Tabcorp Holdings Limited (TAH) Earnings Call Transcript

Ladies and gentlemen, thank you for standing by, and welcome to the Tabcorp Holdings Limited Half Year Results 2021. [Operator Instructions] I'd now like to hand the conference over to your first speaker today, CEO, David Attenborough. Thank you. Please go ahead.

Thank you, and good morning, everyone, and welcome to Tabcorp's first half results call for the 6 months to 31 December 2020. And I'm David Attenborough, CEO of Tabcorp. And joining me on this call are: Adam Newman, our Chief Financial Officer; Sue van der Merwe, our MD of Lotteries & Keno; Adam Rytenskild, our MD of Wagering & Media; and Paul Carew, our COO of Gaming Services. And given the lockdown in Victoria, we're in separate locations today. Adam Rytenskild is with me in Sydney. Sue van der Merwe is in Brisbane, while Adam Newman and Paul Carew are calling in remotely from Melbourne. We'll be taking you through the presentation lodged with the ASX this morning, which should run for about 25 minutes. And then we'll be happy to take your questions. I'd also like to draw your attention to the standard disclaimers set out in the investor presentation. And in addition, we're not making any forecast today in respect of the second half. And if I can take you first to Slide 3, which provides our reflections on the half, which obviously occurred against a backdrop of COVID-19. The Lotteries & Keno business not only demonstrated its resilience, but its performance has been excellent across its portfolio of games. And this really reflects strong execution by the team in its approach to refreshing games and rejuvenating the player experience. And this business has delivered a compound annual growth rate in EBIT of 13.6% since our combination with Tatts in 2017 and made up circa 2/3 of Tabcorp's EBIT in the half. Our other 2 businesses face greater challenges in these difficult times with our Wagering & Media and Gaming Services retail operations facing major COVID-19 disruptions. Many hotels, clubs and TAB agencies were trading under restrictions or even closed in the half. And this reduced revenues and earnings, but we're pleased with how our teams manage the business through this disruption and continued to deliver for our customers and partners. Our Wagering & Media business is in a very competitive market. But it's now better positioned than at any time since the merger to perform and benefit from our investments in digital, data personalization and media. And we've done a lot of work over the past 12 months to reduce costs, preserve cash and strengthen the balance sheet, including the capital raising, and this has improved the group's financial position. We're resuming the payment of dividends under our reset dividend policy with today's announcement of a $0.075 per share interim dividend. And the final part of the integration of Tabcorp and Tatts will also be completed this half, with delivery of the retail venue uplift in UBET states. And this brings this complex program to an end. And our current run rate will deliver $95 million of annual cost synergies this financial year. Therefore, it's no surprise that we're seeing interest in our Wagering & Media business at this time. Recent results have been impacted by COVID-19. The risks from integration are now materially behind us and the benefits of recent investments in Wagering & Media are not yet fully reflected in earnings. I'll say more on this later. So with the worst of the COVID disruptions likely to be behind us, and the business is well positioned, we're feeling positive about the second half. I'll now hand you over to our CFO, Adam Newman, to take you through our group financials. Adam?

Thanks, David, and good morning, everyone. Thanks for joining us. Moving to Slide 4 now. The group reported net profit after tax, but before significant items, of $207 million in the half and statutory net profit after tax of $185 million. Group revenues declined 1.5% despite the impact of COVID-19. However, the significantly lower Gaming Services revenue largely flowed through to VC, resulting in group VC being down 7.1%. We've outlined significant items in more detail in Appendix 1. Please note the $69 million after-tax profit on sale of our Jumbo shareholding was offset by an ATO amended assessment. This amended assessment related to the tax treatment of license fees that Tatts incurred in 2016, which relates to the New South Wales gaming machine monitoring. We've lodged an objection against this assessment. There were also $22 million in one-off costs associated with Racing Queensland arrangements, the Tatts combination implementation costs and restructuring charges. The Racing Queensland top-up payment was the final one that was made -- to be made with the minimum fee obligation arrangements ending on the 31st of December. If we move to Slide 5, this bridges between first half ' 21 EBITDA in the prior period. The first half continued to be materially impacted by venue closures and other COVID-19 restrictions, especially in Gaming Services here in Victoria. There was good discipline around cost control in the half, which helped to soften the impact on earnings. If we move to Slide 6, and as David has mentioned, we have now materially completed the Tatts integration and expect the cost to implement will be at or below $130 million, down from the previously advised $135 million. As integration has been winding down, we've been moving into the next phase of optimization to further reduce our costs and simplify the business. This program of work have the focus and support of the executive leadership team. In the first half, gross EBIT savings of $8 million were delivered with cost to implement of $2 million, excluding redundancy charges. We are targeting $20 million to $25 million in gross savings for the full year. Our baseline for measuring savings is FY '20 adjusted to remove COVID impacts and other nonrecurring items. The larger savings initiatives in the first half included significant restructuring within Gaming Services, and Paul will talk to this later, the impact of the announced reseller changes in Lotteries & Keno and ongoing agency rationalization within wagering. In the second half, optimization activities will be ongoing in Gaming Services, and we'll continue to see further benefits from agency rationalization. We'll continue refining our operating model and complete a review of procurement category spend. We'll now take you through the results for each of the individual 3 businesses, and I'll hand over to our MD of Lotteries & Keno, Sue van der Merwe.

