Entain Plc (ENT) Earnings Call Transcript

Good morning, and welcome to Entain's Q4 Trading Update Analyst and Investor Call. I'll now pass to CEO, Jette Nygaard-Andersen, to open today's call.

Good morning, everyone, and thank you for dialing in today. As always, I'm joined by Rob Wood and the IR team. I'll kick off this morning with a brief summary of our performance and progress delivering our strategic objectives and ambitions and Rob will take you through Q4 trading in greater detail, and then we will open for Q&A. I'm pleased to say that we continue to make excellent progress on our strategy as a global leader in betting, gaming and interactive entertainment. Through our growth and sustainability strategy, we're delivering sustainable growth while operating in a global industry with attractive dynamics. We are focusing on the customer, delivering great products and engaging experiences to an ever increasingly recreational audience. And we have clear evidence that our strategy is bearing fruit as evidenced in today's announcement. Q4 was another record quarter for online actives, up 14%. Online NGR hit a new record in Q4, up 8%. In fact, our group NGR was a record high too. And our retail operations are going from strength to strength as we further improve the appeal of our shops for customers. M&A remains a core strategic growth driver for us with 5 acquisitions delivered since the start of 2022, including SuperSport via our newly created Entain CEE as well as BetCity, which completed last month. These are businesses with leading positions in attractive, fast-growing and regulated markets with strong brands and local management expertise. They also clearly demonstrate the excellent M&A opportunities open to us and how well placed we are to deliver on them as we pursue regulated market growth opportunities across the globe. And it is not just geographic expansion. I'm really excited we have now taken our first steps into the attractive adjacent markets of esports and skill-based wagering with Unikrn launching towards the end of the quarter. It's still early days, but we're happy with progress to date and are planning for the launches over the coming months. Our Q4 online NGR was in line with expectations, reflecting a number of moving parts across our global business during the quarter. As I've already mentioned, Q4 saw us deliver yet another record number of online actives and business growing. Customer engagement is visible across our group with retail also continuing to exceed expectations. Q4 NGR for retail was plus 9% constant currency of our industry-leading offering on our betting and gaming terminals in the U.K. drives increased footfall and broaden our audience. As a result, I'm delighted to see that volumes in U.K. and Italy retail are ahead of pre-COVID levels, and we continue to outperform the market. We saw fantastic customer engagement during the World Cup, with many customer initiatives across our brands all resonating well. The World Cup captures the essence of a recreational sports lover enjoying the thrill of an amazing global sporty event. Our focus on the recreational player has benefited from our data analytics, our personalization algorithms as well as our brand campaigns such as Ladbrokes' Rocky and B1 fan-led campaigns launched in October. In fact, the Rocky campaign has been growing, driving Ladbrokes with traffic with existing customers up 30% and plus 75% for new customers. Moving on to BetMGM in the U.S. As you heard from the team in the business update last week, BetMGM continues to go from strength to strength. 2022 revenues were ahead of expectations, and we are on track to deliver positive EBITDA in the second half of 2023. We retain our leadership position in iGaming and have cemented our position as a top 3 operator of sports-betting and iGaming across the U.S. with 19% share. While this EDR share is slightly down on previous periods, our MDR share, which, of course, has a greater correlation with profitability continues to be our focus as we concentrate on bonus optimization. While the U.S. market is still in relatively early stages of growth, we are pleased with our position today and all key metrics are trending as we have hoped. As announced last week, with the most recent USD 150 million investment from the joint venture parts, we are extremely well positioned to continue to drive growth and profitability from our U.S. operations. Assuming no major changes to our environment and target markets, we expect financial support for BetMGM to come to an end as we move into profitability in the U.S. but our ongoing operational support from technology to product, data analytics, [year-end ] and people remains vital to BetMGM's ongoing success. Our commitment to sustainability is, of course, core to our strategy. As announced last month, our pathway to 100% of our revenue coming from regulated markets has been accelerated. As of the end of January, we have exited those unregulated markets with no clear route to regulation. I'm also proud to say that we are the only major global operator to exclusively operate in domestically regulator and regulating markets, a brand-new benchmark for our industry. In October, Entain Sustain showcased our ESG initiatives and achievements so far. The international rollout of our ARC program has now reached 22 markets. We also launched our initiative alongside McLaren Racing to empower women for careers in tech as well as our ongoing support of grassroots sports, which truly enables meaningful change. We continue to set the pace for sustainability and player safety for our industry across the group and across the ESG landscape. So in summary for me, we are continuing to make excellent progress, both executing and delivering against our strategic ambition. The underlying strong momentum is visible across our markets, brands and products with the unique Entain platform capabilities driving growing market shares. SuperSport and BetCity are the most recent joins to our long list of compelling M&A transactions and both servers expand our presence into highly attractive regulated and fast-growing markets. We've continued to innovate and invest in new opportunities and the Unikrn launch, we embrace the exciting opportunity within esports and skill-based region. We delivered record actives growth with record online NGR as well as outperformance from retail in Q4. The final quarter rounded off a year where we not only delivered progress on our strategy, but further growth with NGR across the group including our share of -- BetMGM up double digits at 15%. All this [indiscernible] EBITDA of between GBP 985 million to GBP 995 million for the full year 2022, approximately 12% up on last year and ahead of expectations. So overall, it's been a very successful year. So I'd like to take this opportunity to thank all our teams across the globe for all their efforts. Their excellence and dedication to delivering the best experience for our customers are core part of Entain achievements and delivered another year of great progress. On that note, I will pass to Rob for more details on trading during the quarter.

