Tabcorp Holdings Limited (TAH) Earnings Call Transcript

Good morning and welcome to Tabcorp's FY '25 Full Year Results. I'm Gillon Mclachlan, and I'm joined on our call by CFO, Mark Howell. I'll talk you through the highlights before handing over to Mark for the financials. Can I -- I refer you to Slide 3 first off. And this year, we present a very different set of numbers. We feel we've come a long way. We have double-digit growth in revenue, EBITDA and EBIT. We've delivered OpEx savings of $39 million, ahead of our updated guidance in February. We have a stronger balance sheet, having reduced debt by $251 million with a reported leverage of 1.6x. We had a smooth transition to the new Victorian license, delivering EBITDA uplift of $83.7 million for 10.5 months of the agreement. These are the results of a fitter company, and a company with a simpler operating model, uplifted capability, improved cost and capital discipline and an evolved strategy that is being executed quickly. We're going to be relentless in executing the plans that I'm talking to you through now. Let's go to Slide 6. The new team are on board and settled into their roles. I'm pleased with the functional capabilities and the culture we're building. I'm seeing operational improvement every day and look forward to that coming through in performance. Together, we've created a leaner organization. We've removed 230 roles in FY '25 and implemented a vertical structure that allows us to move faster with clear P&L accountability. You're starting to see improved execution. We have new customer offerings like the TAB Takeover, TAB Time and AFL Miss-By-One. I'm optimistic this will be the start of changes you will see in FY '26. I'll now push you to Slide 8. This is our game plan, our strategy on a page. You will see this slide a lot. It's in every presentation. Every member of our team knows where they fit into the strategy, their role and what they are accountable for. I speak to this in every meeting we have at Tabcorp, and I'll do the same with investors. This is the plan you should be measuring us against. The strategy unlocks value across our entire asset base, and I'll spend the next couple of minutes providing an update on each of the pillars. I've already spoken about the first pillar with the uplift in capability and change the operating model. The right people are the foundation of the strategy and anchor everything we do, a relentless focus on people, plan, culture, team. Can I push you to Slide 10 now on our second pillar, growth for industry and ourselves. There are 3 callouts on this slide. The first is making a national tote a reality. We are committed to this. A national tote will increase liquidity, attract new customers and allow product innovation. We will be working closely with the racing bodies and regulators. New technology is being developed. There's still work to be done, but the team know we are going to create a national tote and will be good for the industry. Industry reform in New South Wales remains a priority. Our position has evolved over the last year, and we are working more closely and collaboratively with the racing New South -- with the New South Wales industry on a joint long-term solution. We need to do this together, and I thank Racing New South Wales and the broader industry for their collaboration. Finally, MAX. There's been a lot of chat about MAX. Our focus is growing the business. We've appointed a new General Manager who started a few weeks ago, and we'll look at expanding our footprint. We want to grow earnings and make it even more structurally profitable business. You'll hear more about our plans for MAX as the year goes on. Slides 11 to 13 are our third and fourth pillars, which have retail at the heart. We are focused on creating a true omnichannel sport and racing entertainment experience that integrates our digital, retail and media business. We now have a weekly calendar of integrated retail offers headlined by TAB Time. It's an example of a true omnichannel offering. The offer is promoted on Sky, available only in retail and the bet is placed on our digital app. TAB Time provides a reason to use the Green App in Venue. It's why we are creating retail-only generosity offers across the week. I announced Tap-In-Play at the Macquarie Conference and trials are now well underway in 20 New South Wales venues. In-play betting makes up over 50% of the international market. It's underutilized in Australia. We're continuing to modernize the look and feel of our retail offering with new screens, the end of teletext and refreshed branding. We can also control screens in our venues to ensure customers are receiving the right offers at the right times. Work is advanced in the creation of new betting terminals that will modernize the customer experience and deliver important safer gambling enhancements. Our new betting terminals will mirror using the app. Phase 1 of our new commercial model came into effect last month. Benefits from the first phase are expected to be reinvested into enhancing the customer experience and growing the value of the network. Everything good is green and funders are seeing that in venues. To Slide 14, our stand-alone sports and media business. Our media business is changing. We are focused on closing distribution gaps, looking internationally, evolving our business model and presenting better. New talent, different presentation, better integration. Sky will look and feel different for Spring. Our media business is one of our strongest assets, and I look forward to sharing with you its evolution during FY '26. I'll now hand over to Mark.

