Entain Plc (ENT) Earnings Call Transcript

Good morning, and welcome to Entain's Q3 Trading Update and Analyst and Investor Call. Please note that this call is being recorded. [Operator Instructions] I will now hand over to your host, Jette Nygaard-Andersen, Chief Executive Officer, to begin today's conference. Thank you.

Thank you, operator. And good morning, everyone, and thank you for dialing in today. As always, I'm joined by Rob Wood as well as the IR team. And it's great to be speaking to you all again. And as usual, I'll start with a brief overview of our progress, delivering on our strategic objectives and ambitions, and then Rob will take you through our Q3 trading in greater detail, and then we'll open to Q&A. So I'm pleased to say that we've delivered a robust performance across the group with NGR up 12% for the year-to-date. Online NGR in Q3 was broadly in line with expectations, 2% lower on a constant currency basis, which largely reflects of the headwinds included in the prior year comparators. What is fantastic to see is that more and more customers are choosing to play with us. Q3 delivered another record numbers of actives. We aren't just creating a great experience online. Our digitalized offerings in our shops is the best on the high street, with retail delivering another strong quarter of growth, up 10% year-on-year. As a result, our underlying momentum is good. In first half, we outperformed our main competitors in key markets, and we expect that to continue. It is this underlying momentum that demonstrates the strength and resilience of our business as our customer focus continues to drive a broader and more recreational player base. We continue to take great strides in delivering an even better offer. In sports, our new fan zone for both Coral and Ladbrokes brands is proving very popular, delivering an exclusive match day experience to customers in the U.K. And in gaming, 3 of our top 5 games this year are new in-house releases, last 5 of BetMGM's top 10 games are Entain in-house creations. In retail, our industry-leading gaming machines and betting terminals in the U.K. are driving revenue growth and a broader demographic of customers. It's the entire cabinet experience, the menu journey as well as the greatest content range, much of it exclusive, that is providing customers with what they want in a format they enjoy. The insights that our data and analytics provide is a powerful tool for both marketing and player protection. With over 160 million profiles, we have an exceptional understanding of our customers. It's a significant differentiator and it enables us to lead our industry in digital marketing and, of course, player protection. We are constantly improving the way we engage with our customers, evolving alongside them. But there's still much more we can do, and we are developing new performance marketing skills and centers of excellence to ensure all of our brands benefit from our customer insights. Our focus on brand marketing continues, and I hope you have all seen our iconic Rocky campaign with Ladbrokes and bwin's fan-led creative. Both were launched recently and have been hugely successful. Over in Australia, the Ladbrokes Cox Plate race was center stage of spring carnival. And as we announced last week, we are taking the Ladbrokes brand into retail through our partnership with HAE. But it's not just sports. Partypoker launched its first Ontario poker series as well as an exciting new tournament leaning on our partnership with McLaren Racing. Moving to BetMGM. We continue to power ahead in the U.S. We're the clear #2 in our markets with a share of 25%, excluding New York. We remain the leader in iGaming with 31% share with games in both New Jersey and Pennsylvania. In sports betting, we focus on those markets where we see strong returns. This strength is most evident where we were live on day 1 of a state regulating. Most recently, we launched in Kansas, and we are delighted with the customer activity and engagement levels we've seen so far. BetMGM's Q3 NGR was just over USD 400 million, up approximately 90% versus last year as the market continues to open up. On a same-state basis, Q3 NGR was up around 50% year-on-year. Whilst July and August are seasonally quiet, BetMGM's strong financial performance over those months reiterates the long-term profitability of our business model, which is seasonally on the marketing front. As we continue to build scale and momentum, this reinforces our confidence in reaching sustainable profitability during 2023. During Q3, BetMGM started rolling out it's refreshed Sportsbook app. This has a reimagined design, improved navigation and enhanced personalization to optimize discovery and the end to end betting journey. The app re-ramp has landed really well, and we'll be launching single app single wallet before the end of the year. The NFL season has started strongly. Volumes have been fantastic with strong performance across all metrics, actives' handle, bet count, reactivations, margins, all really positive. Of course, the start of the fall season, sports kicked off with its usual slurry of promotional and bonusing incitement. However, so far, the market has been relatively rational and in line with our expectations. Time for the NFL buildup, BetMGM launched its latest star studded advertising campaign with Jamie Foxx and Vanessa Hudgens joined a by number or Sports stars. Alongside the U.S., we continue to see growth across our other strategic pillars. Our core online markets are expected to grow at around 7% to 8% CAGR over the next 5 years, with some of our newer markets growing at double-digit rates. We have announced 9 transactions in the last 18 months, 5 this year taking us into new markets as well as deepening our presence in growing markets. And in new opportunities, Unikrn is getting ready to launch our skill-based wagering products, opening up an exciting and potentially significant new opportunity. Looking across our business, we estimate that the markets we are in are worth around USD 70 billion today, and we aim to drive meaningful and profitable market share as the opportunity continues to expand. Critically, across the group, we continue to set the pace for sustainability and player safety for our industry. ARC is leading the way, and we couldn't be more pleased with how it's demonstrating groundbreaking levels of player protection, and we look forward to sharing more with you at our Entain Sustain event next week. But this isn't just across core U.K. and international markets. As you know, the ARC program has been rolled out internationally and in the U.S., Entain and BetMGM, let our operator peers to create the industry's 12 principle of responsible online gaming. Let me finish by saying, as we look forward, we remain mindful of the shifting macro environment. But Entain has a healthy underlying momentum and is making great strides in broadening our customer appeal. Our diversification across geography, products and broader customer base underpins our group's sustainable high-quality earnings. Therefore, we remain confident and are well positioned to deliver on our strategic pillars of growth and sustainability over the medium term. With that, I'll hand you over to Rob.

