Tabcorp Holdings Limited (TAH) Earnings Call Transcript

Good morning, and thank you for standing by. Welcome to the Tabcorp Holdings Limited Full Year 2022 Results Call. [Operator Instructions] Please be advised that today's conference is being recorded. I'll now hand you over to the Chief Executive Officer, Mr. Adam Rytenskild. Please go ahead, sir.

Good morning, and welcome to our call for Tabcorp's financial results for FY '22. I'm CEO, Adam Rytenskild, and I'm joined by our CFO, Dan Renshaw. We'll take you through the presentation we lodged with the ASX this morning for the next 20 minutes or so, and then we're happy to take your questions. Starting on Slide 3, we achieved an important milestone as we successfully implemented the demerger of Lotteries & Keno on the 1st of June. Demerger makes the numbers look more complex than usual. This presentation has been designed to help you understand the business dynamics for the year, as well as provide you with necessary reconciliations. I'll also provide an update on our strategy and our FY '23 priorities. Our FY '22 results are a line in the sand. They mark the end of old Tabcorp, a Tabcorp that wasn't set up to grow digital wagering market share. We're urgently changing that, and we're excited about what we can achieve. You've seen in our first 3 months that Tabcorp is becoming more nimble and bold in everything we do. We have a new TAB app that is ready for launch, 2 new products that will be released before Christmas and substantial legislative wins in Queensland, New South Wales and the ACT that will help us level the playing field so we no longer pay double the wagering fees and taxes as our competitors. We've made a clear decision to pivot our Gaming Services business to integrity services. And we're working with the Star Entertainment Group to transition their Sydney casino on to our New South Wales monitoring platform. We will also sell our noncore eBET business. The results you see today will be different for FY '23. We will have new products, and we'll be competing on a more level playing field in multiple states. We also don't expect to have any COVID disruption. Our FY '22 result was impacted by several factors, both externally and internally. COVID was a unique negative period for us, while it was largely positive for our competitors. Our 2 largest retail markets were shut down for 16 weeks and a record number of race meetings were washed out. Tabcorp with Lotteries & Keno didn't have the structure and capability to win in wagering digital markets. We recognize that and we're changing that. This is driving our sense of urgency, and we believe we are now taking the appropriate actions to recover lost ground. Dan will cover the detail of the results shortly. At a high level, our continuing operations delivered $2.37 billion in revenue down 4.3%, and EBITDA of $382 million or $361 million on a pro forma basis. The statutory NPAT of $6.7 billion includes a $6.5 billion net gain on demerger, which has been disclosed as a significant item. We returned $0.13 per share in dividends to shareholders in the year, representing an 80% payout ratio of NPAT before significant items and includes 11 months of earnings from Lotteries & Keno. We're in a strong financial position with net debt of just $20 million at year-end. This provides us with capacity and optionality. However, as we have said consistently, we will remain disciplined in how we invest shareholders' capital. On to Slide 5. It's an incredibly exciting time to be at Tabcorp. We're making a positive start to transform Tabcorp into a competitive and growing business. We have energy and a strong sense of urgency. We've had a clear strategy and a focused ambition to grow our customer base. The hero metric for the company is digital market share growth, and this ambition is reflected in everyone's KPIs and in their personal incentives. I'm determined for us to be different and to be obsessed with creating products and experiences that Australia loves. To do this, we need to urgently reinvent the company and we're doing just that. We outlined our strategy at our June Investor Day and we've made a positive start in the key areas of people, product and technology and in our commitment to customers. Our people are integral to delivering on our strategic objectives. We're transforming our culture to be customer obsessed, to be bold and to be unified to win. Cultural change is a key determinant of whether we're going to succeed in transforming the business. Our people understand the urgency that we have to work. We have a renewed Board, a renewed executive leadership team and this includes new capabilities in key areas such as customer, technology, strategy and legal and risk. Through the demerger, we've been working intensively to make our culture more innovative, bolder and unified to win. We started moving to our new operating model, which will help us be a simpler and faster organization. This has begun with our technology and customer teams. Our new KPIs have an increased weighting towards customer metrics that align with our ambition to grow customers and grow market share. Slide 