Lottomatica Group S.p.A. (LTMC) Earnings Call Transcript

Good morning. This is the Chorus Call conference operator. Welcome, and thank you for joining the Lottomatica Group's 9 Months 2025 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Mirko Senesi, Head of IR at Lottomatica. Please go ahead, sir.

Thanks, operator, and good morning to everyone. Welcome to Lottomatica Q3 results presentation. I'm here today with our CEO, Guglielmo Angelozzi; and our CFO, Laurence Van Lancker. Now the floor directly to Guglielmo for the presentation. Guglielmo, please?

Thanks, Mirko, and good morning to everybody. Happy to announce another very strong quarter. We are on Page #2 of the presentation. The quarter has been very robust both in financial terms and in competitive terms. EBITDA is up 18%, in line with the increase that we had in Q2. Market share is at a record high on the entire portfolio. This is driven by the performance of the historical brands, which reached the peak of 24.8%. So we achieved a record high on the entire portfolio notwithstanding the migration of PWO. PWO is at its lowest during the quarter but, of course, because we completed the migration during the quarter. But of course, it's on the path to recovery, and we already see very encouraging and strong sign. So very good quarter. Page #3 of the presentation. And this is not the end, of course, because there's more to come, we believe. With the PWO integration completed, I do plan with a lot more product and tech innovation, which has been done during the quarter and having a positive online regulatory backdrop. We think that there is room for further organic growth. This will generate, of course, additional cash flow, and so discipline on capital allocation and focus on shareholders' return will remain key. Now let me focus on a few points that we have highlighted in this slide, namely the PWO integration, the completion of the PWO integration and the implication of this, all the job that we've done in terms of product and tech innovation and how this will reflect potential into additional market share gains and then, of course, on capital allocation. Now to start with PWO integration, Page #4 of the presentation. You can see here quarter-by-quarter what I was mentioning before. So the strong -- very strong track record of the historical brands, which gained 3.2 points of market share compared to quarter 1 of 2024. We're having a look, give or take, here in the slide to the last 2 years quarter-by-quarter. PWO, as you can see, has been pretty stable until the beginning of the migration. At the completion of the migration in Q3, it reached its negative peak, but then restarted to go up after the migration was completed. Of course, this happens because during migration -- pre-migration and during the migration, you freeze the product implementation and all the innovation on the old platform. There's very limited CRM activities that you can do. And also when you execute the more technical migration, you actually freeze the customer base in order to migrate clients. But then, of course, when the customer base, when the brand is onboarded on the new platform, on the group platform, you can restart all CRM activities. You do a bunch of targeting to do reactivation of the customers, which have been impacted in migration. You can do much more effective CRM. You have a better product, of course. And in the case of PWO onboarding, the group's platform, we have the availability of Lottomatica Core, which is our proprietary martech platform, which is going to be a very strong lever for the competitiveness of PWO. So on Page #5, we see a little more in detail what the anticipation of the migration as implied. Of course, on the negative, higher impact -- a negative impact on the revenues in general and compared to historical brands in the year 2025. Because, of course, with the migration, with all the slowdowns that I just mentioned, revenues also slowed down. So there's been higher impact in 2025. But on the other side, you have an anticipation of the synergies. So you see more synergies in 2025 actually than planned. This results in basically no effect on the group's EBITDA that we estimate at circa EUR 860 million for the year, assuming the year-to-date to September and assuming a normalized payout for Q4 revenues that we expect to be at EUR 2.27 billion for the year. Now going on to the second block. So PWO is completed, no impact on EBITDA, in the mix of revenues and anticipation of synergies. And the second block is product innovation. As I mentioned, we've done a lot of product innovation in this quarter, especially in iGaming. As you can appreciate from the slide, there's been a constant progression in terms of new content launch through the years. It's important to innovate and make available new products to player to give them opportunities to choose. And