Thanks, Jette, and good morning, everyone. As Jette has already outlined, our underlying performance remains healthy with good positive momentum. Group NGR was up 2% year-on-year in Q3, broadly in line with expectations, and year-to-date NGR is up 12% year-on-year. In online, NGR was up 1%, helped a little by FX, as on a constant currency basis NGR was down 2% versus last year. The enforced temporary closure of the Netherlands, while we wait for licensing, took 3 percentage points of growth. So stripping that out, online NGR was up 1% in constant currency. Q3 last year also saw the benefit of the end of the Euros tournament as well as lockdowns in Australia. If we adjust for those 2, NGR would have been up mid-single digits in Q3 this year. So that's our underlying run rate. Additionally, with further growth in our actives space, which is up 65% on 2019 and up 6% year-on-year, and with ongoing momentum delivering market share gains, you can see why we are confident in the underlying performance of the business. Our strategic focus to broaden our recreational base, coupled with the ongoing implementation of RG measures in the U.K. does mean that spend per head continues to track lower year-on-year. However, importantly, we have not seen any further deterioration due to macro conditions than we highlighted in Q2. Looking at some of our key online geographies. In the U.K., year-on-year trends improved significantly versus H1 despite the ongoing affordability measures being implemented by leading operators. In Australia, we continue to go from strength to strength, but as anticipated, it was down in Q3 as it lapped lockdowns in the major states and a 30% growth performance last year. Brazil delivered further growth with Sportingbet leading the market. However, this growth is more moderate versus our expectations due to market overcrowding ahead of its regulation. Over in Italy, we bounced back to strong growth as lockdowns washed out of the prior year numbers and omnichannel operators continue to outperform. And in Germany, trading remains challenging as we still await robust policing and the issuance of gaming licenses. A quick notes on win margin. Online continues to benefit from strong sports margins with Q3 this year at 12.9%, a fraction ahead of last year. In retail, we continue to see encouraging performance across our shops with NGR 8% ahead of 2019 levels. In the U.K., this has been led by the strength of our digital offering with both the gaming machines and BetStation cabinets doing very well. Whilst in Italy, volumes have also recovered to ahead of pre-COVID levels and the growth trajectory that we enjoyed pre-COVID has now resumed. BetMGM in the U.S. continues to grow rapidly, as Jette has discussed. The NGR of just over $400 million for the quarter sees NGR year-to-date up to $1 billion, meaning we are well on track for our NGR target of over $1.3 billion for the year. It's also good to see that whilst we remain the outright market leader in iGaming with 31% market share, our online sports betting offer continues to perform well. In particular, when you look at states where we were live on the first day that the state opened, our market share is around 25%, which is a good reflection of our capabilities, and it points to future online sports betting share gains as more states open up. Before I wrap up, let me share some color as to how we're thinking about online growth next year. Recognizing the increasingly challenging economic environments around the world, I think it's prudent to model a range of revenue growth assumptions for the year ahead, and our range of growth scenarios are aligned with analyst thinking and consensus for 2023. Importantly, let me also remind people of the excellent resilience and flexibility that we have in our business model. Most importantly, around 80% of our cost base in online is variable. Variable either because it's formulaic as a percentage of revenue, like gaming duties or content royalties, or variable because it's uncommitted and can be flexibly controlled as appropriate, for example, our marketing spend. Almost all of that variable cost sits above contribution margin and that is why you hear me say that we can manage our business to contribution margin, which for us is approximately 40% without affecting the medium- to long-term growth of the business. The circa 20% of our cost base, which is less variable, typically sits between our contribution margin and our EBITDA margin of mid- to high 20s. That control and flexibility above contribution provides both comfort and sufficient visibility on profitability for us to plan with confidence and continue investing in the future. So whilst we remain vigilant and disciplined, our growth strategy continues. Coming back to the present and in summary, for Q3, the performance was broadly in line with expectations and excluding the Netherlands, we exited the period with a return to growth in online. Retail continues to trade well, and BetMGM is going from strength to strength and firmly on track to deliver guidance. Looking to Q4, we anticipate strong growth in online as we annualize both the temporary loss of Netherlands and the loss remaining lockdowns in Australia from late October, and we also look forward to benefiting from an exciting World Cup. Therefore, we reiterate our full year EBITDA guidance of GBP 925 million to GBP 975 million. With that, I'll hand the call over to our operator, who will open up the lines for Q&A.