8. To win, we must create products our customers love and modernize our marketing strategy to drive digital turnover. Our full ecosystem of channels, content, data capability and product is aligning behind this. Beta testing of our new TAB app is complete, customer response has been positive and we remain on track for launch in September, well ahead of the spring racing season. We also have new products being developed in parallel, which are on track to be released before Christmas. At our June Investor Day, we spoke about rebalancing our marketing to drive growth. Our spend for spring will be 73% in digital channels compared to 59% last year. Our new marketing approach underpins our Aussie Spring Rituals campaign that we've just launched ahead of the app release. This will lead us into spring racing and then into the FIFA World Cup. It's going to be a vibrant half. Today, we have a digital business with around 780,000 active customers on the current TAB app. It's a solid base to grow from. This is an app we're replacing because the technology and customer experience isn't where it needs to be in the current market. We have a significant opportunity to grow in a digital market of over 3 million active customers. Our new app is built on leading technology that will allow us to be more innovative and faster in releasing updates and new products for customers. Our leading racing and sports vision content and Venue Mode will be improved and better integrated in the new app. Put simply, the new app is faster and simpler to place a bet. It's exactly what our customers have been asking for. I'm really excited to confirm by Christmas that we'll have launched a social betting feature and the same race multiproduct. This is just the first step, but it's an important one as we work to win market share and to grow. Slide 10. In terms of leveling the playing field, we have had positive momentum with meaningful outcome since the demerger in Queensland, New South Wales, the ACT and in Western Australia. In Queensland, the Point of Consumption tax will be increased to 20% and the level playing field will be implemented, meaning all operators pay the same wagering taxes and fees. In New South Wales, the Point of Consumption taxes increased to 15%, and the government has signaled a review of the long-term industry funding model. The ACT has increased the PoC to 20% and its jurisdiction is a level playing field. The Premier in Western Australia has also signaled in the parliament that a level playing field is the likely funding model with the new WA license, which is expected to be issued before Christmas. For Tabcorp, a level playing field means that we'll be able to compete on level terms with Northern Territory license bookmakers. We'll be able to invest these resources into products, offers, price, venues and the betting experience for TAB customers. This will help us grow and win back market share. It's still early days and there's more work to do to create a level playing field nationally that's good for us, good for the industry and good for government. However, these initial steps are encouraging, and we expect more. Slide 11 in Gaming Services. For Gaming Services, our strategy outlined a narrowed focus on integrity services and today we announced meaningful progress to deliver that. I want to free us up to execute on what matters and to deliver our strategy without distraction. We've decided to sell our eBET business and have commenced the sale process. eBET is a supplier of loyalty and tracking systems to gaming venues in Victoria and New South Wales within MAX Integrated Systems. In FY '22, eBET generated EBITDA of $4.4 million and an EBIT loss of $2 million. We're also working with the Star Entertainment Group to finalize an agreement to monitor their EGMs in Sydney. This is an example of how new Tabcorp is beginning to successfully execute the strategy we outlined for this part of the organization at our Investor Day. We're also expecting the Tasmanian government to soon announce the outcome for their new monitoring license. Now we're a gambling entertainment business. We must look after our customers and deliver our products safely. Gambling can cause harm for some customers if not monitored and managed proactively. We're conscious of that and take it very seriously. Over a number of years, we've invested in our systems, processes and capability to assist customers and help them be safe. This is a priority, and we will continue to invest to ensure we deliver the safest environment we can for customers and for the Australian community. A recent example of work done in this area is an early intervention campaign we ran in July. The Responsible Gambling team conducted over 1,000 customer account reviews, which resulted in 380 customers being contacted personally to check in and offer tools and support where needed. Being customer-focused for growth absolutely includes creating a safe environment for our customers. TAB is Australia's most trusted wagering brand, and we take that role very seriously. We'll now shift to the financial performance, and I'll hand you over to our CFO, Dan Renshaw.