then, of course, you have to present these opportunities in the best possible ways to your apps and websites. But we've continued to increase the throughput of new games through the years and also in 2025. Another key point here is that we focus more and more on exclusive content. Exclusive content means content that, for agreements with the top providers, we get on time-based exclusivity. So we have an advantage towards the market. And you can appreciate from the slide that this is 10x the amount that we had in 2021. So we're focusing a lot on this. The concept here is providing more content, innovation and differentiation in terms of content for exclusivity. The time exclusivity is not enough. So lately, we've been focusing on another concept, which is bespoke, tailor-made exclusive content. Now we have a lot of experience and know-how in B2C online. We have know-how in omnichannel, which means in terms of product games with a very good payout. And we have our own studios so also we know how to build the products. This allows us to be able to ask for specific products which are designed on purpose for us by top third-party providers. And of course, we have full exclusivity, not time based on these products. This increases the distinctiveness of the offer and also improves the product portfolio life cycle. There's a couple of data points here. Of course, this has not been going for long but it looks to be very promising. We've tripled the life cycle of the games with these bespoke exclusive content. And there's a couple of examples here of a couple of games, one that we launched, the first experiment in this -- 1 year ago, which has shown a massive premium in terms of turnover compared to the other launches that we've done in the same period, 18x more. And another game that we recently launched which is currently in our top 10 of most played content. So innovation, lots of new content, exclusivity -- time exclusivity and tailor-made content. Another point in terms of offer is the onboarding of PWO on Lottomatica Core, our martech platform. This means having available for PWO lots more data, behavioral and business-driven personalization, data that allow us to improve the customer journey and a much more effective SEO engine basically. So this is another important improvement that we get from the migration of PWO on the group's platform. All of these, we are on Page 9 of the presentation, results into additional opportunities for market share, additional market share gains in the future. We tried to outline this brand-by-brand in this slide. Of course, there are things which are common to every brand, namely the distribution of the long tail of the operators, which we believe will start to happen with the new concession scheme and throughout 2026, but also the improvements coming from the Lottomatica Core. But there are others which are specific to each brand. Planetwin, I already mentioned, the recovery post migration and the exploitation of the functionalities of the group's platform. Betflag, which is doing much better in iSports but still has unexpressed potential compared to its position in iGaming. GoldBet and Better can focus even more on omnichannel experience and cross-sell. And of course, Totosì, which will benefit from additional commercial agreements and on the work that we are doing and going to do on the profitability improvement in the mid-term. As I mentioned in the beginning, we are Page #10, this will result -- has already resulted in cash flow -- operating cash flow improvement and potentially even more in the future which brings us to the point of managing these in a wise manner. So going back to our capital allocation principle, we have our dividend policy. We have our financial policy. And then all the excess cash available is deployed to basically currently the buyback, which is doing fine, very well. It's -- we've bought back 2% of the share capital. It's been driving compounding returns. Or alternative, it could be deployed in M&A but with discipline. Page #11. This is just to remind a key point. M&A, we've always been doing it. We're pretty good at doing it. But we want to keep a disciplined approach and measure that on value creation and benchmark that vis-a-vis the share buybacks. In the last 5 years, we've not been slipping. We've assessed 57 targets. We've fully due diligenced 14 but we pressed the button only on 3 of them and all in Italy because we have a very selective approach which is focused, as I said, on value creation and shareholders' returns. And we are committed to keeping that. So good news on the current business momentum, opportunities on additional market share growth in the future on the various brands, very strong operating cash flow generation and potentially also better in the future, discipline in capital allocation. So I give the floor now to Laurence. Laurence, please?

