FDJ United (FDJU) Earnings Call Transcript

Good day, and welcome to the FDJ 9 months 2023 revenue call. Today's call is being recorded. [Operator Instructions] I will now hand you over to your host, Mr. Pascal Chaffard, Executive Vice President in charge of Finance, Performance and Strategy to begin today's conference.

Thank you. Hello. Good evening, ladies and gentlemen. And you must have seen our press release we published at market close. And the following presentation that we are about to comment is also online in the Investors section of our corporate website. I propose to begin with the first slide. And to tell you that this presentation will focus on 2 recent significant events for FDJ. First, beyond the temporary underperformance of Euromillions and the impact of the new Amigo formula. I will come back on our underlying business that is still growing by a solid mid-single-digit figure with trends remaining unchanged from one quarter to the next, and the consumer behavior is also unchanged. Second point we will address is our recent acquisitions, ZEturf and PLI that are not only a perfect strategic fit, but will also make a significant contribution to our performance and to changes on the group structure. So at September 30, our revenues amounted to EUR 1,875 million, up 4% compared to 2022 on a reported basis and up 1% on a like-for-like basis. Excluding Euromillions and Amigo, group revenues rose by 8% and by 5% on a like-for-like basis, identical to the levels recorded at the end of June. If I focus now exclusively on lottery, excluding these 2 games, lottery revenues increased by 3%. As we said at H1 result presentation, in Q2 lottery performance has been affected by the low number of high jackpot of Euromillions. Q3 has clearly not improved on this point. It's even deteriorated. We will come back to this in more detail. But I can already say that this situation is temporary and will statistically normalize. All the fundamentals of this game are still there. I will also comment the development of Amigo relaunched at the beginning of June with a more responsible formula in response to a request from the National Gaming Authority. The performance of this game is stabilized and will be offset over time by other games, more recreational beginning in a few days by EuroDreams. In sports betting, we are very satisfied of our performance. The very positive trends remain unchanged with sales growth of 9%, overperforming the market. It is notably on the basis of the weaker-than-expected performance of Euromillions in the third quarter that we now have an annual revenue growth target of plus 5%, including the initial contributions from ZEturf and PLI and growth of between 1.5% and 2% on a like-for-like basis. I will also come back to this later in more detail. And as I've just indicated from the fourth quarter onwards, we will benefit from the integration of ZEturf, which closed at the end of September and PLI, which we'll close very shortly. Let's now look at the breakdown by activity on the next slide. Lottery instant games are performing well with a 4% increase in stakes in line with the growth seen at the end of June. Draw games, on the other hand, posted a 6% decline in stakes driven by Euromillions and Amigo. For Euromillions, I will elaborate specifically in the 2 next slides. And in Q3, it's notable also that Lotto stakes raised up over 5%. For Amigo, the decline in business due to the relaunch was consistent during Q3, remaining at approximately minus 25%, similar to the figures recorded at the end of June. And as I said before, sport betting continues to perform very well. Both online adding point of sales, we have been outperforming the online market for several quarters and have significantly improved our market share. In Q3 for sport betting, as we anticipated, the football schedule was less favorable compared to 2022. If you recall, last year, the calendar was densified before the World Cup. And the winnings remained stable, both compared with end June 2023 and with 9 months 2022. Amigo and Euromillions are the games that generate also significant traffic, both at point-of-sale and online. Their underperformance, therefore, naturally exerts downward pressure on the overall growth in stakes in the -- on the 2 channels. It is worth noting that adjusted for Euromillions, online stakes are showing a robust growth of 16%. Now let's examine Euromillions, which registered a decrease in stakes of 15% by the end of September and a 31% drop in Q3 alone. The game's performance versus 2022 was penalized by a low number of high jackpot, i.e. jackpots in excess of EUR 75 million. Stakes are linked to the level of the jackpots and their growth accelerates exponentially when the jackpot exceeds EUR 75 million. We are facing a deficit of jackpots over this threshold, which began in Q2 and continued and even deepened in Q3. As you can see on the slide, with just 4 draws over EUR 75 million in Q3 2023 compared with 16 in Q3 2022. This number was particularly high. We clearly highlighted that last year. By the end of September 2023, our jackpot sequence stood within the 9% of cases, the least favorable compared to 2022 being within the 23% most favorable cases and in the 7% most favorable cases in Q3 alone. In both years, these statistics are quite atypical. And globally, since 2019, Euromillions has grown by nearly 10%, even with the 2023 figures. Next slide, I explained that to mitigate the effects of chance on the jackpot levels, FDJ has developed special events with jackpots directly initiated at EUR 130 million. This boosted jackpots by the Euromillions community were introduced with a big success at the games we launched in early 2022. To date, in 2023, there were 3 such jackpots just like in 2022. However, their rolling frequency varied significantly between the 2 years, as indicated on the slide. In 2022, these jackpots resulted in 16 draws predominantly concentrated in the second and third quarter. Additionally, during the summer of 2022, we experienced a long cycles almost continuously with the Euromillions jackpot naturally rolling, whereas in 2023, there were only 4 draws. First, EUR 130 million jackpot was won on the second drawing. The second and the third did not even roll. The third one was organized on September 29 and impacts Q4. The consequence in 2023 is a substantial decrease on the average jackpot amount dropping by more than 50% from EUR 111 million in Q3 2022 to EUR 52 million in Q3 2023. Important point to finish on that, we don't experience any demand issue. When the jackpot level is there, the customers are also there. For example, the performance of the EUR 130 million late September, jackpot was very good. The only point is that it has been immediately