Thanks, Gil. Good morning, everyone. As Gil mentioned, we have spent much of the last 12 months getting fit and evolving our strategy. From a financial perspective, getting fit has meant embedding cost and capital disciplines into the business as well as strengthening the balance sheet. Overall, we think this is a pleasing financial result. We have delivered satisfactory relative revenue performance given the soft wagering conditions and demonstrated good cost control and cash flow conversion, which has led to improved operating leverage and a reduction in financial leverage to 1.6x net debt to EBITDA at year-end. There is still much work to do as we look to embed and execute the strategy. Before I run you through the results in detail, there are 4 key messages that I want to leave with you. First, the reformed Vic wagering license broadly provided the expected uplift in revenue, VC and earnings, allowing for the soft market conditions, where volume remained negative for much of the year. We estimate the Vic license has delivered an uplift of $84 million for the 10.5 months is in place. Second, removing the benefit of the Vic license, we achieved broadly flat wagering revenue growth for the year. Within that, fixed odds revenue growth was up 2.2%, fixed odds sports revenue growth was up 8.9% and cash revenue was up 2.4%. Third, we have embedded improved cost disciplines across the business and have taken action on headcount, including the execution of zero-based design program. These measures have led to an in-year cost out of $39 million and some of the benefits will annualize into F '26. Lastly, we've had strong underlying operating cash flow conversion of 99% as earnings began to grow, and we reprioritized capital spend. F '25 CapEx landed at $115 million, a reduction of 24% on the prior year, which assisted our free cash flow for debt reduction. Our leverage ratio landed at 1.6x, providing us with significant balance sheet flexibility as we move into strategy execution. So now moving on to the results. Slide 17 sets out the F '25 group financial results. The first thing I would say is the reformed Vic license makes the comparison with the prior year difficult. Group revenue grew 11.8% to $2.6 billion. EBITDA grew 23% to $392 million. D&A benefit from the prior year impairments, and these factors combined contributed to an increase in EBIT of 94%. Net interest increased as a result of the increased borrowings to fund the upfront payment for the Vic license as well as the impact on the interest discount unwind of $25 million. As previously flagged, the high effective tax rate was driven by the nondeductible Vic license amortization and the interest discount unwind. And finally, NPAT before sig items grew at 77%. The final dividend of $0.01 per share brings the full year dividend to $0.02 per share, a 54% increase on the prior year, reflecting the earnings growth we've had. For the remainder of the presentation, I'll provide an overview of 3 areas: the drivers of EBITDA growth, cost control to deliver operating leverage and the strengthened balance sheet. So turning to Slide 19, we can see the drivers of EBITDA growth. The incremental EBIT earnings uplift from the reformed Victorian wagering license was a major contributor to EBITDA growth, providing $158 million VC uplift, which was offset by $74 million of costs to deliver $84 million of incremental EBITDA for the 10.5 months it was in place. Improved yield in international wagering activity also provided an uplift of approximately $12 million, while increased Sky rebates of $12 million was a headwind. The improved Vic license terms are reflected in the 250 basis point improvement in Wagering and Media VC margin to 37.6%. Other benefits to earnings include the increases in Integrity