Thanks, Adam, and good morning to everyone. In this financial part of the discussion, we'll cover 4 main areas. Firstly, we'll cover the group performance. Secondly, divisional EBITDA bridges and performance. We'll then turn to the balance sheet and capital. And finally, we'll finish with some discussion about OpEx management. So turning first to Slide 14, this shows you the P&L from continuing operations before significant items along with the reconciliation to statutory NPAT including the earnings from the discontinued operations of TLC. There are 3 key items to call out on this slide. Firstly, as mentioned by Adam, COVID impacts weighed on the business predominantly in the first half. This adversely affected revenue and earnings performance. I'll explain the operational performance in some more detail shortly. The second callout is interest expense of $125 million that you can see there on the page, and that's not reflective of the current net debt position that we've also disclosed this morning. That's because interest expense from continuing operations actually comprises 11 months of the pre-demerger interest that's on the USPP and bank debt and then 1 month on the new facilities. The third callout is that the NPAT from continuing operations delivers a loss, and that's been impacted by the interest expense I just described as well as the COVID impacts I mentioned earlier. The waterfall chart on Slide 15 shows the components that drove the change in EBITDA from continuing operations versus the prior year. As you can see, the headwinds of COVID, investment in generosities and the wet weather impacted the VC. OpEx was impacted by lower COVID mitigants that we had in the pcp. And we had increased spend on technology and advertising, which was partly offset by $18 million of benefits from the final round of 3S cost savings. Pro forma dyssynergy to the right on that graph is an adjustment of $21 million, and that's in line with the Scheme Booklet. Turning to the operational performance of the divisions. Wagering & Media, as we outlined in February, our results in this division were heavily impacted in the first half by retail closures in the 2 largest markets that we have for Wagering in Victoria and New South Wales. This also included a reduction in the Sky venue subscriptions. In addition, wet weather in the second half led to a record number of abandonments in rain-affected tracks, and we estimate that this impact was around $5 million at EBITDA. These adverse impacts were partly offset by higher export revenue and increased digital distribution revenue in the Media & International business. The market remained competitive, and we maintained our investment in generosity through the second half at a higher rate than the prior year, although that was lower than what we spent at in the first half. That's not unexpected. Increased spending in technology and the cycling of some one-off COVID cost savings in the prior year was partially offset by the previously mentioned 3S savings. On Slide 17, we talk a little bit about the COVID impacts that we're describing. As we outlined in the first half result, COVID-19 had a material impact on the business in '22. And we noted though in February the improved performance in the business as our venues reopened, and that trend has been consistent through the second half. We're hopeful that the worst of the pandemic is behind us and F '23 is a new base to build from. The final slide when talking about Wagering & Media is Slide 18 talking to the key metrics. Our digital market share has been stabilizing with TAB digital performance benefiting from that retail reopening I just mentioned and the ability to offer our full omnichannel experience. We've consistently said that the business is in better shape when all channels are open. As Adam said, this stabilization of market share is good to see, but our ambition and our strategy is focused on growth. When looking at the yield graph on the bottom left, you'll see that generosities increased in FY '22 and this more than offset a small increase in the gross yield. You'll also note in that graph a change to our disclosure on yield. We've changed from a fixed odds to a total yield as we believe this provides a better view of our performance now that we're investing generosities across both fixed odds and Tote, and also noting that our fixed odds and Tote businesses are roughly the same size. As you would expect, the contribution from our venues to VC was a tale of 2 halves, given they were shut in the first half. And the value of having that diverse source of earnings again came through in F '22 with digital and Media & International comprising 73% of our VC in F '22. Turning to Gaming Services on Slide 19, and this was a pleasing result from this business in a really challenging environment. Looking at the 2 main parts of the business being Venue Services and Reg Services. First, the Venue Services, I'll just explain a bit of the result here. Revenues grew, given there were fewer lost trading days in Victoria versus the pcp. That's our largest market for that part of the business. Conversely, though, when it came to Reg Services, we had a decline in revenue given its main exposure is to New South Wales where 3/4 of the business is located. The growth in OpEx was largely due to cycling significant cash preservation and cost-reduction opportunities that we had in the pcp. I said at the start that this was a pleasing result from this business. And the team did bring it back to profitability with full billing recommencing from December 1, but they also delivered on their optimization program to streamline that business, including a national field services model and have rightsized the MPS business in line with the EGM contract profile that's going to come into effect post August 2022. In terms of a status update on the Venue Services contracts post August 2022, this is as follows: 50% of our venues are signed beyond August 2022, generally for between 5 to 7 years, on a full venue service fee model. 10% of EGMs will be on a new advisory-only model, and the balance of EGMs will not be extended. These machines were subsequently sold to customers, generating a profit on sale that will be realized in F '23. In MAX Venue Services, as I said, there with a new advisory model we're pursuing a capital-light model. That will be focused on generating consistent near-term free cash flow through both the renewal of contracts towards that advisory-led model, combined with the sale of machines to venues that don't extend their contracts. Leaving the business performance and now turning to capital. On Slide 20, you can see our balance sheet is in good shape with capacity that provides flexibility and optionality for the company. Net debt at 30 June was $20 million, and that's in line with the guidance that was given at the Scheme Booklet. We do note some material upcoming payments on the right-hand side of that graph. That will impact our drawn debt level, including the final dividend to be paid by Tabcorp Queensland payments related to the legal settlement that we've announced and industry reforms. We've also got a final license payment in Queensland to come, and well, some remaining demerger payments. The dividend of $0.13 per share represents an 80% payout ratio, including 11 months of Lotteries & Keno. As we have said previously, our new target ratio is 50% to 70% of NPAT pre significant items. CapEx for the year was $134 million. That was in line with the guidance we provided. Importantly, we saw an increase in growth CapEx, and we expect this to continue in F '23 as outlined at the Investor Day. F '23 CapEx forecast remains up to $150 million. We're providing a new disclosure and target for F '23 with D&A today, and we're providing that number to be between $250 million and $260 million for the next year. Leaving the balance sheet and turning finally to cost management before I'll hand back to Adam. We completed the 3S program in F '22 with the continuing Tabcorp businesses contributing over 75% of the benefits over the life of that initiative. In F '22, we delivered a further $23 million of EBIT savings. As we look forward, cost discipline and commercial rigor is a key priority and focus. We're well advanced in the development of short-term and medium-term initiatives in our new Genesis program that we have outlined at Investor Day, and we expect to start seeing the positive results of these in the second half of F '23. And that will allow us to manage cost growth to a 3% to 4% target within what is clearly a high-inflation environment circulating in the economy. Importantly, this range still allows us to invest in the business to support our transformation and growth strategy with a portion of the funding coming from more productive use of our existing OpEx envelope, including in areas such as advertising and promotion, technology spend, and this is in line with our disciplined approach to operating costs. I'll now hand back to Adam to give a trading update and outlook.