Thanks, Jette, and good morning, everyone. As Jette has already outlined, I'm delighted that our business continues to perform well, delivering strong numbers in both Q4 and across 2022. In Q4, we posted all-time record revenue for both our online business and the wider group. Group NGR was up 7% year-on-year in Q4. And for the full year, it was up 10%. Those numbers were both in constant currency, which I'll use throughout. Starting with online. Q4 NGR growth of plus 8% was in line with expectations and reflects the underlying growth in our online business plus an anticipated boost from the men's World Cup and the softer margin comparative from the prior year. As Jette said, we enjoyed a successful men's World Cup with fantastic player engagement across our business. FTDs and actives both increased during the tournament by approximately 10% versus run rates and stakes and NGR on the tournament were as strong as we expected, up over 30% on the year rose in 2021, albeit helped by more matches. Despite losing top-tier football during the tournament, much of which shifts into this year, our best estimate is that the World Cup was still incremental adding approximately 2 percentage points to online NGR growth for the quarter. Whilst the benefit to online NGR growth from the World Cup and from a soft margin comparative was expected in Q4 guidance, there were a few ups and downs that were not expected, but which net out over the quarter. On the plus side, our SuperSport acquisition completed prior to year-end, adding 2 percentage points, but that was fully offset by delayed licensing in the Netherlands and extreme weather disruptions to racing calendars due to freezing conditions in the U.K. and floods in Australia. Overall then, online NGR was in line with expectation. Looking more closely at online sports, margin for Q4 was strong at 12.9%, in line with both H1 and Q3, supported by our increasing recreational mix. By geography, there were no surprises during the quarter. In the U.K., the business was flat year-on-year, marginally better than Q3 as underlying growth was offset by ongoing absorption of affordability measures. Pleasingly, we continue to take market share in the U.K., whilst growing our actives space throughout the year. Australia returned to growth in Q4 after lapping lockdowns in Q3 as the team continues to lead the charge, providing customers with a fresh and engaging offering. Italy and Brazil continue to grow, while the Baltics showed ongoing resilience despite the economic challenges in the region. And in Germany, trading remained challenging with a lack of regulatory enforcement. Importantly, however, we received our gaming licenses in late November. So we're hopeful that much needed robust enforcement action will now be more evident in 2023. In the Netherlands, we completed the acquisition of BetCity after the period end, and we are at an advanced stage with licensing our bwin.party brands. We still hope to be licensed in Q1, if not Q2 this year. In Croatia, SuperSport is performing strongly in the exciting CEE region with double-digit pro forma NGR growth in Q4. As you've often heard us say, Entain is the most geographically diversified and globally regulated operator in our industry. We also outgrow our markets year in, year out. Our strategy to focus on the customer is broadening our customer base to more