Aristocrat Leisure Limited (ALL) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to Aristocrat's Investor Management Roundtable. Thank you for joining, and thank you for your interest in the company. This is a new initiative for us. It's in response to the market's desire for more corporate access. And it's also in response to the fact that, unfortunately, this year, there's been no virtual -- in person. There's not been -- no in-person trade shows. Whether it be Sydney's AGE or this upcoming G2E in Las Vegas where we're looking at virtual options to navigate. Over the next 1 hour, we've got members of our management team, including CEO and Managing Director, Trevor Croker; our CFO, Julie Cameron-Doe; and our CEO of our Land-based operations, Mitchell Bowen. We're going to address the more popular questions that we've received from those registered attendees. I'm going to do my best to avoid doing a bad impersonation of Michael Parkinson by directing those questions. We will be able to take live questions, and we'll do our best to accommodate that. For any of those live questions that we can't answer because of time and the flow of the meeting, we'll do our best to get back to you post this meeting. This meeting is being recorded. We'll be getting a transcript, and we'll be posting it on our website for those people who'd like to go through those materials afterwards. But with that, I'd like to thank you for your interest, and I'll open the meeting with a question to Trevor in terms of just extending your welcome, but also how Aristocrats approach this COVID event, given it's been uncertain times, and there's been really no precedent playbook. Thanks, Trevor.

Yes. Thanks, Rohan, and welcome, everybody. Thank you for your continued interest in Aristocrat and for your quality time this morning for this next hour or so. COVID, it came and it came very quickly. We effectively saw our Land-based business close almost overnight. We saw the communities in which we live and operate close effectively in a number of days and that changed the way that we had to think about our organization and our business going forward. With that occurring, we focused on 4 principles, and they were really around our people first, customer centricity, liquidity and balance sheet preservation and maintaining a supply chain for our product and manufacturing. The team were very good at pivoting, as I said, communities in which we operate and our land-based customers closed literally in days. And we went from being close to 100% of people working full-time in offices to close to 100% of people working full-time out of offices across the population of in excess of 6,000 employees around the globe. With that, we had a 3 phased approach in the way that we thought about this problem. First of all, it was about respond and it was about recover. And now we're starting to enter into what we're calling the thrive part of the recovery from COVID. I'm confident with our strategy, and I'm even more confident with the execution that the team have delivered over the last 6 to 7 months as we've managed through this challenge and seeing changes in our business operations on a day-by-day basis. We saw our Digital business respond very quickly, coming off some strong momentum from Raid and more recently, the launch of EverMerge. Also the rebounding of our Social Casino business -- Product Madness with new features and live operations. And at the same time, our local Land-based businesses were able to respond, and they came into this position -- came into this scenario with -- in a good position. Strong balance sheet, strong operational metrics and a strong portfolio of performing games, and since then they'd been able to respond and focus on our customers and provide great customer service and customer satisfaction. I think the efforts that team have demonstrated through this period have been admirable. They've been exactly what you'd expect of an organization that's looking to continue to grow and sustain its growth profile going forward. At the same time, our D&D business took the opportunity to refresh and refocus the portfolio, and we didn't miss a beat with all the changes we made in our organization through this period. We did not miss a beat with the delivery and the strategy of our cabinets, games and technology, which I'm extremely proud of, and it's our way to help lead the industry out of this period of time. I'm sure there'll be more questions during the presentation, and I hope that we are able to address those. But with that, welcome to our presentation, and thank you, Rohan.

Yes. Thanks, Trevor. All right, let's turn the attention over to the Land-based side of things. And obviously, we hit corona, we all of a sudden, our customers' casinos are closed. It was a pretty tough environment for everybody. Mitch, can you just talk about the Land-based, the market operations at the moment, and where we are in terms of the casino openings and performance post reopening, please.