Thank you, Guglielmo. Move on to Page 13 when we look at the group results. The company achieved EUR 1.64 billion revenues in the first 9 months of the year, recording an overall growth of plus 16%. Looking at adjusted EBITDA on a reported basis, we've recorded EUR 617 million of EBITDA, equivalent to a growth of plus 28% versus the previous year. In Q3, we've recorded EUR 511 million of revenues and adjusted EBITDA of EUR 195 million, which is equivalent to an 18% growth compared to the previous year. When we look at the margins, clearly, there has been an improvement since last year. We've recorded 37.6% of adjusted EBITDA margins, and this is thanks to a mix effect where online with a higher margin is growing faster, and secondly, because of the synergies that have come in the 9 months and also ahead of schedule, as Guglielmo mentioned earlier. On Page 14, when we look at by segment, we see that on the left-hand side that online continues to remain the main growth engine of the group, recording a growth on a reported basis of plus 27%. And this is followed by Sports Franchise with plus 22% for revenue growth. And this has also been supported by the favorable payout in Q1. And then Gaming Franchise recording low single-digit growth in the first 9 months. On an adjusted EBITDA basis, the effects, taking into account also the effects of the synergies, growth has been faster with Online recording 33% growth; Sports Franchise, 51% growth; and Gaming Franchise, plus 5% growth, also thanks to the effect of the bolt-ons that are coming into the P&L. On Page 15, when you look at the operating cash flow, on the left-hand side, with CapEx, we see that recurring CapEx of EUR 67 million in the first 9 months, which is pretty much in -- which is in line with what we spent last year. We have EUR 46 million spent on concession CapEx. And here in the call out, you could see what we expect to spend for the full year, which is EUR 77 million for the retail concessions during our prorogation regime and then EUR 35 million for the upfront CapEx for the online concession. It will all be paid in 2025. And then EUR 52 million of one-off growth CapEx, which includes the deferred component and carryover from the 2024 bolt-ons that we had indicated at the beginning of this year of EUR 32 million as well as the integration CapEx related to PWO of EUR 20 million. This brings us on the right-hand side to an operating cash flow, defined as EBITDA minus CapEx of recurring and concession, of EUR 504 million, which is compared to EUR 353 million in the 9 months of 2024. On Page 16, we see the net financial debt bridge from 30th of June '25 to 30th of September '25. So in addition to EBITDA, you have a negative impact of net working capital. This is negative by EUR 87 million due to the payment of the Imposta Unica tax, which is typical for Q3 given that is a large payment that is done in the month of August, and this reflects the normal typical seasonality that we have where Q3 has the highest cash absorption due to working capital. Followed by CapEx of EUR 46 million, financial expenses leases of EUR 15 million and then a buyback of EUR 64 million, which is the amount that we spent just in Q3. Just as a reminder, the total amount that we've spent to date is EUR 117 million, equivalent to EUR 5 billion shares or 2% of the total share capital issued. And then other of EUR 30 million, which includes integration costs of EUR 13 million. And this brings us to a net financial debt as of the 30th of September of EUR 1.856 billion, including EUR 221 million of cash and a net leverage of 2.1x, which continues to remain at the low end of our financial guidance. That said, we are completed.