Thanks, Adam. And I'll start on Slide 9. The results for Lotteries & Keno demonstrates continuation of the strong momentum we've built in recent years across our portfolio of games. The strategic and deliberate actions the team takes to drive performance are delivering across our key metrics. Well-executed game changes to Set for Life and Saturday Lotto, active management of jackpot games and a solid foundation of base games has the business in a strong position with a well-balanced revenue portfolio and healthy distribution channels. Revenue and earnings growth was delivered, notwithstanding a tough comps that included record Powerball runs at $110 million and $150 million. A continued focus on customer experience, brand and channel meant the business was well positioned to respond to the impact of COVID-19. Digital growth in excess of 20% and improved reseller arrangements lifted margins, while the resilience of the retail channel underpinned a strong revenue result. The charts on Slide 10 illustrates the extent of the jackpot variance on the pcp with almost $550 million less in prize offers across major jackpot and half the number of jackpots at $50 million or more. Additionally, Saturday Lotto's major annual event fell in January this year as opposed to December in FY '20. Against this backdrop, the first half result is quite remarkable. The value of the balanced portfolio approach, investing in building powerful brands and our relentless pursuit to excel in customer experience and engagement through all of our channels is clearly evident. On a like-for-like basis, turnover across each of the games was up over 20%. Instant Scratch-Its growth of 39% is a standout as is the Set for Life and Saturday Lotto results. Through the pandemic, we've seen a shift to lotteries across the gambling entertainment and discretionary expenditure categories. Digital continues to grow strongly, accounting for almost 1/3 of all lotteries turnover. The addition of PayPal and payment options for customers aided conversion rates. Keno, too, was a solid contributor to the half. Digital growth was very strong, and the retail channel rebounded well once venue restrictions were eased. Slide 11 provides some insight into the positive performance of Set for Life and Saturday Lotto since we introduced the product changes to these games. The suite of carefully considered and well-researched changes were borne from a deep understanding of our players' motivation and extensive product knowledge and were developed internally by the team. The changes delivered benefits for our players and reinforce the unique market position for each game. Customers have clearly responded favorably with strong sales uplift and price retention figures. These were then further buoyed by category shifts and a surge in interest in lotteries. Slide 12 takes you to our focus areas for FY '21 across the game portfolio, customer experience and distribution. Consistent with our ongoing price development road map, we have again turned our attention to the jackpot part of our portfolio and are exploring a potential change to Oz Lotto. Our Instant Scratch-Its brand is an important differentiator in the portfolio as the only physical and retail-only product. It has a demographic appeal skewed younger than most draw games, and a sophisticated product segmentation model drives development of the ticket range. We're planning for The Lott app to be in the Google Play store within the second half, and we will complete the final stage of our omnichannel rollout as we implement the model into South Australia. This will allow retailers to earn digital commission and deliver benefits to our customers. Thanks for the opportunity to take you through our performance today. And I'll now hand you to Adam Rytenskild, the MD of our Wagering & Media business.