recreational audiences, and we now exclusively operate in regulated or regulating markets. This all gives us the most sustainable and highest quality of earnings. Our growth is also actives led, as Jette mentioned. Our online business delivered another record of the active players in Q4, with Q4 monthly actives up 14% year-on-year and up 10% versus Q3, of course, helped by the World Cup. Whilst the greater recreational shift has led to lower spend per head year-on-year, the run rate on spend per head has remained flat since Q2. On to retail. And as you've heard throughout the year, our retail business continues to exceed expectations and Q4 was no different with NGR up 9% year-on-year. In the U.K., we have the best gaming and betting terminal offering on the high street. It is this in-store digital offering that is driving customer engagement, footfall, volumes, and an evolving younger customer demographic. Like-for-like volumes have settled ahead of pre-COVID levels and our market share in the U.K. has grown from 40% a few years ago to 45%. And given U.K. retail remains a $2.2 billion revenue marketplace and every 1 percentage point is therefore worth over GBP 20 million. We continue to focus on driving further share gains, which ultimately benefits both our retail and online P&Ls. In Italy, retail revenue is also ahead of pre-COVID levels, whilst our smaller estates in Belgium and ROI remain behind. Before I turn to BetMGM, let me comment on full year 2022 EBITDA, which we now expect to be just shy of GBP 1 billion in the range of GBP 985 million to GBP 995 million. At the midpoint, EBITDA will therefore be up 12% year-on-year and 4% ahead of previous guidance. Looking by segment, online EBITDA finished in line with expectation. And pleasingly, we ended the year with contribution margin in line with our original target at a little over 40%, which demonstrates the flexibility and the resilience of our business that I talked about on our Q3 call. The EBITDA outperformance versus guidance was therefore not driven by online, but by 3 different areas. Firstly, retail and the revenue outperformance that I mentioned earlier. I'm not expecting analysts to increase retail EBITDA for 2023, given revenue outperformance will cover the inflation headwinds previously flagged from absorbing higher wage and energy costs in the U.K. Secondly, lower investment into our new opportunities segment as approximately GBP 17 million of the guided GBP 50 million investment has shifted from 2022 into 2023, primarily because Unikrn launches have been soft launches so far. And thirdly, our previous guidance excluded the SuperSport acquisition, which added GBP 8 million of EBITDA to Q4 before year-end. Now on to BetMGM and a quick word on profitability. After growing it to a near $1.5 billion revenue business in just 4 years, we are now close to delivering profitability. As you heard last week, through a combination of bonus optimization and strong same-state revenue growth, which was up 51% in 2022 and lowering CPAs, which were down 21%, we expect to be EBITDA positive in H2 this year. Whilst this represents an important and satisfying milestone, the focus for BetMGM remains on delivering our longer-term objectives of a 20% to 25% market share and a 30% to 35% EBITDA margin. With that, I hand the call over to our operator, who will open up the lines for Q&A.

