then the profitability will come and the valuation will come with it as well. And if you do that, the shareholders should be very, very pleased. So that's where we are at the moment. Do you want to do the first one, Rob?

Yes. I'll just add that, so 18% is the New Jersey iGaming market share. I think we're pretty optimistic that, that can be replicated in other states, potentially more so, given other states, MGM might consider themselves to be home states with a stronger brand than New Jersey. New Jersey is very competitive as well. So I think 18% market share is more than achievable in gaming in other states. Clearly, FanDuel, DraftKings is lower than those numbers. So I think you're referring to sports betting market share to begin with. You would expect their share to come down as others rise, but can we get to 18-plus percent in the fullness of time? Absolutely. I think the market leader is not going to be known this year or next year. I think it's several years to get to that position. My guess is the market leader's market share will start with a 2. And that's what we're actually aspiring to achieve.

The next question, we'll go to the line of Michael Mitchell of Davy Global Fund Management.