Yes, sure. Thanks. Morning, everyone. Look, I think when you start to look around the grounds, we'll start with the Americas. New openings can continue to progress. I think we're up to just over 90% of properties are open across the North American marketplace at the moment. They still are varied in terms of their capacity. So some between that 25% up to 75%, things like veering their number of entry points, how many F&B outlets they've got open, what they're doing with their gaming floor. They all largely are around that social distancing. So some spread their EGMs, some have turned every alternate one-off or on. So it is still a market-by-market, channel-by-channel approach in that regard. The U.S. operators are still doing targeted marketing towards their patrons as they come into the floor. But largely, they are prioritizing game performance and the top-performing products to be turned on over that period of time. So we do see some encouraging signs and some green shoots across North America in terms of player responses and coining levels are remaining pretty robust at the moment, which is good to see. I think when you start to look at Australia, we're largely about 95% open parking Victoria. For a second, obviously, we're all very clear on what's happening down there with our Vic partners. But New South Wales, Queensland, South Wales, Northern territory, are all progressing quite well. Similar buoyancy on player demand and similar restrictions in place in terms of contact tracing and those sorts of things. Asia largely continues still, Macau struggles with foot traffic coming through the door. So that's a slower recovery than we originally thought it would be, but then the broader Asia markets are starting to open up as well. So overall, we are seeing some pretty positive signs in -- across the globe in terms of reopenings.

Mitch, we're very fortunate as a company to have a strong balance sheet to provide some support to our customers as part of the reopening. Steven Green from Super Investment asks, what's the status of those operational and financial discounts that we provided for those casino reopenings?

Yes, always, thanks for that question, Steven. I think, look, last time we spoke, we did talk about -- we mentioned that we would be discounting our fees, whether it be on gaming operations or systems maintenance or service contracts, those sorts of things, up to 90 days. And we've largely seen the majority of those terms finished at the moment. We are seeing a fleet activation over 85% of our fleet at the moment, which shows a reflection of, not only the service-led strategy in terms of getting our machines and fleet activated and merchandised and socially distanced, but also the quality of game performance and innovation that's coming through the pipeline at the moment. So we are -- so when I say 85% of that fleet activated, that's broadly. That's across the globe. Specifically, we're seeing higher run rates in key markets like Oklahoma where we've been focused with key customers across the board on that. So we haven't seen we have -- customers have been very good. We talked about a month-to-month review on that. And so I would say of that 85% sort of fleet activation, largely, all of those are returning to normal levels at the moment.

Okay. So if we've got 90% of casinos reopening, we're activating our gaming ops. On the way forward, how do we see the U.S. market at the moment? And importantly, what's the risk of further closures with COVID cases still at elevated levels?

Yes. Well, the last question is anyone's guess, right? We've seen what second wave can do to Victoria. So I think we can all kind of stick our fingers in the air on that one. When we talk about further closures and how the fleets are going, we are seeing some pretty positive green shoots across North America with players returning into venues. We are seeing some buying cycles start to return as operators start to refresh their floors. But largely, we are seeing -- I can -- obviously, I mean, you guys all know, right, when you think about the different channels across North America with our tribals or our regionals or corporates or route markets, they are all different, that continues to remain the same. But what we are sort of starting to see is the leasing model, that gaming operations type model is positive because it allows customers to maintain flexibility on their fleet. We are seeing a bit of a conservative approach to sort of to capital spend. And we do expect to see that conservative approach through the sort of the next 6 months of our first year as everybody is. You guys ask customers, all look for those buying signals from consumer confidences in GGR and those sort of things. So I think we'll start to look at that gaming operations footprint, you look at our data point of that 85%, we get pretty comfortable on what that's going to look like moving forward. And then when it comes to outright sale and capital expense budgets, we are taking a bit of a conservative approach on that as we talk to operators as they can serve capital during these uncertain times.

In terms of game performance, how do you see the portfolio performing at the moment as we've come out of this with the casino reopenings?