Services VC as a result of the annual CPI fee increase as well as increased project work. Underlying costs improved by $16.6 million. $30 million in other cost headwinds include $10 million of demerger dis-synergies, while the balance being an accrual for staff incentives that were nil in the prior year. Slide 20 provides an overview of how to interpret the headline OpEx increase of 13.6% and demonstrates the significant focus on cost over the last 12 months. On Slide 20, you can see the delivery of cost savings through both cost -- structural cost out and tighter control of discretionary costs has led to a 2% reduction on an OpEx base on an underlying basis across the year despite persistent inflation and regulatory cost headwinds. We have rebased F '24 for items such as the change in the Vic JV, the merger dis-synergy and the direct costs associated with the NPS business, which we exited in the first half of F '24. Inclusive of the incentive accrual, OpEx grew by only 50 basis points across the year, which is a pretty good outcome. Slide 21 provides more detail on actions taken across F '25 to achieve a $39 million cost reduction for the year. To provide a bit more color, around 85% of these cost savings were structural in nature, including headcount reduction, the implementation of zero-based design and outsourcing, while the remaining 15% was being tighter on discretionary costs such as advertising and promotion and travel and entertainment. As I said, a reasonable portion of these cost actions taken in F '25 will annualize into F '26, and there remains an opportunity for further cost benefits. However, we expect these savings to help offset inflationary headwinds and to support the investment in the strategy to drive growth. OpEx in F '26 will also be impacted by the additional 1.5 months of Vic license. Slide 22 demonstrates the greater focus on capital discipline with CapEx for F '25 landing at $115 million for a year-on-year reduction of $36 million. Together with the earnings increase, this has driven an improvement in return on invested capital across the year. For F '26, we expect CapEx to be in the range of $120 million to $140 million as we set aside funding for new strategy initiatives such as the retail commercial model. We are also providing guidance on F '26 D&A of between $215 million and $225 million with a step-up from F '25 being largely driven by an investment in shorter life digital assets. Slide 23 shows the strong cash flow generated by the business for the year. The negative working capital balance of the business means that as the business grows, it materializes into cash flow which in turn can be used to fund CapEx, reduce debt, fund dividends or be used for other investment purposes. After removing the working capital benefit from the Vic JV unwind, underlying cash conversion was 99% for the year, an excellent result. Unlevered free cash flow of $356 million has allowed us to reduce net debt meaningfully across the year. This strong cash flow generation has allowed us to strengthen the balance sheet in F '25, as can be seen on Slide 24, with reported leverage at year-end of 1.6x, well within our leverage target range of less than 2.5x through the cycle. Net debt reduced at year-end to $609 million. At 30 June, we had $803 million of undrawn facilities and unrestricted cash and maintain access to diversified funding sources with no debt maturities until F '28. The strengthening of our balance sheet across the year provides significantly greater flexibility as we move into strategy execution and is a highlight for the year from a financial perspective. As I said at the outset, overall, this is a very pleasing result, and we're getting the business back on track. I'll now hand you back to Gil for some closing remarks.