Thank you, Sue, and good morning all. For our Wagering & Media business, the key things to note are, firstly, underlying earnings performance was solid for the half. COVID was obviously a significant disruption, and we managed it well. Secondly, we're a stronger digital business, that we have more to do and we'll continue to improve the offer. This will accelerate now that integration is materially complete. Thirdly, the team is confident and focused for the second half and beyond. We now have a much improved platform for growth. Turning to Slide 13. Our retail channel was severely impacted, especially in Victoria, where many of our 700 venues were closed for most of the half and have been closed again this week. Given these impacts, it was good to deliver a solid result. Ex Victoria, revenues grew 5%. Retail bounced back well as it reopened, and we continue to have good digital momentum. We've quantified an unfavorable net impact to earnings of circa $25 million. This takes into account the retail closures and the data center outage and then is partially offset by the favorable U.S. election result. This was our biggest ever fixed odds book, and Joe Biden's win was a positive result. We also continue to make good progress on cost with OpEx down $8 million on the pcp. On to Slide 14, which outlines how we navigated the COVID-19 effects. It's important to remind you of the unique nature of our business in the Australian market given our multichannel network, the more complex regulatory environment we operate in and narrower margins. In that context, COVID-19 was more favorable for our digital-only northern territory license competitors. However, our digital and customer growth was strong and account customer acquisition was a record. Digital was 61% of our business in the half, and we did $5 billion of digital sales. Our digital share was lower during the period. However, I don't believe this is a proxy for future share. This was a very abnormal period with unprecedented disruptions to our business. We're now a better business with integration largely done, significant improvements made over the last 2 years and great customer initiatives to come. It's been a tough 6 months, but I'm pleased with the competitive resilience of the business and how we've responded to COVID. Regarding yields and generosities. Generosities increased significantly during the period. We were deliberate in our approach to strike the best balance between customer growth and financial performance. That's something we carefully balance given our narrow margins. Net yields were impacted but helped customer acquisition as well as retention in the days following the data center outage. Our new data and personalization capability is playing an increasingly important role in how we interact with customers. Now while we continue to make the business more digitally competitive, it also needs to be supported by reforms that level the playing field and assist the wagering industry sustainability. The recent point of consumption tax increase in Victoria was another step towards addressing the inequalities of racing industry funding. However, substantial inequalities remain. We're focused on ensuring the conditions we operate under, and the strategic choices we make in the future enable us to be more competitive and sustainable. Complementing this is our risk, compliance and responsible gambling approach. We're focused to ensure we deliver sustainable earnings in a category, and particularly for us as a business, that will continue to be closely scrutinized for the way it manages customers. Slide 15 provides an insight to our accelerating pipeline of customer experience initiatives to give customers more of what they want. With integration materially behind us, it clears a pathway for more innovation going forward. Some call-outs. We've recently extended New South Wales racing's media rights to 2035, underpinning Sky's commercial model and strategy to be the aggregator of premium racing content. This is on top of Queensland's media rights being extended to 2030. And in Victoria, we've renewed thoroughbred digital rights and are well progressed on renewing the retail rights. We traditionally under-index on sport, which we've been addressing to attract a new and broader base of customers who are then introduced to a wider range of products. We're particularly focused on U.S. sport. We want TAB to be famous for being the home of U.S. sport, and that's backed by our NBA, MLB and NFL partnerships. U.S. sport now makes up 25% of our sports turnover. Our strategy of transforming the retail experience continues to be well received by punters. Digital-in-venue turnover ex Victoria was up more than 50% year-on-year. And the ex UBET states was up 115%. We will continue to innovate in this space to take the experience to the next level. We're thinking differently about optimizing the retail network coming out of COVID. One of the things we're trialing is a cashless retail offering. We've rationalized our agency network, and we'll continue to think prudently about this part of the footprint. Enhancing our product portfolio is a key focus. Our Same Game Multi turnover and revenue was up more than 300% year-on-year and now represents over 20% of digital sports revenue. We also have a big tote innovation coming this half, and it will be supported by the personalized tote offers we have launched off the back of our new data capability. We're also still committed to national pooling, have scoped the technical build and continue to work through potential solutions with the rating industry. Moving to Slide 16. When TAB and UBET came together, we set out to integrate and then transform the business with a truly combined digital and retail offer, backed by a cutting-edge personalization platform and leaner, more efficient base. There is always more to do, but the transformation has made TAB a more sustainable and better business. The digital offering has improved, and we're better placed to take advantage of our unique position in market. We're now in the most competitive position we've been in since the merger, and we would not have weathered the COVID disruption, if that was not the case. There is obviously much speculation regarding the Wagering & Media business in the market. While the Board works through that, the Wagering & Media team is focused on the business and continuing to build on the platform we've created over the last 2 years. The team believes in a bright future for this business and are not at all surprised in the level of interest currently being shown by external parties. Thank you, and I'll now hand over to Paul Carew, COO of Gaming Services.