[Operator Instructions] I'll take our first question from Ed Young at Morgan Stanley.

I've got 3, if that's okay. The first one is on your favorite subject yet, the U.K. white paper and regulation. I guess it's perhaps more of a question for Rob. Can you perhaps quantify what the impact on your business has been over the course of 2022. Mindful this has been going on a long time in the background as you say. You mentioned your comments there, you've been absorbing the affordability impact within the sort of existing growth rate, if you like. So are you still talking to the mid- to high single-digit percentage impact to group EBITDA that you've sometimes talked to, given what you've already done or is any update there? The second, you both mentioned Unikrn and the soft launch that's happened and I appreciate there's been the cost phasing into 2023. But I just wondered if you could talk a little bit more broadly around how we should think about success in that business as it starts to ramp this year. And if you might perhaps give a framework over what you're expecting in terms of revenue contribution or what kind of milestones you're looking for that business as you think about whether you want to invest more or less into your sort of outer year period? And then finally, yes, you spoke of excellent M&A opportunities. I just wondered if either of you could comment on the pipeline and how you see public and private valuations of potential targets at the current moment?

Yes. Good morning, Ed. Thank you very much for your questions. Why don't I start with Unikrn and M&A. And then for once, it will be Rob's task to answer your question around the white paper. I'm sure we'll come back to that later on the call anyway. So let me start off with Unikrn and you're right, we soft launched by the end of Q4. So we are now in 2 markets of Brazil and Canada outside of Ontario. And I think it's important for me to just say that we're playing the long game here. So it's really important for us that we build almost the market around our business, and we are going about this the right way. In 2023, we are looking to expand into further markets. I'm not going to align them all up here, but we are looking at market test, for example, Australia and New Zealand that has really firm regulation and a great esports audience and probably around the flow that can market [ share ]. As of course, we learn as we go along and upgrade our products. So I think we should stress that we are playing the long game here. We are really flexible on marketing. So we want to make sure that we can call up our key guys and they come out as we expect before we throw a lot of marketing investments into it. But it's all looking good. We had a good start, and we're really looking forward to the next couple of quarters where you have more and more tournaments also coming on. When we launched, there hasn't been any tournaments and obviously, we had the World Cup. So we're following our KPIs. We want to build a market here, but the first year, as such, it won't be expecting to see a lot of revenue and EBITDA will be in the outer year. So that was on Unikrn. And then let me just turn to M&A before I hand over to Rob. I guess, we're as active as ever when it comes to our pipeline. As we've said many times, the things that we look at is really strategic fit. And then, of course, the team and the products and the business in itself. And mainly, we're looking at M&A in order to support our growth plans. So whether it's entering new markets, as we saw within labs or deepening our presence in existing and core markets or expanding into new areas, such as we did with Unikrn. And I do think that in the current environment, that could open up opportunities for us as we have a really strong balance sheet with our strong cash generation and also a successful model for doing this. Now in terms of valuation, I mean, we are clearly not an operator that are buying distressed assets here. So we are buying really strong businesses. And surely, we've seen public valuations come down somewhat. But these are strong businesses. So I say private valuations are still holding up, but I still think that there are opportunities for us with our strong balance sheet and with the model that we have that it can open up opportunities for us. So we are being as active as ever. Rob, for once, I will hand the white paper question to you.

Okay. Thank you, Jette. So we've always been cautious on quantifying impacts because it's really quite hard to do, and particularly when you've got things like COVID, rebound, noise in the numbers, but if you look at the second half of 2022 in the U.K., we were almost flat, just a fraction under whereas ordinarily, we would expect the market in the U.K. to be sort of mid- to high single digits, and then we expect to outperform the market as we have done throughout 2022. Again, in the U.K. So therefore, logically, there could be 10 percentage points of drag from absorbing these measures, which I'm sure the larger operators are carrying as well as customers ultimately get diverted to the black market and unlicensed operators. So if it's 10 percentage points in the U.K. on a weighted basis for Entain, that would equate to about 3 percentage points. And if you think we've been carrying that for some time, to answer part of your question, you can easily add up to already having taken a large part of the estimated GAR impact that we gave 2 or 3 years ago. So it does feel like we've absorbed the lion's share. But as we look forward to 2023, there is an ongoing impact through the first half of the year. and then we'll need to see what comes out in the white paper. So we're cautious on outlook for the U.K. for 2023 until we have that clarity. But hopefully, that gives you some flavor of how we're thinking about the U.K.

We'll now take our next question from Joe McNamara at Citi.

I've got 2, if that's all right. For 2023 on growth, it would be great to understand the puts and takes to growth. So kind of how much we expect from Germany and the Netherlands. Obviously BetCity is a large part of the Netherlands given you're currently unlicensed to be bwin.party. Is there kind of any material detractors you'd like to flag perhaps Belgium? And also, should we expect Germany and Netherlands to be broadly breakeven for 2023? I'll ask my second question afterwards if that's all right.

Okay. Joe, thank you for your question. So we're not going to give any detailed guidance on this call, but I'll hand you over to Rob for any indications on how to think about growth in the digital market for 2023.