Thanks, Dan. Look, this really is an exciting time to be at Tabcorp. I'm finding it incredibly invigorating and I know my team is. We're already seeing positive signs for FY '23. In July, our digital market share was 25%. This is an increase from 23.5% in July last year. Group revenue was up 14.6%, including 11.2% growth in Wagering & Media revenue. These were COVID impacted retail months last year, but do highlight retail customers have returned. If you remove WA where we're not allowed in the market, our digital market share was actually 28% compared with 26% last July. These are strong improvements post demerger and highlight a positive trajectory for FY '23. Our transformation has started. In the near term, we have a clear plan with specific actional priorities for FY '23, including the launch of our new TAB app, which is faster, simpler and different. We look forward to launching our 2 new products, our social betting feature and the same race multi-product, before Christmas. This will transform the TAB customer experience. Structural reforms at the level playing field with offshore bookmakers will further improve our competitiveness and our opportunity to grow. We will no longer have to compete with one hand tied behind our back. In Gaming Services, the pivot toward our unique integrity services capability has begun with the proposed sale of eBET and arrangements with the Star Entertainment Group in their Sydney casino. We're now a different company, a company better set up to drive digital wagering growth. We're urgently transforming Tabcorp, and I look forward to providing you with a further update at our AGM and our half yearly results earlier next year. Can't wait to roll out our new TAB app. We're gearing up for a really exciting spring and to deliver a terrific customer experience for the FIFA World Cup. Thank you, and I look forward to your questions.

[Operator Instructions] Our first question comes from Matt Ryan from Barrenjoey.

