Entain Plc (ENT) Earnings Call Transcript

Good day, and welcome to the GVC Holdings H1 Post Close Trading Update Conference Call. At this time, I would like to turn the conference over to Mr. Kenneth Alexander. Please go ahead, sir.

Hello. And good morning. I'd like to kick off. Obviously, I'll talk about the news regarding me this morning and -- retiring from GVC. This is something that I've been thinking about for quite some time. I've been -- I don't know if people realize my personal situation. My family are in Scotland. I come down to London every week, Monday to Friday -- well, most times, and sometimes a little bit shorter than that. I've been doing it for a long, long time. My youngest daughter is now just going to university, and I have decided that this moment was coming for quite some time, that it is time to get back to Scotland, be there and spend time with my family rather than do this sort of crazy commute that I've been doing now for, God, nearly 20 years. I recruited Shay about 4 years ago, I think, just after we acquired bwin or just about the same time we acquired bwin. And I said to him at that time that the intention even then was that he would hopefully be my successor. And I'm glad to say that today, that plan that was put in motion 4 years ago has been successful, and he is taking over from me as of today. So I've worked with Shay for 4 years, and there's probably a handful of people that have been absolutely critical to the success of GVC, and nobody has been as critical as Shay Segev. He is a first-class operator. He has been taking on more and more responsibilities as for this moment. It can't be more evident that over the last couple of years, he's been taking over more and more responsibility, and he is absolutely ready to take on this role as of today. He's also supported by Rob Wood, who is -- who was fairly new to the role, young. I don't know if even -- many of you'd even heard of him when he took on about a year ago, and I have to say that he is, by some considerable way, the best CFO that I have worked with, and I've been fortunate that I have worked with quite a few good ones. So between the 2 of them, the business is in excellent hands. And there's absolutely no reason why it can't continue to tick on as it has done in the last few years and beyond that. I'm very proud of the business that I've managed to build with the team. We've got great people, great technology, great brand, a great culture and it's been a great story, but it had to end sometime. And I felt after my time up in Scotland at lockdown, it really just ground it home. I just don't want to keep coming down, battering myself down to London. I've done it all, and it's time for Shay to take it over. As for the results, they are stellar. The results we've announced in the first half of the year, they are a testament -- and I've mentioned a couple of people here, obviously, Shay and Rob, but it's very much a team effort, and the people that work for GVC, I've repeated many, many times, as far as I'm concerned, are the [ leaders ] in the industry. We've got an absolutely fabulous team, right from the executive level down to the senior leadership team and right to all the people who have worked within GVC globally, all over the world, including it could be in Manila, it could be in Australia, it could be Tel Aviv, it could be Gibraltar, or it could be even retail estates in Italy or in the U.K., absolutely first class, and these numbers are testaments. And you can look at the numbers. And yes, the digital growth is stunning despite lockdown and limited sports fixtures, et cetera, et cetera. But I think you have to look -- like you can't really buy it until you -- the strength of the business has to be seen beyond the numbers, which is during lockdown, the whole business came together. Plans that were put in place, and I must remember our HR Director had planned along with Shay and his teams for the worst-case scenario around COVID, and I must admit, I said that I didn't believe it could be as bad as it was going to be in terms of lockdowns. I was wrong. They were right. And frankly, they had plans in place. So the business, including all our retail estate, were closed out in an orderly manner, were then reopened quicker than any of our competitors and, more importantly, in an orderly manner, where health and safety to our customers was absolutely paramount. And our digital business was fully operational from the first day of lockdown and, of course, lockdown pretty much is still here, but right throughout and keeping the volumes going, as I've stated, in the numbers. So I said at the time when we entered COVID that if we were to cope with this crisis effectively, it would serve us well for many, many years, help with the culture, help bringing the business even closer together, the various parts around the world. And that -- I have to say that teams have absolutely nailed it. And they can't be seen in the numbers, but I can tell you, the business has coped with probably an unprecedented crisis better than I could have ever expected. So on that point, as for what I'm going to do in the future, as I said, I'm in Scotland now. I've been in Scotland for 4 months, and I'm going to remain here, take some time off and see what I might well do in the future. Probably undoubtedly not going to be gaming, undoubtedly probably will not be in plc land. I'll probably do something to keep myself busy. I've enjoyed my time in plc land. I've enjoyed myself in online gaming. I've enjoyed myself in GVC. But all things need to come to an end. And as I say, the time was right for me, and I am delighted to hand it over to Shay in good shape, and I'm sure he'll do a stellar job in the coming years. So on that note, I'll let -- it's all yours, Shay.