Look, in short, probably never been stronger. We -- the breadth and depth of the portfolio is great. We've obviously got great industry reports like the EILERS-FANTINI reports and some survey reports that come out, not just on the cabinet side, I think. I think we've got 5 -- 5 of our cabinets are in the #1 slot spots at the moment across our Mars footprint, our Arc footprint, our XTs and our Helix footprint, Flame, et cetera. When we start to look at our content, I think last report, we had 16 of the top 25 games across that report. When you start to look at games like Dragon Link, Lightning Link, those sorts of franchise, Buffalos, we've got some really big franchise brands out there at the moment -- that the one I referred to that sort of player demand. Players are coming back to the floor, looking for their favorites, right? And we have had tried and true favorites over many years. And obviously, with new releases like Cash Express, with Star Trek, Zorro, these sorts of products, they continue to build on that great performance that we're seeing across the market at the moment. So I would say our performance has never been stronger, and it continues to go from strength to strength.

So when you look at game performance and you're talking to your customers, particularly in this new environment, how does that translate? Is it purely based on costs for the customer or pricing from our perspective? Or is it based on game performance?

It's based on value at the end of the day. And so I think we spoke a couple of months ago around our recovery plan and our response to the COVID environment with our service-led and customer-led approach. And so yes, while we've got a great performing fleet, we've also got top level service. We unfurloughed and brought back our staff before anybody else did. We've been out in the field and on the ground responding to customers in a -- on a case-by-case basis. We know it's not a one-size-fits-all for everybody. And we've spoken previously about those channels, tribals, routes and regionals and those sorts of things. So I think when we start to look at where our footprint is going and what customers are looking for, they are starting to think about well, where is the best bet? How can I get more bang for my buck on a footprint? And what are the value-added services can I expect from a vendor going forward? So that's leading to a lot more strategic conversations, a lot more longer-term conversations and obviously, maintaining our spend on D&D becomes a pretty important part of that.

So as we sit here today, we've got Jamie Nicol from DNR Capital, we've got pretty well most of the sell-side asking, how do you see the market size on the U.S. Land-based business over the next couple of years?

So I think based on what we've sort of just talked about with conservative custom capital, we are looking at a bit of a compressed market through the FY '21 year. But we do expect to exit that closer to the FY '19 run rate. And so we're kind of looking at over a 12- or 18-month period of that recovery, both at a GGR or coining level and at a machines turned on level. We are -- there are some customers that are sort of talking to us about well, I've got a reduced floor footprint and I'm making similar returns to what I was previously, and so why do I need this many machines? And so I know that's probably a question that the market has. And that's absolutely a viable question to have at a point in time, right? But -- remember, when I talked about, they still got reduced -- they've got restrictions on their floor, reduced entry points, targeted market to sort of their mid-tier to top-tier players. They haven't welcomed everybody back into their venues. So we're just encouraging operators to think a bit longer term on that and making sure they're not making short-term decisions around that. So we do expect the market to recover over the next 12 or 18 months.

So if you have a look at the Aristocrat business model, phenomenal penetration on the recurring revenue on the gaming ops side. And so therefore, we're less beholden to our customers' discretionary CapEx cycle. But still, there's about 30% of our revenues based on FY '19 is outright sales. So Matt Williams from Airlie is asking, how do you see outright sales in particular and that replacement market over the next 1 to 2 years?

So probably need to break that down into a bit more detail. So I would probably start off by taking, maybe to use an industry term, a bearish approach on Australia. I think the majority of us are on the ground here, and we know what's happening in Vic. We know what restrictions are in place and the conservative approach government's taken. So we know Australia, there is largely -- while it's a churn market, it is an outright sale market. So I would probably -- well, I do expect the Australian market to be compressed significantly over the next 12 months. When you start to look at the U.S., it's a little bit different because we have that portfolio approach, right? We have a magnitude of commercial options available, and we've got a portfolio approach. And we think about not just game ops and not just game sales, but when we talk about those other adjacencies that we're into with our steppers and bar tops and VLTs, and we start to think about what we're doing in our systems and customer experience business around our mobile applications and cashless gaming and those sorts of things. We don't see as impact as we're seeing in Australia. We see a compressed market but not as impactful. And we'll look to modify our commercial flexibility around the outright sales market in North America and ensure that we're bundling and looking at the portfolio in its entirety.