won. It's the same for Lotto and instant games with the performance of the Friday the 13th event last week, which was very satisfied. Now on the next slide, I come back to the global revenue presentation, and this slide provides a breakdown of revenue by business activity, both at event of September and for Q3. I won't revisit the low trends of betting, as I've already discussed them. Regarding diversification activities, you can see that the revenue at the end of September has doubled compared to 9 months 2022, primarily driven by our international and payment services. On a comparable basis, it has grown by more than 10%. Now let's look at our full year objective. On the fourth -- in the fourth quarter, we anticipate a stability in revenue from sports betting and online gaming, reflecting the continued momentum from the beginning of the year, but with a very high comparison basis from 2022 due to the World Cup. And we expect revenue growth in the lottery driven by draw games, including Amigo, and with several events, including the launch of EuroDreams annuity games on the October 30. Boosted jackpots at EUR 200 million in December for Euromillions as well as instant games. The comparison basis on Euromillions will also be more favorable for us in Q4. Thus, for the full year 2023, FDJ aims for a reported revenue growth of approximately 5%, including ZEturf and PLI, equivalent to between 1.5% and 2% on a comparable basis. This growth is lower than what we presented in July because we did not anticipate that the underperformance of Euromillions would persist for one more quarter, but as I already said, it is temporary. I mentioned earlier in my presentation, the atypical statistic in 2023. We understand that our forecasts are based on a median statistical expectation and not on extreme ones. Our EBITDA margin rate will be maintained at about 24%. It means that the cost savings plan we have initiated in late 2022 to counteract the effects of inflation and which we discussed in July has continued and has intensified since. Beyond that, we will benefit from high level of our financial results. It is extrapolatable from that of H1, and we also reaffirm our commitment to distribute between 80% and 90% of our consolidated net profit. Now I will discuss of our external growth momentum and its contribution to FDJ value creation. By the end of September, we completed the acquisition of ZEturf, which has been consolidated into FDJ accounts starting October 1. And we can also confirm that on October 3, the Irish lottery regulator approved the acquisition of PLI, which is Premier Lottery Ireland. And the finalization of this acquisition is expected to take place in early November, after which PLI will be consolidated into the FDJ group's accounts. The acquisitions of ZEturf and Premier Lotteries Ireland strengthen our model. If you recall that the strategic objective presented on -- as with CMD in November last year, ZEturf and PLI are perfect fit. ZEturf is the second largest online horse racing operator in France with an approximate 20% market share. Its acquisition allows FDJ to complement its online gaming offerings and become the fourth operator in the French sports betting and online gaming market with a global market share exceeding 10%. PLI is the operator of the Irish lottery and its acquisition represents a significant step in the international expansion of our strategy. This acquisition come with substantial advancement for FDJ, they significantly contribute to the growth and profitability of the group. Combined ZEturf and PLI provide an additional mid-single-digit contribution to the group's full year activity and EBITDA growth. Simultaneously, we are evolving our organization to extract maximum value from these acquisitions, specifically to integrate ZEturf. FDJ will adopt a new organization for its sport-betting and online gaming activities and PLI will integrate a new international lottery business units. And fourth, we aspire for FDJ's EBITDA growth to be based on 2 pillars in the future; organic growth and M&A. So if I go deeper into ZEturf. To fully benefit from the potential of the merger with ZEturf and the synergies from -- for online businesses open to competition and also to be able to size and capitalize on external growth opportunities in the online gaming field, both in France and internationally, FDJ will adapt, as I said, a new organization for its sport betting and online gaming business in competition. It is in our business interest, and it is also in accordance with the commitments made to the ADLC, which is the French Competition Authority. This is a process on which we have just begun working with ZEturf team as we were forbidden to communicate while the case was being processed by the French Competition Authority. The operational implementation of this process will be progressively done in 2024 and will be completed in 2025 once the various stages have been completed, including total operational and legal separation of FDJ PoS activities, monopolistic and online activities in competition and also merger of ZEturf and FDJ online activities to create a single player account and wallet with access to the 3 activities open to competition. So with revenues exceeding EUR 50 million by 2022, ZEturf doubled the revenues of FDJ online activity open to competition and we'll have an accretive effect on the contribution margin of the business unit sports betting and online gaming as early as 2025. Thereby, thanks to ZEturf and the very successful full launch of the poker activity at the end of 2022, our online gaming offer is now complete and covers the 3 authorized segments out of the French market, sports betting and online gaming in competition of which FDJ become, as I already said, the fourth largest operator with a market share of over 10%. And finally, we'll talk a little bit about Premier Lotteries Ireland, PLI, the operator of the Irish lottery. In 2022, our Premier Lotteries Ireland recorded revenues of EUR 140 million with an EBITDA market comparable to FDJ. We started working with PLI teams to build a medium-term strategic plan, aiming to accelerate growth and to increase profitability of PLI, based on sharing of best practice on both operators and articulated around 3 axes: First, capitalizing on FDJ experience to animate the instant games portfolio; second, activating or energizing the draw player base; and third, continuing to improve the journey and digital gaming experience. As you can see, the main lever being used to develop the value created by PLI is the growth of this business. But of course, beyond that, we will implement other synergies, just cost synergies, purchasing IT front. So thank you for your attention. Now let's move to the Q&A session.