Thanks, Adam, and I'll commence on Slide 17, the Gaming Services. The period continued to be heavily impacted by COVID-19. Gaming venues that were open traded with density restrictions, and in greater Melbourne, venues only reopened in November. It's worth noting that Victoria represents around 30% of the Gaming Services business revenue. As we said at the full year, we suspended fees to venues that were shut, notwithstanding any contractual obligations they may have had with us. The fees have been progressively returning to pre-COVID levels once venues have reopened. This decision did wipe out the majority of earnings in the half, but as a major industry player, we took the position that it was the right thing to do. In all states, we have returned to billing at 100% of usual rates, except in Victoria, which is at 75% and will likely go to 100% by the fourth quarter. The gaming market is buoyant at the moment, and even though less than 100% of machines are operational, customers clearly want to continue to patronize their local venues. As well as managing through COVID-19, the emphasis was on the turnaround plan to improve things like the business' cost structure and capital intensity. We've got good traction there, and I'll cover this in more detail on the next slide. In terms of extensions to the remaining Victorian EGM contracts, COVID-19's uncertainty has made it difficult to meaningfully engage with venues and progress new extensions. Now moving to Slide 18. This slide takes you through the key initiatives of the 5-point turnaround plan. It delivered $3 million in savings in the first half of F '21 with 70 roles removed from the business as well as rationalization of the property footprint and our fleet. This will deliver $9 million in savings on an annualized basis and forms part of the 3S program of work. We've also completed leadership team changes and put in place a simpler operating structure. We're currently focusing on the review of the technical services function, and that's where a lot of the cost base is in this business. We're looking at optimizing field operations, streamlining supply chain processes and the operating model and improving client management. Basically, this is simplifying the way we deliver and allowing us to focus on the areas that add the most value. There's more to do, but the overall turnaround program is delivering what it needs to at this stage so we can lift performance and profitability of the business. Thank you, and I'll now hand back to Adam Newman.

Thanks, Paul. If we now take a look at capital management, and we'll move to Slide #20. You'll remember at the full year release that we announced revisions to our key capital management targets regarding gearing and dividends. We also undertook a $600 million equity capital raising. Those funds were used to pay down existing drawn syndicated debt facility and a USPP note that matured in December. I'm pleased to say that as at 31st of December, our gearing was at 2.8x, comfortably within the new target range of 2.5 to 3x. But that was assisted by some deferrals of lottery taxes. However, we remain confident of remaining within the target range at year-end, even after those deferred lottery taxes have been fully repaid. We understand how important dividends are to our shareholders. So as David has mentioned, we are pleased that the Board has approved the resumption of dividends, a $0.075 fully franked dividend. This represents 80% of net profit after tax before significant items. This will be payable on the 17th of March to shareholders registered on the 23rd of February. Finally, in relation to CapEx, with lower CapEx in the first half primarily due to COVID-19 and actions taken to optimize our spend, we now expect full year total CapEx to come in at around $180 million to $190 million. Depreciation and amortization will consequently be a little lower than earlier expectations and is now anticipated to be around $380 million to $390 million for FY '21. I'll now hand back to David for his concluding remarks.