So we're seeing great game performance. We're seeing good growth, good market share gains. How do you see that from an operator's perspective on your view around design and development spend over the next few years?

So look, I think we're all clear that you can't -- D&D is one of those things you can't just flick a switch off and then flick it back on. So D&D is not a 6- or 12-month view. It's a 2- to 3-year horizon, right? And so when you look at the depth and breadth of the portfolio that we've got in terms of our cabinets, our content, that return on D&D investment is going to come over a 2- to 3-year period, not at an exit rate of a 12 month. So we did take the approach that in a crisis to ensure that you invest where you're going to get the best bang for your buck, and that is, in our view, capital expenditure within our D&D portfolio. And so what our big focus is now on D&D is we've been very thoughtful in the spend that we're doing. So we've reduced some spend in areas like hardware and cabinets, but we've got targeted spend to make sure we've still got new hardware coming out into the marketplace. We're still developing behind our adjacencies that we've spoken to the market about previously and ensure we've got a content pipeline behind that. But we are looking at what we can do internally around our technology efficiencies in terms of our game development kits and platforms, how we look at our engineering and how we get efficiencies across our engineering side of the business. And look, and really, it just becomes then that basically, as we've talked about, gives our customers confidence that we are going to continue to invest into the future. And that's allowing us to have far more strategic, longer-term buying conversations with the majority of our key customers across there. So we do take a longer-term view on D&D. And really, what our job now is, as we talked about a compressed market, is from a sales perspective, we have to focus on the velocity of that commercialization and how we get that speed to market, how we manage our fleet, how we are optimizing the best performance and making sure that we're leveraging our data and our technologies to put the best products in the right floors at the right time, to maximize our customers' return. So it is one of those things that is -- it is important for us. It's -- in the absence of M&A, it is the best bang for buck on spend, and we'll continue to do that over the foreseeable future.

So Mitch, finally, on D&D, we have received a question from Matt Ryan from UBS. And it sounds like Aristocrat continued to develop games during the COVID lockdown. How do you intend to release those games considering that there is a potential lull in buying activity in the short term?

Yes. Thanks, Matt. Look, again, it comes down to how we're targeting our fleet. So yes, there is a compressed market, no question about that. However, there are key releases, i.e., we just released Star Trek as the world premiere at the M Resort earlier this week. And so it's actually about the broader commercialization of these games. It's not just about a single customer, it's about how we broadly released these. And we are starting to adopt, you'll see, if you haven't already, some convergence of the digital world as well. We've live streamed with some YouTube influencers, some Land-based product launches. We did one of Dragon -- high denomination Dragon Link from the Seminole's property. And that's touching more and more people around. So we're looking at more innovative ways to commercialize our products, but no question, it's going to be about fleet optimization and portfolio management as we go down that path.

Thanks, Mitch. So at Aristocrat, we see D&D as an investment. But obviously, it has a massive contribution to our P&L. So it's probably a good segue to move across to a few financial questions. And introduce our CFO, Julie Cameron-Doe. Julie, before we go into the detailed specific questions from the audience, can you just broadly look at the key initiatives in how we've been managing COVID in response.