Thanks, Mark. I believe we became a much improved company over the last 12 months. You ultimately are judged by your plan, people and culture, and the change this year has been significant. There is a big agenda in FY '26, and we're going to be relentless in executing it. I'm pleased to present results that show earnings have increased double digits. We've delivered cost savings ahead of guidance and our balance sheet is in better shape. We expect modest growth in the wagering market in the year ahead. I'm pleased with the progress and happy to take your questions.

[Operator Instructions] Our first question comes from the line of Andre Fromyhr from UBS.

I just want to start with the cost savings. So you've called out $39 million saved in the year gone. That compares with about $20-odd million that you'd recognized in the first half. So what I'm trying to understand is what's sort of the run rate of things that you've delivered so far? And does that imply that there's further room to show up in cost savings next year? Or to what extent are you already reinvesting that in strategic initiatives?

Yes. Thanks, Andre. It's Mark. We obviously aren't giving a cost out number next year. We've been deliberate in that. As I said in my presentation, a reasonable portion of that run rate will annualize into next year, but we expect it to largely offset inflationary headwinds and to reinvest into strategy, which we're already on that pathway. So yes, there are obviously cost savings. There are other things that we're focused on, including keeping the tight range on discretionary costs. And yes, that's where we're sort of headed for F '26.

Maybe an expansion to that, though, like are you still active in taking costs out? And I guess one of the reasons I'm asking is just keeping an eye on the one-off restructure costs, some that sort of showed up again in the second half. Are we sort of done on that program now? Or will that be a recurring feature?

No. We're going to continue. The main area for this year that we're focused on is around technology, and there's still tech transformation going on. But as I sort of said, we will be any sort of cost savings we're largely just expecting that to offset inflation and then reinvest.

Sure. And if I could just ask one more. Dabble looks like a bit of a highlight in this result. If I'm right, it was a loss contributor in the first half, but it was profitable at the full year. So wondering if you could talk through the exit run rate, shall we say, for the year on how Dabble is going. And as part of that, as Dabble scales up, is there any more investment required in that business that would require Tabcorp to contribute more capital?

Yes. Andre, it's Gil. Yes. No, I don't think so. The numbers are in there. The business is performing well. We're happy with our investment, and we don't look to be -- we don't think there's going to be any more capital required from us.

Can you comment on the run rate, yes?

Yes. Look, obviously, it's the first time since we've invested that we've actually had a share of profits, which is obviously a testament to where the business is at and how quickly it's growing. So we are pleased with our investment in Dabble. And I think since we've invested, revenue growth is north of 5x from where we originally were. So we're obviously pleased with how that investment is going.

Our next question comes from Matt Ryan from Barrenjoey.

I was wanting to ask about the retail revamp and Phase 1 of the new commercial model. And just hoping if you can sort of share what we should be expecting this year from that and also the products that you talked about within the CapEx spend being allocated to that program?

Thanks, Matt. It's Gil. What I'd say is that, broadly speaking, the new commercial model is about getting greater alignment with retail. And so the changes in the FY '26 model will be reinvested back in the customer experience. The key change this year is removing the commissions with venues under $10,000 of turnover. Well, clearly, then we're in constant dialogue going forward with our venues and how CapEx plays into the commercial model for FY '27 and beyond is in discussion right now.

Okay. And I was just interested in your comments on the wagering market. Maybe you could talk about what you saw over the second half and what's sort of, I guess, feeding into your expectations for modest growth moving forward?

I guess what I'd say is it's stabilization of growth. We were down still in the second half. And so modest is modest of a market that got better through FY '25, but it was still down through to the end of the financial year. And so we're not -- we're sanguine about it, but it's traveling okay, albeit off a base where we were coming sort of tracking down a couple of percent coming into the full year.

Our next question comes from the line of Kai Erman from Jefferies.

Just keen to dig into the balance sheet outcome. You're sort of deleveraging faster than expectations, and you sort of flagged some investment into retail initiatives. But I'd be keen to hear about how you guys are thinking about investment opportunities and your balance sheet optionality as you continue to deleverage, particularly given you're somewhat below that under 2.5x net debt-to-EBITDA target.

Thanks, Kai. Gil. Our focus at the moment is on executing on this plan. We're really -- I do feel the improvement in the balance sheet strength is a significant call out in these results and clearly, it gives us optionality. At the moment, our focus is on the plan ahead of us, working with the assets we have, reinvesting in our retail network and our partnerships and our business. But at some point, I'm sure there will be other options. But at the moment, we're focusing on the plan as presented today.

And you sort of flagged earlier, sort of mentioned some upcoming changes to Sky. Is there any detail you can give us on what these changes will look like from a product perspective? You sort of mentioned that they're sort of upcoming for the Spring Carnival.

I think that'll be the way you view it at the moment. We're obviously working within the business. We're reporting to the Board on a broad-based plan in the September strategy meeting. So I'm referencing that hopefully, we will start showing up differently in first half of this financial year and the more structural stuff we'll come back to you over time.

Our next question comes from the line of David Fabris from Macquarie.