Many thanks, Kenny. First of all, I would like to say a big thank you, Kenny, for having built this incredible company, from a modest beginning to a global FTSE 100. I am excited taking on the role. We've got exciting times ahead of us with many opportunities. For those who don't know me, I've been COO for 4 years, working very closely with Kenny. Over the last time and over the time, I've been responsible for many number of key areas, including the U.S. joint venture, our tech platform as well our M&A strategy. In addition, I drove the successful integration of both bwin.party and Ladbrokes Coral. I've been in this industry for 15 years, previously worked in Gala Coral and Playtech. GVC is in incredible strong position, as demonstrated by the remarkable performance we have delivered in the first half despite the uncertain world we are currently in. That means we can look forward with optimism. And my initial 5 key areas of focus are: Firstly, the U.S., probably our biggest opportunity to create value in a new dynamic market. Our ambition is to be the leader in that market. We will do whatever it takes, as we demonstrated last week with the increased investments. Secondly, organic growth. Our year-on-year double-digit growth over the last 18 quarters reflects the opportunity we have. We have proven track record of building and rebuilding strong brands and growing market share. We operate in markets that are growing. Around 94% of our revenues last year came from markets that are growing over 10% per annum. We are the best in the industry in digital marketing and our operations are supported by the best tech platform and products. Thirdly, M&A. I've been looking after our M&A strategy for a while, and we are focused on bolt-on deals in regulated markets where we can leverage our expertise. We had an exciting M&A pipeline going into the COVID-19 crisis that we put on hold until we're back to normality. Yet, that pipeline is no less exciting, and we will continue on that. Next, operational execution. We have excellent track record excelling and the best team and people across the industry. This excellence has been demonstrated through the current COVID-19 crisis. Our team across the business stood up, and I'm so proud of them. We do things well. We never fail on any objectives we aimed. Yet, I'm keen we always look for continuous improvement. Having led the successful integration of bwin and Ladbrokes Coral, I can see further opportunities across the group. Finally, responsibility. We provide exciting entertainment for our customers every day. But we do need to ensure that we have robust safety net in place for those customers who show behavioral problems. We have done much so far in putting the safety net in place with algorithms, checks and interventions. There's always more we can do and will do. It's essential that responsibility is part of our DNA. We have regulatory changes ahead, and we will continue to work with regulators and other parties to ensure that we got a good outcome. I'm extremely excited about the road map ahead and look forward to talking to you more about that at our interim results in August. I now hand over to Rob to talk about the results this morning.