[Operator Instructions] Our first question comes from Leo Carrington from Citi.

First of all, 3 questions. Firstly, can you just clarify the combination of the impact of the media games, game mechanics and the jackpot timing. Has anything on the media mechanics and the way consumers play changed since you first saw the impact in July or has that been consistent? Secondly, around the instant loss rates, have you seen any corresponding or in the quarter, did you see any corresponding offset to the lower draw stakes in Euromillions, i.e., the consumers move any of their spend over instant, while the jackpots were lower in Euromillions? And then lastly, just around the new organization built to support the tough acquisition. Are there any one-off integration costs that we should be aware of for 2024?

Okay. First question is about amigo and how the situation is. To recall, Amigo, the modification what we have done on Amigo are mainly linked to 2 things. First, opposed of 15 minutes by our on the -- from the beginning of the morning until 2 o'clock in the afternoon, it means that we will -- we do draw every 5 minutes, except at 50 and 55 of each hour. And second, we lowered the maximum bet that we can do on one slip, which was previously EUR 20 and is now EUR 8. So the impact was quite immediately close to minus 25% in the activity of this game and is stabilized. It is the same as we see in June and July and at the end of September. So we think that the situation is totally stabilized with a minus 25% stakes for this game. If I also recall, we had to modify this game because it was demanded by our regulator. And it happens that we will develop other games that are more recreational with less question -- addiction questions, and it will -- and we will offset this Amigo question over time. And the first thing that we will do will be next week because we'll launch EuroDreams next week. So your second question was related to instant lottery and you asked whether we had a positive impact on instant games because of the lower jackpots in Euromillions. Clearly no and it's most the contrary. What happens is that when you have important jackpots in Euromillions, you drive more traffic on the point of sales. You drive traffic of the -- of many more players that are coming into the shop to benefit from the higher level of jackpots. So when you don't have those high jackpots, you have less traffic on point of sale, so less business on the instant lottery games. But as you see, instant lottery games is going well because with this impact of the lower Euromillions jackpots, we have a 4% growth on instant lottery. That means that they are doing okay even if they were not boosted by Euromillions jackpots.

And also, we have the same kind of effect coming from Amigo. Those 2 games are clearly generating a very high traffic in the point of sales and also online for Euromillions.