[Operator Instructions] First question is from Ed Young, Morgan Stanley.

I've got three, please. First of all, on the concession license, obviously, we're now close to the time that's going to be coming into effect. Can you give us an updated view on how much you think is sort of up for grabs and addressable? And how quickly we might be able to see that, do you think, in your financial results? The second is online margins were very strong in the quarter. I guess that's the benefit of PWO as well. Is the Q3 online margin the right expectation for that going forward? Or is the 9-month number closer to what we should model? And then finally, on M&A, thank you for the detail on the sort of discipline you're applying to your M&A lens. You've also spoken a lot about the technology plans, both integrating PWO and all of the other sort of product improvements you're making in technology. If we take a step back and think about your M&A lens, if you were to do something outside of Italy, do you have in your minds eye view of how large you would like an acquisition to be ideally? And in your minds eye, is that also a deal that you would be synergizing, i.e., putting on to its -- onto your platform? Or would you potentially be running a multi-platform strategy? I just wonder if you have any view from those 14 deals you've looked at, what you'd ideally like to achieve?

Yes, Guglielmo. I'll take one and three. So on the concession, yes, I mean, we stick to the estimate that we've given so far. So we estimate that the potential area for -- the potential grab is for the market is 7 to 8 -- sorry, 7% to 10%. That is basically done by the 3% which has already opted out and is actually going out of business on November 13, plus the remaining part, which is based on business model, which are not compliant with the new concession anymore. It could be anything between 7% and 10% at market level. How fast that happens, there's probably going to be some -- which happens around the start of the new concession, meaning November and December, because that's the part you will see the effect of those who have opted out. Then for the rest, it will take more time, so we go into 2026, because part of that is going to be driven by the new technical and compliance rules, which require technical upgrades, which will take until May 2026. So it will be spread during 2026. In terms of impact on our P&L, we have a strategy which we discussed which we shared in the last earnings call, which is trying to maximize the reach, say, how much customer base out of this redistribution we can address, we can grab. And then several of these cases come at much lower profitability than our historical brands for lots of reasons. It's longer value chain. And we will have to work on profitability in the mid-term. So first, its customer base and market share starting from the new concession into 2026 and then work on profitability, which is a mix of basically supplier conditions and improvement of the margins alongside the value chain. So it's not coming immediately. It's taking time, but it will come, hopefully. On M&A, and then I'll leave point number 2 to Laurence. We don't think that going international with bolt-ons will be at this stage particularly meaningful. You don't achieve diversification and at the same time,you make the story more complex. If we do something international, it will have to be something meaningful and it will have to be an industrial rationale, so it will have to come with synergies. Now for sure, the synergies will be around strategic suppliers. We all buy from the same content suppliers, the same -- we all buy the same business services all around Europe at least. So there's a synergy potential with that which may be significant. And it's not different from putting together two in-country online assets and doing international M&A. It's the same type of providers, counterparts and things that you have to do. So this is the baseline. Then it will depend on the asset. You may have -- we're not -- there's not a prescription here. I mean it's -- you may have an asset which is very sizable in a country, which is already doing very well, which is a very good product, and it makes no sense to do a replatforming of the gaming platform, absolutely no sense, and it's going to be very risky, and you don't see why you should do that. But at the same time, you can integrate that, you can provide to that the layer above that, which is the martech layer. It's the Lottomatica Core, which is functionalities, which can be linked to the platform without changing the gaming platform, which is the risky business. And it's on top of that. And still, you can create a lot of value, especially on all the digital marketing activities and that doesn't require replatforming. On the other side, there may be assets where the trade-off between the risk of a replatforming and the benefit of providing a better product, not necessarily the same product for all the countries, but a better product can be worth the effort. So it will be a decision which will be made on an asset-by-asset basis. Nevertheless, you can have top line synergies relevant and not only top line because the martech will also help you on the cost side, on the cost of managing affiliation programs, on the cost of managing bonuses and promotions. So you can have synergies on the tech side without a replatforming of the gaming system, but with adding the Lottomatica Core to martech layer. I hope I answered your questions.

Maybe on the second one, I'd say that Q3 has been a strong quarter in terms of margins. which has been helped by the acceleration of the synergy realization. But there's also some timing of costs. So I would not take this as a normal run rate margin. We're more looking at for online in particular the mid-50s, so which is pretty much in line with what we've seen in the first 9 months.

Next question is from Clark Lampen, BTIG.

I wanted to follow up on PWO first and maybe see if there's a target for market share, I guess, beyond just solely recapturing what's been lost over the past couple of quarters with migration. And as we're looking at the synergy target that you guys provided in the slide deck, is that primarily revenue synergies as we're thinking about 2026? Maybe second question, sort of following on Ed's questions with regard to relicensing, as we think about maybe the sort of medium-term state of the market a couple of years as we sort of flow through the re-licensing, do you expect something as the market sort of concentrates and coalesces around a smaller number of operators? Could market share start to eventually resemble what we're seeing off-line? Or sort of if not, why should we expect maybe to sort of settle out in a different way?

So Clark, I think at least on the market share for PWO, I mean, we're now at around 6% of total online. We were at 7% pre -- a bit north of 7% pre-migration. I think it's fair to say that our objective is to at least recoup that level -- that amount. And then the rest is to be seen. Of course, I don't think we would be happy stopping there, but it's always hard to predict or give any guidance on that. I think on the synergy target, what you'll see is of the total amount, there's only -- it's -- you can see the split between CapEx and OpEx. You'll see the revenue and OpEx of EUR 77 million run rate, EUR 10 million of that is revenues, the rest is OpEx. And then there's an additional EUR 10 million of cash costs that bridges the EUR 77 million to EUR 87 million, which is -- which includes CapEx synergies as well as synergies on the guaranteed costs that we've already achieved.

Clark, on the re-licensing and the market in 2 years' time, yes, it will be more concentrated. Most likely it will be more concentrated. That's where all the forces are -- the direction of the forces are pushing. Will it be as concentrated as much as off-line? Probably a little less because in offline, you always -- things are more sticky because you have a physical network and you just don't wake up and have a physical network and change the market share. It's for sure more sticky business. So once you are concentrated because of the size and quality of your network, that pretty much stays unless you do something very, very bad, but -- or very good on the other side. But that's a tendency, yes. It will be for sure. We believe that there's all reasons to think that it will be -- offline can be a benchmark, not probably the final ending point, but yes.