Great. Thanks very much, Shay. Good morning, everyone. So overall, you've seen the headlines. We're very pleased with the performance of the business through first half of the year, and that very much applies to both the pre-COVID period to mid-March and the post-COVID period as well. Just as a reminder, we had excellent momentum in the business coming into the COVID period. We reported revenue growth across all channels of plus 11% in constant currency for the 15th of March, and that was made up of online NGR being up double digits again at 19%. U.K. retail was also performing well at only minus 5%, despite Q1 being the last quarter before we annualized against the triennial review changes. And European retail was performing strongly as well at plus 24%. Then, of course, all our shops closed and sporting events were canceled. And so Q2 had a very different shape to it. But the strength of our business model and the diversification of our business through our brands, our products and our geographical spread meant that, overall, we've been able to deliver a relatively good performance across the first half. I think the benefits of diversification were clear to see in several different ways. So geographically, in Australia, horseracing survived throughout the period, and our Ladbrokes and Neds businesses over there performed exceptionally well. They grew at around 76% in Q2. And at one point, Australia during Q2 accounted for half of our global sports business. Product diversification was also paramount during the quarter, whether that's shifting volumes to minor sports like table tennis and e-sports, or to gaming products like bingo, casino and, of course, poker, which performed very well. And also, having diverse and strong brands, I think, helped us. Gaming brands like partypoker, Foxy, Gala Bingo, they've all grown exceptionally well as customers were already familiar with them as lockdown kicked in. So I think that strength in diversity is reflected in our very strong online numbers. As you've seen, NGR up 23% in Q2 in constant currency. And within that, gaming was up 46% in the quarter. Now of course, we're seeing a steady increase in top flight sport. And thankfully, it's clear that our customers are pleased to see the return of sports as much as we are, because betting activity is back to pretty close to pre-COVID levels already. Just on retail. Clearly, revenues for both U.K. and European retail were down significantly in H1 as shops were closed. But our teams have worked extremely hard, as you heard earlier from Kenny, to get all of our shops open. In the U.K., we opened on the first possible day in each jurisdiction, and we've done it in a fully compliant manner with social distancing measures in place. As you'd expect, all of our shops across the U.K. and Ireland are now open. And thankfully, those initial onerous restrictions in Scotland are going to be lifted next week. You have to say early signs on trading are encouraging and ahead of where we might have expected to be. It is early days, of course, but we're less than 20% down on pre-COVID levels already, which is a good result given restrictions are still in place. And it also means we're immediately back to profitability, which, of course, is important. So we were EBITDA positive right from week 1. Demographic data is also encouraging. We can see that our older customers have come back to shops in the same proportion as pre-COVID levels. So the older customers haven't chosen to stay away so far. In Europe, European retail, it's a similar picture to the U.K., actually. We're almost entirely open. Just a handful of shops in Belgium left to go. And again, volumes are within 20% of pre-COVID levels. And that's despite, again, ongoing restrictions. There's no football in Belgium, for instance, and there are some other product gaps as well. But [ crucially ], we're already profitable in European retail as well. So all in all, even though group NGR is down 10% for the half because of retail closures, we're very happy with our performance and especially with our online growth. You might remember in our full year results in March, we talked about our record of consecutive quarters of double-digit year-on-year growth in constant currency. And now with Q2 delivering 23%, we're up to 18 consecutive quarters of double-digit online growth, which is some record. And pleasingly, that growth came from all our major territories in H1; every area was up double digits. So again, demonstrating the strength of our business. Let me add a quick note of caution on revenues. You've got to imagine, as we move into the second half of the year, that there will be increased macro pressures on discretionary spend. Local government support unwinds, recessionary pressures may kick in. And also, as lockdown easing around the world, there'll clearly be more competition for leisure spend, and that will have an impact on us. And I should point out as well, we have benefited from unusually good GGR margins in H1, especially in the U.K. and Australia. So heading into H2, I'd say we can be absolutely confident on our relative performance, but we should also be cautious that there are some market headwinds as well. Moving down the P&L. We expect first half EBITDA to be in the range of GBP 340 million to GBP 350 million on a post-IFRS 16 basis, which clearly is a reflection of the strength of our online performance. But also do remember, lower levels of marketing spend in there, in particular in April and May. And looking forward, a bit too early for us to give clear guidance on the full year outturn, but we would expect, of course, stronger EBITDA from our retail divisions in H2 compared to H1. But do note that we could be lower in online as you can't assume those margins will continue into the second half of the year and we'll more than likely increase our marketing spend in H2, as we push to continue our strong market share growth in all territories into 2021 as well. Just lastly from me, a quick word on cash. Really pleased to be able to confirm that we achieved our target of getting through the period of cancellations and retail closures with 0 cash burn, which is no mean feat, and which thanks mostly to the cost and cash management measures we've put in place, but as well, of course, the stronger-than-expected revenues in our online business. So in summary, a highly unusual shape to the first half of the year. But as usual, GVC delivered another strong performance, and we look forward to the second half with some caution, but with confidence as well. So with that, I think we can open it up now to Q&A.

[Operator Instructions] We will take our first question today from Ed Young of Morgan Stanley.