Yes. And even with that, we have a 4% growth on instant flat. Third question is can do you -- will we have some one-off integration costs for the integration of ZEturf? The answer -- short answer is yes, mainly in 2024. That is why we said that we will be accretive on the online contribution on the sport betting contribution margin by 2025. It means that it will not be the case in 2024 because we will face some integration costs to merge the player base between FDJ and ZEturf and to select the best-of-breed part of each system to build a very performance offer by 2025.

Our next question comes from Jaafar Mestari from BNP Paribas.

I have 3 questions, if that's all right. And one is on cost savings, where you said some of that plan has helped you offset the slightly lower revenue. And are we talking about bigger savings? Are we talking about the same envelope of savings which delivered a bit earlier? I'm conscious that this was a part of the 2025 guidance, not just this year. So how are we looking for the medium term on those? Secondly, just interested to hear more about Premier Lottery Ireland now that you have completed it and that you're launching this strategy acceleration. So what's the average license duration that they have? How it's structured? Can you launch new products as part of your existing license like in France or is it more of an Italian style license where if you have fixed product and if you want more you need to ask? And then just in terms of taxation, is it closer to the French model with lots of taxes or is it like a U.K. model with payments to good causes and other sorts of payments you -- just any color on what the structure is and how it allows you to grow it within what limits? And then just lastly, a bit of a thematic question. So EuroDreams, what other annuity games like this do you have in the portfolio as the games that have a monthly payout for the rest of your life. Is that something that has a particular appeal right now with the consumer in a higher cost of living environment? Is there a wider opportunity across instant games and online to introduce more of those if it tests well with consumers?

Okay. Jaafar, so your first question is about the cost savings, how big are they. What we have said is that to be able to achieve the 24% margin in 2023. We had first to mitigate the impact of inflation, inflation on the salaries, on the contractors, on the energy, on tickets -- scratch card ticket, et cetera, et cetera. And we said that what we had to mitigate is something like to offset something like EUR 40 million to EUR 50 million. And as we have now a growth rate -- revenue growth rate that is a little bit lower than we expected first. We had to compensate it on fixed cost. And we have another EUR 20 million savings to be able to maintain what is important for us, a 24% margin. And we will continue to work on our performance in the future. We think that it's important to work on the 2 pillars, which is driving growth and also driving more performance and have a more efficient cost base. So we'll continue to do that, and it will help us to achieve also our other targets, which are, for example, to meet the 25% of EBITDA margin in 2025. Second point is more information about the PLI. So the length of the license is 11 years from now. The license we have bought is as an end in 2034. We have the possibility to launch new products. The regulation is very similar to the French regulation, whether it's a tight regulation with the authorization that we have to ask for launching new products. But it is possible to launch new products, well not in the Italian world, but more in the French or U.K. world. The taxation is quite similar to the taxation in France. They have an average player payout of 65% and the split of the GGR is 1/3 for the lottery as revenue and 2/3 for the tax. And the tax is directly linked to good causes, which is a better thing that we have in France. As you know, that in France, our good cause is the French budget, but it is less easy to communicate than the 2,000 causes that are financed by the Irish lottery. That means that the Irish lottery has a tremendous image in Ireland, and we can build on this image. Also, you asked about what we can do to do better on the growth of this lottery. What is clear is that we have really a better experience on instant games. They have a lower part of their business on instant games. They have a portfolio that is -- that we can -- we think easily improve. Also, the way they are managing their draw games, it can also improve. We have some points that we can share also and learn from Ireland. For example, they have more than 5,300 point-of-sales, which is very important, very diversified and well organized point-of-sales. So this is a real strength that they have. They have also 15% online penetration, which is better than the one we have in lottery in France. But still, we can improve this level of online penetration. So we are quite focused and very positive about the fact that we will be able to improve the figures of this lottery, and we will tell a little bit more about that maybe next year. On EuroDreams, a very interesting question. We see that in all other countries and especially in the U.S., in the U.K. also, annuity games are performing very well. In France, we had not launched a lot of annuity games. Keno had a small part that could be paid in annuity, but it was very, very side. And we had in the past 1 or 2 scratch cards with annuity payments, but this is the first time that we will launch a game that is built on this insight. And we think that this insight is a very good insight. If we look at what has been done in the U.K., for example. As you may have noticed, U.K. is not on the community that we launched EuroDreams. The reason is because they have already launched in the U.K., something that is very similar to EuroDreams. And we have a little bit copied this game that is a very good success in the U.K. We think that the situation that the French people are facing today with problems of inflation, of purchasing power, et cetera, is very positively linked to annuity games. To have the comfort of having what we say in our commercial for EuroDreams, a EUR 20,000 coming each month for 30 months -- for EUR 30 is an insight that works very well today. And especially on the quite young people, what we call young is from 25 to 40 years old. So we expect that we will attract younger people in average than the population of our games and more digital population. So we expect also to have a high part of this game digital. As you know, Euromillions and Lotto are already quite highly digital in France between 20% and 30%, and we expect for Euromillions to be in the higher range of this…

Bucket.