[Operator Instructions] The first question comes from the line of Ed Young of Morgan Stanley.

My first question is on the online growth expectations. Rob, you talked about scenario planning. You said it was aligned with analyst thinking as well. I wondered if you could just dig into that a little bit more to help us frame the debate. Your 3-year CAGR at the moment is 11% in online. Jette, you also mentioned market growth expectations of maybe 7% to 8%, but there was also some talk about market share gains in there. So perhaps could you talk a little bit about how you see the scenarios for online growth going forward?

Yes, absolutely. Let me just kick off, and I'll hand over to Rob also for further comments. I mean let me just start off by saying that when we look at Q3, we are very pleased with what we are seeing and especially the underlying growth and the underlying momentum going into Q4. So there's a lot here. That's really great for the business, and we continue to grow our monthly actives, which is really what it's all about. Now looking ahead, we, of course, are mindful of the environment in which we operate in, and we remain vigilant. And that's really why when we look ahead, we think it's prudent to -- instead of modeling out 1 growth scenario, we're modeling out several growth scenarios. So that's what Rob talked about in the introduction here. However, I want to stress that as our business is not the bellwether of discretionary spend here, and we have this diversity around geography and products, that's why we keep on executing our strategy, and that leads me to the comment that I made in my introductory remarks was that if we look longer term, so outside of rest of year and 2023, we are expecting that our core markets will grow at 7% to 8%, whereas the newer markets, so some of the emerging markets will grow double digit. And that's why when we look ahead, we expect us to go back to potentially double-digit growth across the territories here. So there is a rest of year and there is how we look at 2023, and we are not here to predict how the macro or the economic environment develops, which is why we're looking at scenarios. And then we look longer term where we believe our market is going and how we expect us to perform in those markets. So that was a little bit the overriding comments here. Rob, do you want to talk a little bit more about 2023 and the scenarios?

Yes, happy to do that. So as I said in my opening comments, Q3 run rate feels like mid-single digits on an underlying basis for online. Q4, we anticipate higher than that, high single digits. Why? Primarily because of the World Cup, that, therefore, doesn't carry through into 2023. So back to mid-single digits as an underlying run rate. That's the best view as we see it today. When it comes to scenario planning, as yet as alluded to, clearly, we have to be mindful of the environment. We study the numbers every week. It feels like a low single-digit to high single-digit range is appropriate. The scenario planning. The good news with our business as I outlined earlier on, is that when you apply a 40% contribution margin to that, the range of outcomes from an EBITDA perspective is tight. And therefore, we can manage the business accordingly and continue to invest in growth, whilst, of course, remaining vigilant all the time. I should say that none of those numbers include SuperSport or BetCity, that's all incremental growth on top of base scenarios that I've mentioned.