I've got 2, if that's okay. First of all, Rob, you gave some very helpful detail there on some of the aspects where the growth has come from. But I wondered if it's possible to give a bit more on the drivers of the organic growth in online beyond the sports/gaming split that's been disclosed? And were there any particularly outstanding geographies outside of Australia? I appreciate you said it was broad-based. And can you talk a little bit about what the growth has been in new customers or actives compared to high yields from either sort of pent-up demand and good results? And then my second question is on M&A. So Shay, you referred to the strong pipeline that you think is exciting. Has COVID changed your view on M&A targets at all? Obviously, you've seen good benefits from diversification in both products and geography and online, or seen retail be impacted severely during that period. So has any of this shaped what you think you'll be looking for in terms of target profile or size?

Should I take the first question? So in terms of where has the growth come from, if we think about it in pound note terms rather than percentage terms, I would say 4 key areas. You called out one, Australia sports undoubtedly strong during Q2. Another area, the U.K. sports brand gaming businesses contributed significantly as well. And then U.K. gaming brands, so both Gala and Foxy performing particularly well, helped in particular by retail migration, we think, in gaming brands, far less retail migration in the sports brands, but it's been clear to see for Bingo in particular. And then the last one I would call out is partypoker, where all around the world, we have seen, well, frankly, a doubling of activity, which has been great to see. Clearly, other areas as well, but less so, I would say, Europe and Lat Am; Europe because we're still down on tennis and basketball content, and Lat Am, we don't -- it's predominantly sports business, predominantly football, and local football is not yet up and running. And -- so those are the 4 areas I would call out. In terms of spend per head versus FTDs, we have seen acquisition rates double, which has been great. But remember, though, that we -- our brands around the world are very well established. And so the sort of the pound note contribution from FTDs is helpful, but it's not as material as the spend per head aspect. So most of the strength that we've seen has been from existing customers rather than new customers. In areas like Bingo, a little bit more from new customers, in the sports brands much more so existing customers. Shay, do you want to take the M&A one?

Yes. Yes. In terms of M&A, so our appetite for M&A did not change. I mean, clearly, one of the trend from GVC is our proven track record of acquiring businesses and then integrating them. We just concluded there's a listing of the Ladbrokes Coral integration, which was a great success for us and deliver a lot of value. And as I mentioned, we had a pipeline of a few bolt-on things we were looking. I mean the focus is clearly on regulated markets, buying things for the right price, which matches our own strategy, entering new markets and deploying our expertise. And we will continue doing that. And there's no real time line. Once we find something which makes sense, we will do it, and clearly become more complex to do larger transactions because less is less. But clearly, we are looking now on to bolt-ons, and we will continue doing it, when things are more back to normality.

Perfect. Just 1 quick follow-up on that, Shay. So no change. Would you still be looking at online and retail targets? Retail only? Online-led? Or what's your sort of view of what the right target profile would look like ideally?

I mean, look, I don't think we can say what we -- I mean I wouldn't eliminate any options. I mean, clearly, digital is something we want to grow. I mean in general in the world, I mean, e-commerce and digital is growing faster, and this is where we want to focus, we want to be a double-digit business. We do see value in retail. I mean in some regulated markets, retail is essential. It's part of the overall offering. So I wouldn't eliminate retail. But clearly, digital is the focus. We might acquire something which has some retail elements in order to accelerate our digital business. I mean U.K. is a good example. I mean our U.K. retail, I think it's -- I believe it's a very strong enabler to omnichannel also for our digital growth and the great numbers we will see today.

We will take our next question from Stuart Gordon of Berenberg.

Three from me. And obviously, first of all, Kenny, all the best with your retirement. Can't think of a better place in the world than Scotland to spend it. And congrats, obviously, Shay, with your appointment. But Shay, you spoke about your 5 pillars that you're going to move forward with as CEO. And obviously, the fifth one being responsibility, which is currently the subject of a lot of regulatory scrutiny, so -- and it's of great interest to investors. So I was just wondering if you could expand a little on your own thinking here and how you propose or expect taking forward the regulatory debates in key territories? Secondly, I was wondering if you could talk a little bit about the extent to which you feel having your top brands has really helped through the lockdown, in particular in helping lower marketing costs versus the competition and how perhaps that might unfold as we come out of lockdown? And finally, just is there any form of lock-up on Kenny's shares following his retirement?