Yes. So yes, we think that it's a good opportunity and a good moment for launching an annuity game.

Our next question comes from Ed Young from Morgan Stanley.

Hello. Can you hear me?

Yes, very well.

Great. 2 questions, please. The first is the customary question, which I imagine will be a short answer, but just for completeness, could you update us here any further news on the European Commission investigation? And then the second question is on the reorganization of sorts around the acquisition of ZEturf? Obviously, you have to separate that due to monopoly in the competitive area. But if I look at your slide there on slide same difference, you obviously had Parions Sport and Parions Sport Parions Sport en Ligne together before and now they're separated. You clearly weren't able to cross-sell from the monopoly to competition before. So can you just help me understand what is it that's changed exactly in that part of the business? I get why ZEturf couldn't be integrated into PoS obviously? And then were you arguing for something else? Is that the reason why the approval process took so long? What were you perhaps hoping for in terms of a different outcome?

Okay. So you hoped for a short answer on the European Commission, I will give you a short answer. No any -- we have no news from the European Commission. So I will just say the same thing that has been said by Stephane Pallez and me at the end of the end of July. So no news on this subject. Your second question is related to Parions Sport reorganization. So what -- I don't know if I well understood the details of your question, but I will try to answer completely. What we will do is, yes, to separate the operations of Parions Sport point de vente which is the monopolistic part and Parions Sport en Ligne and to separate also Parions Sport en Ligne from the lottery. The situation -- today's situation is that with the same customer accounts with the same money, if you put EUR 100 into your account on the wallet -- sorry, account of the wallet. Your online wallet with -- you can play on lottery and also on sport betting online. So we will end this and separate totally the wallet that is dedicated to lottery and monopolistic exclusive rights products and the wallet that is dedicated to the competition part. And this wallet dedicated to competition, we will merge it with the wallet of ZEturf. And at the end, we will have one wallet for the activity in competition. And with this account and wallet, you will be able to play whether sport betting, horse racing and poker on unique offer that provides all the activities that are authorized. And on the other side, you will have a wallet for FDJ on lottery. And the interest for us to -- for doing that is that we will be able, on the lottery side, to merge this online wallet with a point-of-sale wallet that we are developing and to build an omnichannel experience for our lottery and sport betting offline, so exclusive rights customers. So the first thing is to separate the customers from the exclusive rights and the online gaming and really demand from the French Competition Authority, but it also is the result of what we think is the best for the business as luxury customers are not managed -- run as sports betting customers. It's a very different business. So it's a good thing that we separate the 2. And we will put all this activity online gaming in a subsidiary, this is also something that is demanded by the French Competition Authority. And it was also what we wanted to do, even if they did not ask us. So we think it's a better thing to have a more autonomous subsidiary that will be specialized in online gaming.

I think also one of your questions have been related to any cross-sell today. To be very clear, today, there aren't any cross-sell now in between sports betting point-of-sales and sports betting online nor between lottery online and sports betting online. So this won't, I would say, generate any damage or whatever. We won't lose any leverage from those cross-sell, which today did not exist.

Thank you, Mark. This point is very important. There is no these dis-synergies because we did not do any cross-sell. It is forbidden because it's a competitive market in one side and monopolistic market on the other side. What will continue to be in synergy between sports betting online and offline is the trading activity and the trading activity for online will be in the subsidiary, and they will sell with a market price contract, the odds to the sport betting point-of-sale part. Not have 2 different teams making the same business that is creating the odds.

Yes. That's a very comprehensive answer and very useful. Perhaps if could ask very quick follow-up on the very short answer. When you said you were repeating the answer from that you gave back in July, is that to say that you still expect or hope the decision due in 2023?

Difficult to say. Today, we don't have any positive news about that. So it's still possible, but I cannot commit whether on the one side or on the other.

No positive nor negative.

Yes, no positive, no negative.

[Operator Instructions] Our next question comes from Matthew Spiegelman from LWC.