Yes. Let me share a few thoughts. So if you start by looking at Q4, we delivered plus 8% as we've announced this morning. You do need to back out a couple of points for World Cup, plus maybe a little bit more for annualizing staff margin comparatives to get to an underlying view. So let's say you're sort of low to mid-single digits underlying. I say underlying, but that is carrying the U.K. affordability impact that we've just mentioned, and there are still 1 or 2 territories such as the Baltics, where the economic conditions are causing a drag as well. So if you assume that continues through next year, then underlying is probably low to mid. And then obviously, acquisitions would -- end market launches would be on top. To touch on the countries that you called out, actually, Belgium is trading really well. So despite the recent changes in spend limits, pleased with pushing out double-digit growth there in Q4. Germany has been a challenge. That's for sure, as we're waiting for enforcement action, does feel like there's real momentum gathering now. So we hope that 2023 will be the year where Germany returns to growth and some nice green shoots in Germany, actually, even though NGR was still down a little bit in Q4. actives and FTDs were up strongly. So hopefully, Germany is just starting to turn the corner now. In terms of profitability, though, you're right, there will be an increased investment, particularly around German gaming. Now we're permitted to do so. And in the Netherlands, that inevitably will be a drag on contribution margin as well with new taxes and the launch period. I've said previously around profitability for the Netherlands. That first sort of 6, 9 months is probably breakeven before you then get into profitability. So depending on exactly when we go live in 2022, that will answer your question as to whether we expect to make money from bwin.party in the Netherlands in 2023 or not.

Excellent. That's very clear. And then the second one I had was on online wagering growth in Q4. So online sports during the quarter seems to have kind of, I guess, a bit like versus our numbers at least, remain negative year-on-year constant currency to pipe despite the World Cup and Australia comps. Could you help me understand what the main contributors were. Was it, I guess, the U.K. and Australia rating you pointed out and did, I guess, a strong win margin expansion have an impact on recycling year-on-year?

Sure. Rob, do you want to continue?

Yes. Yes, of course. So yes, the last point you mentioned is always valid. You always have to consider a recycling impact on this margin movement year-on-year. So that's part of it. You also mentioned racing cancellations. I mentioned earlier, that was about a 1 percentage impact on total NGR for the quarter. But if you're just looking at sports, it's more like 2 percentage points. So that's an impact. It's also worth saying that with the World Cup, remember, World Cup is more recreational activities, higher margin activity. We made -- I think it was around 18% GGR margin on the tournament. So what that means is from the relationship between stakes and NGR, it's effectively lower stake ahead via NGR, and that's, of course, cannibalizing top-tier football that would otherwise have happened. So there's a few reasons there why as you point out, states was slightly negative even though sports NGR was -- or it was plus 7% for the quarter.

We'll now take our next question from Dave Brohan at Goodbody.

Just two. So firstly, on Brazil, obviously, a bit of a regulatory setback there in December. Wondering could you give a kind of an update on the outlook for regulation in that market now? And then just also on BetCity, any color or commentary you can give around performance in 2022 and the [ behind ] of market share has been trending over recent quarters.

Sure. David, let me start off with Brazil. Yes, you're right. We had expected that the sports betting legislation would come through and that [indiscernible] would sign that during this transition period. So now Lula has won, and he's setting up his government. But despite this delay, we still expect regulation sports betting in Brazil during 2023 with the new administration. So that means legislation probably towards the end of 2023 and then hopefully will be regulated [indiscernible] or into 2024. But we are kind of waiting for the new administration to pick up the matter, and we expect to have an update and more detailed time lines probably through Q1 2023. So that's on sports spending and then, of course, iGaming build. We will also be waiting to see what happens with that, but that should also be on the agenda later on. So all in all, sports betting might be regulated through 2023. Might slip into 2024 and then on the online casino probably also beginning of 2024. However, that doesn't change, let's say, our excitement about the Brazilian market and underlying trends there are strong. So certainly something that we are -- we're looking forward to that happening. On BetCity, listen, they are trading well. So in line with expectations, and both came out of last year well and started the year well, and we're comfortable with the expectations that they have going into 2023. And as you know, they have a strong market share around 20%. So really excited to have completed that acquisition last month, January.

We'll now take our next question from Kiranjot Grewal at Bank of America.

Just two for me. I think the current consensus for online suggest some margin pressures once you account for the announced acquisitions. What's behind this? Is it further cost inflation that we're anticipating here? And then secondly, I think in the past, you mentioned the macro impact from Eastern Europe. Are you seeing any impact in other regions? Just curious if Q4 was a high cost period for customers with the holiday costs and energy costs.