Thanks. I will start with the responsible gaming. I mean, GVC, for a long time, put responsible gaming as something which is key in our DNA. We have a number of initiatives in the business. I mean Kenny has been clearly the face of that as CEO. But there's been a lot going on underneath. I mean I personally is the person who was responsible for, say, 80% of the underlying operation in the business. I was involved in driving many of these activities, which touches many things we do in terms of our products, our interface with our customers, our CRM, new algorithms, as I mentioned, interventions. I mean we deployed market reforms, maybe something we talked about it as well, our marketing, our approach. We have an open dialogue with regulators. We welcome that. I think a good dialogue and clear regulation and positive dialogue with regulators is a positive, it creates certainty and it's good for everybody, for us, as an operator and for the regulators. And it's something which is within our DNA, and we'll continue doing that. So we will leverage what's already been going for some time now. We'll continue doing it. And then GVC is and will be the most responsible brand and operation in the industry. This is the first one. What was the second question?

Second one was just about how you feel having had top brands may have helped in terms of, obviously, there was lower marketing money being spent. And how do you see that evolving at post lockdown?

Yes. I mean, clearly, I mean, the fact that we have the Tier 1 brands with a heritage of years of hundreds of millions of marketing spend is an advantage. And this is one of the key, I mean, brands like bwin, like Gala Bingo, international brands as well that we have, I mean partypoker, of course, as well. I mean it's recognized within customers and it's clearly an advantage, it's advantage that you could see it in the last periods, when we touched some of the spend. There was no sport events, so it makes sense to do it. And people recognize this brand, and it's a clear competitive advantage for the future. I mean, I think what happened in the first -- during this lockdown period is many other operators cut spend. We cut spend. Clearly, our brand is more recognized, attracts more players. And I think as the lockdown and the sport event is coming back, you will see marketing spend increasing, both for us and competitors. And through our efficiencies, both in terms of marketing technologies I mentioned, and our strong marketing teams, I mean, I'm confident that we will continue to do better than others. I mean as we've shown for the last 18 quarters. So I'm confident about that. And the last question...

And I was just going to add, Shay, that -- sorry, I was just going to add, Shay, that we've said for some time that we expect that rate of marketing to tick down over time. And I think this -- the latest period reinforces that that can happen. But by the same token, we're not going to be shy in investing going forward to keep up that double-digit growth. That's incredibly important for us. We want to carry on gaining share. And so inevitably, marketing spend will be higher on the second half of the year as we seek to be opportunistic. And I think the last question was on shares. I don't know, Kenny, if you can maybe touch on that?

Yes. Yes, I'll answer that. Yes, there are some lock-ins. I mean, I think it's the condition of my LTIPs and bonus shares that I took in -- as [ teamed ] shares I had to get for the bonuses I've had in the last few years per the [indiscernible] innovation plan. But -- I mean, I think it's like 4x my salary or something like that. But look, I won't be selling any shares for the foreseeable future. As I said, no, this is not a one-man show. It's never been that. I've repeatedly said it to yourselves and the shareholders for many, many, many, many years, it never was as a result of very fortunate to have very, very good teams, people around me. The team that I've got now is undoubtedly the best we've ever had and upgraded all the time. Business is in good shape. And I think as I said in the call last week about U.S. opportunity, it's definitely the biggest catalyst for our share price. And if we deliver on it or even close to it, there's massive upside in the share price. So I'll be holding them on -- onto them, and I've got complete faith that Shay will nail it. And if he doesn't, I'll hunt him down. No, no. I'm not selling the shares. This is in great shape, great opportunity. The U.S. is a big one, excellent team, and I'll be holding on to them indefinitely and expect to make some good money on them. So that hopefully answers your question.

We will take our next question from Gavin Kelleher of Goodbody Capital.