Very useful. And my second one was there's a line in the statement about greater confidence in sustainable EBITDA in the U.S. for next year because it is slightly different formulation on the existing guidance. Is that just a strong revenue progression for BetMGM that you can see that NGR progression coming through, so you can sort of look forward to next year? Or are you seeing signs of operational gearing and improved profitability within the quarter as well?

Yes, let me take that. So first of all, when it comes to the NGR, you're right that with year-to-date, now we are around $1 billion. So Q4 (sic) [ Q3 ] was USD 400 million, that's up 90%. As I recall, H1 was up 65%. So that just shows that we continue to build both the customer base. I'm very pleased on how we retain customers, and how we are managing marketing as well as boning. So that goes into the operational. And our models just become stronger and stronger in marketing and our cohorts as they develop their is an, of course, an in-build multiplier here. Now when it comes to the July and August, we're very pleased also with the strong financial metrics that we saw during those months. And that then gives us confidence that the model is basically making great progress in delivering the sustainable positive EBITDA during 2023, which we've talked about before and the longer-term profitability of the business, which we've said all along is why we are here. We are building a sustainable business for the future. So both the traction on the top line, but certainly also what we saw through July and August, which I should say, are more quiet months seasonally when it comes to marketing, but it still is a proof point for how our model works .

My final one, just the interest rate environment has changed a lot this year. But does that change your attitude towards M&A and use of balance sheet, there were some recent reports that the company was a better for the Western Australian TAB, for instance. So any thoughts about interest costs and the sort of trade-off on leverage there?

Yes. Let me start off, and Rob, please jump in afterwards. So as we said a couple of times, we, of course, remain vigilant and very prudent when we plan our business, given the recent uncertainty. But the health of the business is good. So we continue to deliver. And we still have a strong pipeline on M&A. And we continue to also look at those opportunities, which we can because of the strength of the business and our strong balance sheet. So while interest rates are not helpful, it doesn't prohibit us to continued M&A here. And in the current environment, it's -- I would say, it might even open up new doors for us or new opportunities where we are looking at things where others are pulling back. So really, our M&A strategy is unchanged here. We start with a strategic fit, the importance to the business, look at the business on its own merits. And then, of course, we look at the financing in the current environment. Rob, do you want to comment on leverage and interest rates further?

Yes. I mean, I'll add a little bit more, but I think you hit the key points there yet. I think the important point with M&A is to remember that the returns that we generate through M&A are so compelling typically because synergies are such a large portion of existing EBITDA that we're buying, what that means is that whilst rising interest rates are unhelpful to the model, they don't -- they just mean that the returns are slightly lower than they would otherwise be. So for the right deal, the right terms, it's still a compelling growth opportunity for us. But of course, we remain disciplined, and we have that factored into our models as we're assessing deals. The -- as yet to said, the other important context here is -- our balance sheet is healthy. We're still forecasting to end this year a little under 3x levered despite 5 acquisitions this year or 9 over the last 1.5 years. So we feel good that for the right deals, the right terms, then there is capacity and desire to carry on with M&A.

The next question comes from James Rowland Clark of Barclays.

My first question is on BetMGM, again. Jette, you stated that you're even more confident about delivering sustainable EBITDA at some point in '23. And you said at Q2 that once you've broken even in the U.S., that would trigger an appraisal of how you might crystallize value in the JV. Could you talk a little bit about the different scenarios under consideration to achieve that?

James, yes, I think -- well, I'm pretty sure what I said was that the main focus now is to make sure that we build a fantastic business for today and for the future and that we were confident in becoming profitable during 2023 probably to the latter part of the year. And that's really the first milestone for us. So there is no real hurry for us or our partners to do further to crystallize the value here. And then we reached that point that could open up further opportunities for us. So whether it's through dividends or whether we, at some point, could look at an IPO. But I just want to reinforce again that right now, our focus is on building the best business here, supporting BetMGM. We do that 24/7 every single day. The team is doing a fantastic job, whether it's in the U.S. or whether it's all the Entain people across the world. So that's really what we're focusing on. And I think we're very happy to see that it's paying off. So you shouldn't expect us to have a plan for the minute that we hit profitability next year. But it's certainly a main milestone for us.