Appreciate the trading update. Just hoping if you could give us some color on where you think you're trading relative to the period before COVID.

Matt, it's Dan here. I might take that one. So I'd interpret your question to be how is retail? Or are you talking about basically the FY '19 year?

Yes. I guess the July group revenue up 15% against last year is a little bit difficult to draw a conclusion from just given that, I think, from memory, the bulk of New South Wales and Victoria were sort of in lockdown at this point. So sort of just hoping that you can give us some color on, I guess, where you would have been in a normal trading environment?

Yes. It's a good question, but we're now talking about something that was at least 3 years ago and so much has changed, not just COVID, but the market's changed immeasurably as well. So I'm not sure it's all that helpful going back all the way to FY '19. What you would have seen had there been COVID or no COVID is that cash retail would have continued to decline. So usually, a lot of the time we get the question it's about is cash retail back at pre-COVID. We wouldn't have expected that in normal trading conditions. What we have said, though, is that versus the pcp, retail, including our DIV is back in line with prior to that lockdown that you referenced. That's probably the most helpful part I can give you.

Yes. That's helpful. And just looking to the detail, I mean, it looks like the pari-mutuel or the Totalisator business certainly grew on a full year basis according to your disclosure. Just interested if you could pick that line item apart. It seems like it's doing a bit better than what it has done historically.

Yes. Continued the theme that we had -- or the momentum that we had at the first half really. We switched our strategy on generosities, only on Saturdays mind you in particular, to focus on Tote to stand us out in the market there. And that delivered growth in Tote. And the reason that was important was that I think that there was a perception that customers didn't want Tote, that they only wanted fixed starts. I think what it's probably shown everyone is that what customers care about is experience and value, and that's what's changed the trajectory of that line.

Our next question comes from the line of Larry Gandler from Credit Suisse.

Actually, Dan, I'm going to change my question now that what you just said really startled me. With regards to Tote, you're talking about customers not necessarily demanding fixed odds but really seeking value. I guess it follows how is the Tote, even with the generosities you're buying, how is it priced relative to fixed odds today in the marketplace? And is there room to push that pricing down further and perhaps capture an elastic response?

Yes. Good question, Larry. If you looked back 4 or 5 years ago, there was a real gap between the Tote yields and the fixed odds yields. And if you look at it today, that gap is almost not there at all and particularly when you look at win in place where the generosity gets applied. So I think that they're priced pretty similarly. We see that Tote most of the time, is in more than 50% of the time, the Tote price ends up better than the fixed price. We backed that up not only with generosity, but with the lot product that gives you some level of surety on price for punters. I know what you're getting at with regards to driving down price and elasticity, but I think punters respond to value and headline value more so than headline price by itself. It's a combination of things, I guess.

Okay. And just to kind of paraphrase what you're seeing there on win place and straight bets -- Tote is obviously competitive with fixed odds and perhaps the overall higher yields are coming from the exotics.

Yes. Correct.

I think for me, Larry, and a little bit for Matt, just to jump in. This is interesting, we've we have been a bit more focused on Tote with our marketing. But very soon it's not just about price. It's about innovation, our customer experience, what we do with our app. And very soon, we're going to have a product in market the combination of those things is much more effective on top of whatever we do with our marketing and price. So I'm looking forward to that in terms of looking -- thinking about the future.

Okay. Great. Adam, just a question on -- or Danny, if you want to take this, digital market share. You've called out that it's stabilized, but in the last 6 months it's actually ticked down. Now I gather that you've got quite a number of initiatives coming out from Christmas onwards, especially with the digital marketing for spring. And you did call out it was 25% digital market share in July. I'm just trying to feel there's a bit of volatility there. Just trying to think maybe in that second half, that June '23 half, should we be expecting a significant step up there? Is that what you guys are looking for, for digital market share in that period?