Just a few from me, please. Just on gross win margin, you've obviously hinted they're very good in the period. Can you just give any sort of sense for how much of it is favorable results driven? How much of it was structural? How much of those are product mix and people betting on stuff they didn't know as much about, et cetera, et cetera? If there's any insight on that? Just on retail and the kind of -- I know it's a very short period, can you just give any sort of kind of insight in how sports is doing, share machines are doing? And then, as well as that's been, do you think there's significant benefits just given -- how sport has come back and the staggering [ on it of ] live TV, et cetera, et cetera, and more sport content year-on-year just in the initial performance from retail. And then just finally, any comments on dividend?

Sure. Should I take -- I'll have a go at those, should I? So on G -- on GGR margin firstly, Australia, given its relative size during Q2 was the biggest driver. Why margins were strongly up year-on-year? Why were they up? Undoubtedly favorable results, key racing events like the Sydney Carnival went in our way. Also a little bit of product mix within the Australian margin as well. So sports is typically significantly lower margin than racing, just in normal times. And clearly, racing was the dominant mix during Q2. So there's a bit of product mix there. There's also a host of management initiatives, which are ongoing to a degree of the structural improvement. So Australia, the #1 driver. Outside of that, football results generally have been positive in June, and that's helped us everywhere, U.K. in particular, not racing, but the football in the U.K. And the only other thing I would add is there are -- as volumes drifted to other sports like U.S. racing, the familiarity point, I think, is partly relevant, but actually, really, it's just because [indiscernible] are generally higher on things like U.S. racing, it's less competitive and there's fewer concessions around it, things like BPG. So it's not so much familiarity in my view, it's more the way that those products are traded. But I think that's the third point, I think. #1 is Australia, #2 is football margins and then #3 a little bit around minor sports being higher-margin than the mainstream sports. So that's on margin. Why don't I touch on retail and then, Shay, feel free to chip in. Let's take the U.K. first. U.K., the stronger element has been the machines. Really interesting to see volumes get back to pretty much where they were very quickly, which is encouraging to see. Sports lagging that somewhat. But I'd say that's not surprising given the program. It's good, but it's not as full as where it would ordinarily be. And therefore, with that in mind, when you think about European retail, that was a little slower to get up to full pace because it's much more a sports business. So it didn't have the machines aspects driving revenues. So it was slower during early June. And then as sport, in particular football, has ramped up, it's back up to somewhere close to pre COVID levels. It is difficult to make comparisons year-on-year, given we're now in the summer with loads of football and we didn't have that last year. It's also difficult to make comparisons against budget because budget has a year within it. So typically, we measure our activity versus the Q1 levels. And as I said earlier, we're inside of 20% down now across our retail estates and trending in the right direction. And the third question, Gavin, will you...

Was on...

Yes, I'd add 2 things on retail. I mean the team has been doing amazing work on retail opening. Clearly with -- as Rob mentioned, I think we've been more pessimistic thinking that when retail is back, numbers will be -- [ the world ] was actually was positively surprised where volumes are coming back, and it's moving to the right direction. I mean you still have social distancing and the schedule of the sports is still a bit moving target. But I think overall, as Rob mentioned, it's very positive. Your next question is what?

Sorry, my last question was on any comment on dividends going forward.

Yes, dividends. So it's too early to have a firm view on the second half of the year. We'll revisit this topic at our interims. I think you'd have to say, given we still have uncertain times in front of us, it's more likely that dividends would resume in the first part of 2021 rather than second half of this year. But we will come back to that point at the interims.

We will take our next question from Simon Davies of Deutsche Bank.

Three from me, please. Firstly, just on Australia, obviously, particularly strong, and you highlighted the margin performance. Can you give us a bit more detail about quite how strong it was? How significant were other factors, in particular, the closure of Tabcorp shops during the second quarter? Secondly, just on U.K. retail, there's been some pretty alarming numbers out there in terms of high street footfall. Are you significantly outperforming that in terms of footfall? Or is this all about increased spend per head? And lastly, just on U.K. online. Any impact in the period notable from the credit card ban?