That's great. My second question is just following up on M&A and reasonably high levels of leverage today in the rising interest rate environment. You stated that the returns on deals you're looking at remaining kind of be compelling. Are they still more compelling than buying back your own shares at this share price?

Let me start on the overall M&A picture. And Rob, if you want to comment on the share buyback. So this is -- the prices are where they are. We've certainly seen that public traded companies have gone down quite a bit, and that could open up some attractive opportunities. I think privately held companies. They are still -- they still have expectations of being paid a fair value for the price. But I do think there are opportunities for us, though, if I look at this strategically because others might be holding back where, as we just discussed, for the right company for the right terms and for the right price, we're still confident in executing on our strategy around growth, in particular, but certainly also around M&A. And as Rob has just said, it's just in our industry M&As to such a compelling opportunity for us to grow the business. But again, in this environment, keeping repeating myself, we are looking at the companies on a stand-alone basis on its own merits, and it needs to be the right company, the right brand, the right team and at the right price and terms. And then we, of course, look at and financing and also compared to how else could we deploy our capital, which is obviously something that Rob and I are very focused on. Rob, do you want to comment further and -- around share buyback.

Yes, happy to. I can add a little more color. And actually, SuperSport was a very real example of that exact consideration should we be executing on SuperSport as we did in August or looking at a share buyback alternative. And as you'd expect, we studied both very carefully and discussed it as a Board. And when it comes down to 2 main considerations really what's best for the business strategically and what's best for the business economically. And when you study the numbers, we found that on an economic basis, SuperSport and M&A still came out on top relative to the larger share buyback that we could realistically do. So M&A was still more compelling. And then obviously, from a strategic perspective, there's no doubt that investing into Central and Eastern Europe and creating a platform for further growth through that region was preferable from a strategic perspective. So I think the simple answer to your question, James, is we will look at a share buyback alternative every time we pull the trigger on another piece of M&A, but even in the current environment as was still the case in August, if you remember, the M&A opportunity came out on top.

That's really helpful. And sorry, my final one is, just could you help us with the U.K. year-on-year growth rate, it was down 15% in H1, but you said it improved in Q3. So I know the comps were easier. So I was just wondering whether that got near or flat in Q3.

So, Rob, do you want to take that one?

Yes, happy to. It did get much nearer flat. It was still negative, but only marginally so. So really pleased with that progression as you say, minus 15% in H1, which was easily the strongest performance across the market, much closer to flat in Q3. The difference, of course, is moving away from lapping lockdowns in the prior year. The question then is, well, okay, well, it's still marginally negative in Q3, what's the underlying story there? Given ordinarily you'd expect at least mid-single-digit growth out of the U.K. market. And really, it's -- is 2 things. One is the ongoing implementation of measures, particularly around affordability. And then secondly, in our view, as we talked about in Q2, there is some impact on the consumer from the macro environment. So we still remain confident that the U.K. will return to growth and particularly pleased to see such a step change from H1 into Q3 as expected.

Next is Michael Mitchell of Davy.

Three, if I could. Firstly, on the U.S., clearly a strong quarter. Rob, I think you used the term well on track to get to the guidance. If you look at the H2, Q3 and Q4 cadence of revenue, last year, it suggests that you could be comfortably ahead of that $1.3 billion plus. So I just wonder if you could comment really on the upside risk to that guidance and whether you gave any consideration to raising the guidance formally at this stage? Question one. Question two, in terms of online win margins, you referenced 12.9% in the quarter. I just wondered, could you comment on how much sports results benefited to get a sense of what the underlying expected margin has reached at this point. And then thirdly, back to balance sheet again, and I appreciate you're in the market raising debt in relation to SuperSport at present. But I wonder could you help us in terms of thinking about interest charge for 2023?