Rob, do you want to take both of them?

So yes, we managed to achieve our contribution margin target in 2022, which we're pleased with. 2023, there is a little bit more downward pressure on that number for a few reasons. The increases in Australian point of consumption tax, you'll be aware of those. There's also a little bit of pressure. I've already touched on it earlier on this call around market launches, for example, the Netherlands, German gaming could have an impact, 1 or 2 other territories that we're looking to launch in. So whilst we'll still be shooting for a contribution margin somewhere close to 40% as we do year in, year out, there is a little bit of downward pressure on it in 2023 from a cost inflation perspective really just in line with run rates and what we've seen previously. So nothing to call out there. Obviously, acquisitions getting laid in on top. Your question around macro -- so the key answer is we haven't seen any change in spend per head since Q2, which is encouraging. And even when you drill into the areas where there have been challenges. For example, we talked about the Baltics. Again, no change through Q3 and into Q4. So hopefully, as we progress through 2023, we'll annualize against some of that impact and indeed start to recover from it.

And just the last question. Which market should be your biggest contributors for online growth in '23? And I mean, alternatively, which ones are you most excited about for the year ahead.

Yes, I can start. So listen, I think all our core markets, we're quite excited about the prospect of them in 2023. Obviously, we have regulations happening in the U.K. Germany, hopefully, there will be enforcement from the regulator there and the body they set up, so we will start to see some good contribution in Netherlands. It's an interesting one for us. Brazil, we're waiting for regulation, but we're still really excited about that market. What ended, of course, Central Eastern Europe, very excited of bringing SuperSport on board. But really across the globe, we're quite excited about the markets that we have there. I haven't mentioned Australia and Italy, I could do that as well. Rob, do you have anything you want to add to that?

Yes. Croatia [indiscernible] growth from Croatia. I think the important answer to your question, Kiranjot, probably other than the U.K., we'll be shooting for growth in all our major territories.

[Operator Instructions] We'll now move on to our next question from Simon Davies at Deutsche Bank.

Just two for me, please. Firstly, just on retail, very strong performance there, and you said driven primarily by gaming and betting machines. Can you just update us in terms of where you got in terms of the rollout of your latest generation machines? And do you expect growth to flatten out in 2023? And secondly, on the competitive situation in Australia, obviously, [indiscernible] has been coming out with fairly aggressive promotions. You talked previously about Tabcorp raising its game. Are you seeing any shift in the competitive landscape in Australia? Do you expect that to impact 2023 performance?

Let me start with Australia, and then I will hand you over to Rob on the retail side. So our serving business are doing really well. They had a good Q4 with high single digits in [indiscernible] growth. And they have been, over the last year, really improving their market share. So it is ticking upwards. And we continue to outperform the bigger competitors there, at least what we've seen in the prior quarters. So we're waiting for their new numbers, of course. But really strong momentum in the Australian business after they've lapped the COVID lockdowns from the quarters last year. We saw that the print yesterday from PointsBet, which [indiscernible] reported a strong Q4 despite the different market [indiscernible] losing share to better, another or a new competitor in the market, but yes, good performance from PointsBet, but our Australian business is doing really well and super pleased as they continue to innovate down under. So happy for the Australian performance and looking forward to 2023 for them. Rob, retail and the rollout.

Simon, so across all of the digital touch points in our shops in the U.K., we're continuing to enhance whether you're looking at the gaming machine terminals at the moment, around half of our shops have the most advanced machines, but we are consistently progressing through the rollout of those our bet stations and the self-service betting terminals. There's a lot more rollouts coming through 2023 as well. But also gantries is an area that we're focusing on in 2023 and then racing terminals as well. One thing that we've noticed is that whilst I mentioned earlier, we've gained 5 points of market share in the U.K., which we're really pleased with. And the average is 45% across all products. Actually, our market share of racing is sort of high 30s. So there's opportunity there, and we'll be focusing on that in particular during the course of 2023 and really touch points like gantries and racing terminals. The way to tap into those opportunities. So in short, it's a continued rollout of best-in-class technology across all the digital touch points. That's really our focus for 2023.