Thanks, Adam, and thanks also to Sue, Adam and Paul for taking you through the performances of our businesses. And as we conclude on Slide 22, I'd like to leave you with a few final points. The first is that we are in a much stronger financial position as a result of the various actions we took last year and our strong operational cash flows. Secondly, all 3 businesses are well positioned for the second half. Lotteries & Keno has entered the second half with strong momentum, with excellent performance across the whole portfolio and accelerated jackpot sequences activated. Wagering & Media has essentially completed its integration, largely transformed its TAB and Sky businesses and is focused on continuing to develop the digital-in-venue offer, sports and racing media content and personalized customer experiences. And as licensed venues are returning to a more normal state across the country, Gaming Services cash flows are progressively returning towards pre-COVID-19 levels. We'll also expect increased benefits across all 3 businesses from our optimization program. We'd like to acknowledge the significant impact of COVID-19 had continued to have on our people and our partners. And it continues to be challenging as the current Victorian experience tells us, so we'd like to thank them for their commitment to helping Tabcorp deliver excitement with integrity. We're committed to working with our venue and industry partners to reinvigorate their venues and racetracks and help them reconnect with our customers. And finally, there has been considerable commentary in the market about our Wagering & Media business. We have confirmed that we have received a number of proposals and unsolicited approaches in relation to a potential transaction involving this business. The details of these approaches and proposals remains confidential. They are indicative and nonbinding in nature. They are also highly conditional and subject to numerous requirements, such as due diligence, financing and various regulatory and racing industry approvals. The Board will take the appropriate time to carefully consider all of the relevant issues and strategic options that arise in respect of these matters. Thank you, and we're now happy to take your questions.

[Operator Instructions] Our first question comes from the line of Matt Ryan at UBS.

Just got a quick question on lotteries. You're obviously seeing some pretty nice leverage through the P&L in that division, including Keno and a record VC margin. I'm just curious around that VC margin as to whether that was impacted by mix or whether you think that sort of margin can continue to increase moving forward?

So Sue, perhaps you'd like to comment and possibly Adam Newman on the VC margin. But Sue, over to you.

Thank you, David. Yes, that was impacted by mix. As we've shared before, every extra 1% of our digital turnover adds about $4 million to EBITDA. We also, obviously, saw a change in mix in our Keno business as you would have seen in the results this year with some of the lockdowns have happened in various states and a significant shift to digital for Keno, and that's been [ good stuff ].

Yes. So I guess the mix that I was probably more talking about was the mix between Keno and lotteries. So that did have an impact on that margin?

I think the mix between Lotteries & Keno, they are different product categories. The increase in revenue that we've seen from the Keno business has obviously been very encouraging, and we certainly will be doing what we can to keep that up in the future. But this is not that people shift spend between Keno and lotteries so much, if that's what you're thinking or were asking whether that shift will remain. Adam, would you want to add anything more?

Look, I don't think I have a whole hit more. I think, Matt, it's also a bit of the math because Keno VC margin is a lot higher than the lotteries. And the VC margin in Keno was impacted a little bit despite the growth in revenue, and that was off the back of daily connection fees with all of the venues being shut. So we had a big digital pickup, but the daily connection fee aspect has an impact from a VC margin perspective. So I think there's a few moving parts and pieces in there.

Sure. And can I just ask a question on cash flow? So I guess even after stripping off what we'd consider to be those one-off lottery benefits, it's still what we thought was a pretty strong cash flow outcome. And I guess, the area of focus for us is probably more around the CapEx from here. So clearly, this year is going to be a bit lower for the reasons you've mentioned. But now that we're through integration, are you getting better visibility on what you think that medium-term CapEx number might be? And I guess, is there some relief perhaps in the next couple of years at least, that you've gone through such a heavy period of CapEx that, that number might start to come back down?

Adam N., over to you.

Yes, thanks. So we've obviously seen a decline in CapEx. It would be fair to say we're working hard given we've come to the end of integration, as you rightly point out, an elevated spend. I'm not sure that necessarily this year, given the COVID interruptions in the first half, is necessarily representative going forward. I think we've guided in the past of at $200 million to $240 million range. And certainly, as we sit here today, Matt, I think that probably holds despite the fact that we're going to be under it for this financial year.

But I guess, I mean, that was always a medium-term number that we had been given. Is there a lower number that's possible at least for the next 2 to 3 years, just given how much has been spent recently?

Look, I think, possibly, but I think the range that we've given at that $200 million to $240 million, as we sit here today, looking forward, we think that's going to be about where will we be spending. There's still a lot of expenditure, particularly in the digital space for the organization, but I think the range of that $200 million to $240 million is probably okay as we sit here today.

Our next question comes from Sacha Krien at Evans & Partners.