I think what we're calling out is share moves around depending on what's going on in market. Interestingly, in that last quarter, we don't -- turnover share was actually up but the mix of yield really impacted revenue for us, but then digital share in July has been stable and better than July last year, which is interesting, given we've got the combination of cash venues trading this year and digital revenue share stronger than last year. So that's good. But it's really just as I said, it's a line in the sand. It's not just beyond Christmas. We've got a new app coming out in the coming weeks. That's going to be really good for us through spring. I've got a new chief customer officer who is going to be taking a different approach and already taking a different approach to marketing, really a performance-driven marketer, and what we do with promotion and brand through spring is going to be different. And then we've got 2 new products coming. And then we've got a platform to keep innovating on. So just expect more to be coming for customers more often from TAB from this point going forward.

Our next question comes from the line of Oliver Ridge from CLSA.

This is Justin Barratt. Can you hear me?

Yes.

Can do.

I appreciate the change that you've made on your disclosure around net yields. But I was just wondering if you could give us an idea on what happened with net yields on your fixed product over the second half or FY '22 just for continuous purposes?

Yes. There wasn't a big shift year-on-year. And you said net yield, right?

Yes, please.

Yes. So there was a slight tick up in the gross yield. It was offset by more spend on generosity, which I talked about before, but it's not a material change. And we prefer to now start talking about total yield.

Okay. No problem. And then the next one, just in terms of your cost growth guidance of 3% to 4%. Can I just understand, is that basically in totality, and I guess, takes into account some of the changes that you might see in the business, such as Gaming Services, losing some of those MAX Venue Services and the opportunity that you have at Star combined with, I guess, some increased investment in your Wagering business as well?

Yes. So it does include everything. It's in totality. Starting from the base, it's make sure that you look at the pro forma OpEx because the guidance is off the pro forma. So that takes into account the dyssynergies put in there. And then there'll be a lot of things moving around. There'll be more on investment in Wagering & Media, and that will be very evident in the first half in what's going to be a big and vibrant half. As Adam said, we've got the new app, a big spring racing carnival, and we've got the FIFA World Cup. But there's other shifts in the cost base that we'll be using to be able to invest in that.

Our next question comes from the line of Simon Thackray from Jefferies.

I just want to go back to Larry's line of questioning around yield, and Adam, the launch of the new app. I just wanted to know how we think about the mix of net yield versus generosities? Is it to drive a dollar yield number as you intend to grow share? And where do the generosities get allocated, I guess, between Tote and fixed odds as we move forward? So I guess you could summarize the question is how are we going to measure success in terms of the new app and for Wagering & Media? Is it digital share, is it yield, variable contribution or some mixture of all of above?

I think I'll jump in and then Dan might want to add some detail. But look, hopefully, you get the sense through what we're sharing with you and what we're saying that there's a lot going on at Tabcorp. We're not waiting around till after spring or anything to make changes that are good for customers. And it's a combination of these things that will ultimately lead to growth. And we are measuring our success over time by growth in digital market share, digital revenue market share. That translates across our whole business. So our venues, which are really important for us and provide fantastic presence for TAB, we want to leverage, which are really important for us and provide fantastic presence for TAB. We want to leverage harder and stronger to drive digital market share. Our Sky business, which is fantastic, we have more content, more channels, more races than anyone, more experts, more tips. We want to use that in a much stronger way to drive digital TAB revenue market share. Whereas before we were talking about generosities and price, et cetera, because we didn't have the platform really to be able to -- combination of product innovation, frequency of updates for punters, a unification of strategy, KPIs and focus across the organization wasn't there to drive betting and drive growth, now it's there. And it's a combination of those things that I'm focused on. Measure our performance over time through digital revenue market share because that's what we're measuring our performance by.

And Adam, as an adjunct to that, when you -- sorry, Dan, I was just going to ask just a follow-on question to Adam. As an adjunct to that, is it possible that you see -- you could see increasing generosities, but you could potentially see, given the platform approach, an increase in net yield as well as digital market share?

Look, I might jump in there, Simon, I think I understand what you're saying. Look, you could see an increase in generosities. We've always got to be responsive to how things are playing out inside the market. And we're always trying to optimize, call it, the net yield outcome. But we don't sit around the table each week and each month obsessing about optimizing the yield outcome. What we sit around talking about around the table is how do we drive our performance versus competition, how do we use the assets that we've got. So that might be an output that you described that might happen, but it's not called an input to the decision-making.