Michael. Let me take the first one, and then I'll hand you over to Rob for online win margins on spot and balance sheet and interest rates. So listen, very, very pleased with how the business is performing in the U.S. And as we said, Q3 up 90% to $400 million, which means that year-to-date, we're around $1 billion. But we are not at this point changing our outlook. As we have said, we've said more than $1.3 billion for the year. So that still stands. Rob, online win margins on sports and balance sheet interest rates, please?

Sure. So another solid quarter for win margin, 12.9%. And I still feel that, that's a good margin for us. I think I said on the last call that it feels like we start with a 12% now in terms of what we would expect, so to hit 12.9% is a good quarter for us. No massive call outs from a geographical perspective. If anything, probably worth mentioning that Australia had a tough margin quarter, whereas Italy in contrast, had a very good margin quarter, and U.K. broadly in line. So no particular stories from a territory perspective other than those 3. Then from a debt perspective and interest rate, so this year, we gave guidance in March, 3.6%, give or take GBP 80 million from a cash perspective, that still feels about right for this year, but inevitably, there will be increases next year, particularly as we look to refinance the March 2024 term loan maturity at some point during the year. What does that mean? Look, it's too early to say really. It would be interesting to see how the SuperSport financing prices. We'll know more on that next week, but we have to anticipate interest going up from where it is this year, somewhere between 5%, 6%, 7% is probably a good estimate for the gross debt across the year. And then in cash terms, inevitably, that will see more than doubling once you layer in the SuperSport new facility as well. So in cash terms near a GBP 200 million as opposed to GBP 80 million this year would be my steer at this stage, but we'll know more next week.

Next question comes from the line of Joseph McNamara of Citi.

Joseph McNamara from Citi. I'll ask them one at a time if that's okay. Excluding the U.S., are there any geographies that you can call out particularly weak or strong in particular, it'd be great if you could touch on Australian trading, given rather difficult comps there and phasing into Q4 as well as an update on Brazil, mainly competition, which you touched on briefly before?

Joe, why don't I just kick off with Brazil and give a little bit of flavor of what we're seeing on the ground. And Rob, if you want to talk about the trading on Australia, Brazil, and any other geographies, if you want to call out after that. So on Brazil, you're absolutely right. I mean we're still delivering strong growth in Brazil year-to-date 21%, although Q3 eased off a bit from H2, and we are seeing increasingly competitive pressures there ahead of regulation. So growth is healthy, but the competition is really gearing up ahead of the expectation that hopefully, after the presidential election that the President will sign off the regulation, and then we'll be able to get license into 2023. We're also still seeing strong average monthly in Brazil where that tips up 15% year-on-year in Q3. And when it comes to competition, I think I touched upon it last time. I mean, we see more than 200 operator sites that are live at the moment. But they're all small, local, low quality. So we don't expect that to proceed once the market becomes regulated and we get into a license regime. Rob, should I hand over to you with some color on trading, please?

Yes. Let me touch on some of the other territories for you. So I mentioned in the opening comments Italy had a very strong quarter, but margin led, nonetheless helpful for growth. Germany still something of a struggle, really hoping the gaming licenses are issued soon. That is the expectation. That means as a reminder that we can start marketing again, we can start bonusing, we can start cross-selling from sports customers and so on. And really, it should mark the start of a growth period in Germany, but not yet. So that's still sort of limping along until those licenses come through. Australia is an interesting call out in Q3. You'll know our H1 growth was excellent, market-leading, up around 20%. Then in Q3, swung to negative. Why negative? Because it's annualizing against lockdowns in Australia in the prior year. So both Sydney and Melbourne, if you remember, fell into lockdowns from sort of June, July through to October. And really interesting, if you look at the performance of the states, which are not lapping a lockdown in the prior year, the H1 growth rate continued through Q3. But for those states that did lap a lockdown, they were down quite significantly, as you'd expect. And because of the waiting, it pulled the average down as well. So once we get past late October, I think it was 21st of October when Melbourne came out of lockdown, then we expect Australia to return to the similar growth trajectories as to where it was. I think these are the main call-outs really from a geography perspective.

Excellent. No, it's very helpful. And my last one, could you give us a sense of how much growth in the fourth quarter you might expect from recent M&A to kind of contribute above and beyond the high single-digit underlying growth that you've pointed out?