I just had a couple of follow-up questions on cash flow as well for Adam Newman, please. So your CapEx is substantially below D&A. So you have about $400 million of D&A. CapEx, you're talking about $200 million to $240 million BAU. Your gearing is now sort of within the target range of 2.8. Look, it looks like you're going to be probably below that target range pretty quickly, and you're paying out 70% to 80% of earnings as dividends. I mean what's the plan once you do get below the target range?

Look, I mean we've got our settings that we've got at this point, so I assure that I think in the event that we start to sit below that target range, we'll revisit at that point in time. But as we sit here at the moment, I mean, we're not considering it to be a near-term issue.

Okay. I mean how do you think about that differential between D&A and CapEx? I mean, I know you've got about 100-odd of license amortization. Do you sort of put cash away on the assumption you're going to have to renew those licenses at some point, but which means you're going to go below that target range? Is that how we should think about it? Because it is sort of 200 to -- 150 to 200 gap between the 2, which is a lot of cash flow.

Yes. Look, I think it's obviously an interesting question with regards to -- you're right. The D&A has a big proportion of it that's related to amortization of some of those license fees at the end of the day. I -- there's a question, obviously, we've got the Vic license coming up, the near-term one. I think from a capital spending perspective, the way we think about it is that we're -- yes, I think we're quite comfortable about where our settings sit at this point in time. And I'm not sure that as the license arrangements play out, we'll get a better sense about whether we put -- need to be putting cash away or not. I think as we sit here at the moment, we've been pretty focused on how we manage through the near-term challenges that we've got from a COVID perspective. And as we come through that side, we'll have a better, clearer ear about how we're going to look at things down the track.

Yes. Fair enough. Just a couple of follow-up questions for Adam Rytenskild, please. Adam, just hoping you can provide a bit more color on the comment at the bottom of one of your slides where you talk about securing changes to license conditions and regulatory harmonization. I mean first of all, does anything happen on this front? And secondly, what's your level of confidence that you'll be able to achieve some of this? And third -- sorry for so many questions. The third one is -- a product like same race multi (sic) [ Same Game Multi ] where we still haven't seen that. I mean, is that delay in getting that sort of product to market a consequence of these license conditions and regulatory harmonization?

3 questions in there. Let me start by saying that, that comment at the bottom of the slide is not an excuse for our business. We're very focused on our digital customer experience, the way we compete and continuing to improve in that space. But the comment is that I believe, we believe as an organization, that some of those changes need to continue to happen in parallel. And I think the first logical place that, that will be considered is when we look at some of the big strategic questions coming up such as the Victorian license. Without going more into that, I think that's where we need to make sure that the shape of some of those -- out of the markets we operate in, support a sustainable future for our business, but also for the industry. In terms of same race multi -- sorry, in terms of same race multi, that's something that -- it's just a matter for us of how we prioritize our improvements to product and customer experience. We've made a lot of improvements over the last 6 months through COVID. Now that integration is behind us, we've got the ability to accelerate that. We've taken an integration with a significant task for the regulators as well as for us. So that does free up the pipe. But it's just a matter of what we want to focus on first. We've got a lot of initiatives coming in the second half, and we'll consider same race multi is in the pipeline of all of those initiatives.

Our next question comes from Rohan Sundram at MST Financial.

Just one question from me, and I'll leave it to David or Adam Rytenskild. Just on the wagering competitive landscape and competitive as always, but how would you view the last 6 months? And how well would you regard how you're competing versus previous period? Just keen to understand if you are seeing any signs of rationality in that market now that we have had a bit of consolidation?

It seems every time we -- it's Adam Rytenskild here. I'll take that one. It seems every time we talk about rationality, something irrational comes into the market. And COVID, no one could predict COVID. So the last 6 months, frankly, and the 3 months before, it was an incredibly abnormal market, and probably is that unprecedented impacts, as you'd ever see, with retail closures across the market. I think we competed really well on that. As I said earlier on the call, our business is different. The shape of our business is different. And we managed our response in that market appropriately, and I think we delivered a solid result, but have also very clear that we've got more to do. And having integration behind us allows to actually accelerate our focus on customer experience, digital customer experience, including in retail.

Our next question comes from Desmond Tsao from Goldman Sachs.