Next question is from Pravin Gondhale, Barclays.

So firstly, on the retail concessions. Do we have any update there? And then secondly, you sort of talked about synergies and timing of some cost benefiting the Q3 margins. Could you help us quantify the timing of those costs? And what sort of -- what's the nature of those costs that helped the Q3 margins?

So I'll go on retail concessions. So where do we stand with retail concession? I mean, the government continues to work on the overall reform of the retail, which also -- and part of that, of course, will be the renewal of the concessions, because you have the reform and then you can launch the concession tenders and award the new concessions. I think we're all aware since a few months of the new scheme -- new proposed scheme for the reform of the sector, which is pretty constructive. We commented on that in the past. Now the government continues to discuss with the regions to find an agreement. I don't think there is any update on that side, except that there is -- there looks to be a strong focus and a strong commitment this time in achieving an agreement. And the basis for that are, as I said, very solid and constructive. So hopefully, they'll make it.

Next question is from Estelle...

No, maybe -- apologies, there was maybe -- there was a second point. I was on mute responding to a third or second question. I think in terms of what synergies were brought forward, I mean, we brought forward a number of -- a certain amount of synergies in the year because we completed the tasks of the integration just earlier. And they primarily relate to the network of franchisees. We talked about one of -- there were two items in particular, which is, one is the replacement of the point of sales, the lower productive points of sales that went ahead of plan; and secondly, the contract renegotiation with the points of sales. That was going to be carried out over the course of the year has been completed ahead of schedule. So these are the main drivers.

Next question is from Estelle Weingrod, JPMorgan.

The first one, with respect to your targeted market share gains following the new online concession regime, you're proceeding with two structures from what we understand. The first one is via Totosì and the second one via direct deals, whereby you take a minority stake. How should we think about the longer-term market share potential across the two? And also I have a question on the payout within iSports. We only got the one for the Sports Franchise for Q3, I think.

Yes. Estelle, so on the structure, yes, there are actually two structures, I mean, there's three ways to gain market share. One is because redistribution happens, you are on the market and you gain market share without just doing the work that you always do because you're able to attract the clients. And there's nothing specific around that except that you continue doing what you do. Then there are two specific initiatives. One is commercial deals. Usually, these commercial deals will be related to Totosì as you -- there will be deals basically for the migration of the customer, the usual structure we discussed. And then there is the latest addition to the toolkit, which is the one that we discussed in the last earnings call, which is these deals with the minority deals with a part to control, which they might relate to Totosì or two other things. It's going to be decided on a case by case. But this is not particularly important. So the important thing is not where the gain shows up in terms of the brands that we have today. It's more than -- we have 3 options. One is being competitive and benefit from the re-distribution. The other one is doing this on the customer base. And the third is doing deals with operators who want to find, who want to onboard a larger project. How much is going to be of each of these categories? It's very hard to say today. It's almost impossible to make a plan on how much will come from each of this flow. It's something that we'll have to comment once it's done, unfortunately. But all of the 3 are active, that I can say. And we're actively working on all of them.

On the second question regarding the payout. And so in Q3, we had for the retail was 81.5% and so -- and for online, 86.1%. So they're both -- sort of they are below -- sorry, above the normalized levels. So in terms of payout benefit, clearly, what we were carrying in the first half as payout benefit has been slightly eroded in the Q3 result of the higher payout.

Could you perhaps just quantify the adverse impact of PWO and the online NGR growth in Q3 specifically, if you have it?

You mean the impact of what, at the revenue level?

Yes.

Well, so we don't break it down. But I would say that the impact of PWO is the primary -- sort of the negative impact is the primary driver for, let's say, for the lower growth that we've experienced to date. That's the main driver. We're not disclosing precisely the split yet.

Next question is from Ben Shelley, UBS.

I've got two. I wanted to come back to capital allocation and M&A and the narrative you've outlined in the presentation. Would it be fair to conclude the core message you're giving today is that given the attractiveness of the Italian market under propensity for shareholder returns, the bar is very high for transformational international M&A? And my second question is you've got a notable free cash flow conversion improvement in 2025. I wanted to get your thoughts on what areas or cash outflows you think you continue to gain leverage over or improve on in 2026.