Yes, sure. Good morning, everyone. Thanks, Rohan. Yes. If you think about where we were at back in April when we first spoke to the market about this. We were very much focused on, first and foremost, the welfare of our people and focused on our customers as well. We were also very thoughtful and deliberate about our approach to it because we -- as I think Trevor and Mitchell have both reflected, we came into this in really great shape. From a product portfolio perspective, we had the best product portfolio, we -- which is the result of years of really targeted D&D investment and investment into really great creative talent that's helped us to establish that. We came into it with a really nicely diversified business, with a strong recurring revenue share in our Land-based business as well as a really thriving and scaled Digital business, which really helped us. And then, of course, we always talk about our balance sheet. We came into it with a really strong balance sheet as well. So when we thought about our response, first things first, we didn't want to destroy any of that value. We wanted to leverage the strength, and we wanted to make sure that we preserve the value in all of those things. So we took an approach of no regrets decisions. It was very early in April. We really didn't know how things were going to start to come back, so we could just see that our customers were closing, were closed down and we didn't know when they were going to return. So we took an approach that was very focused on what can we do in the short term to address this, to really minimize our variable cost and to really minimize our cash burn, so that we can get through this and to really focus on preserving our liquidity. So in terms of the initiatives, as you know, in April, we did talk about how we had furloughed a substantial part of our employee base. We've got about 1,000 people in customer-facing roles that were furloughed. We did take a number of no regrets decisions around people exiting the workforce as well. So there were about 200 people that left at that point. We -- about 200 people went part-time, so that helped us with our variable cost as well. And then there were pay cuts of 10% to 20%, which applies to about 1,500 people. And our Board and our CEO to keep more significant pay cuts as well for that period of time. So it was really a focus of no regrets, what can we do to sort of to manage that cash burn? And then as we started to see our -- as you all know as well, we paused our dividend as well. We looked at all of our contractor and consultant spend, and we -- anything that was variable that we could pause without causing any issues to the portfolio, we took those decisions to pause. And so we managed our CapEx down as well. So a lot of internal projects that we have been focusing on. As we came into this year, knowing that we wanted to invest behind certain skill sets like transformation, like data and so on. We were focusing so heavily on the recovery phase to the crisis that we paused a number of those things. And so that helped minimize that cash burn as well. And then as we started to see our customers starting to reopen, and we started to see the performance come back in, we were quickly -- it's a new term now that we've all had to get used to, unfurloughing people. So we returned people to work sooner than we'd anticipated because we wanted to be able to respond to our customers. So it was very much that people-first, that customer-first focus. So we wanted to make sure that we were the ones that the customers could phone up, and we have people there who could respond to them and help them reset their floors. Because essentially, there's a lot of talk about people wanting to come out of this very fit to fight and leaner. And of course, we're always focused on that from our perspective. But also primarily, what we really want to do is make sure that we come out of this in a position where we can take share, and we can use the advantages I've already listed to take share. So as we've gone through the remainder of the fiscal year, the majority of the people were unfurloughed through the summer in North America. And then just coming into September, we did look at what's the infrastructure in the organization we need to really take us forward and drive this long-term growth. And so you will have seen, and you would have heard potentially about some smaller activities in Land-based around some efficiency measures in Land-based, primarily around our remanufacturing sites and some of these more the process-driven areas where we were able to make some efficiencies in Land-based and that we also having flagged in May that we were going to look at Big Fish in our Digital business. We also took a review of Big Fish, really focusing on what we needed to grow that business going forward. And as a result, there are a number of efficiencies taken in Big Fish and putting us in a position to really invest behind that business and grow in a more sustainable way going forward.

Fantastic. Let's drill down into a couple of specific questions. We've got Rohan from MST Marquee, the other Rohan, and Bryan from Citi. There are specifically, the $100 million cost that we announced in April, they're largely temporary in nature. So should we assume those costs will return in FY '21?

Yes. Thanks, Rohan. So when we look, as I said, when we looked at the measures we were taking in April, and we were focusing on what we could do to minimize our cash burn, we do have to acknowledge that the vast majority of our cost base is fixed. It's largely people-based. And so and when we were looking at the furlough positions, for example, that was a way of making some of those costs variable because those staff were then furloughed, and we're able to seek job keeper or unemployment benefits. So as they've come back, obviously, those costs have returned. But as you can imagine, given the market also reopened and the machines got turned back on, the revenue also started to flow. So we made all those decisions very deliberately, knowing that we had the capacity to cover any of those costs that came back in. A number of those costs were also in relation to, as I said, pausing some of our project spend. And refocusing some of our key projects around the portfolio going forward. And as we've now seen the strength of the market coming back, and we believe in the growth going forward, we wanted to make sure that we can sort of kick start some of those projects again and make sure that we don't have a kind of gap in our content or our hardware portfolio going forward. So some of -- so those costs would have returned as well. So when we think about the future of Aristocrat and we think about how we've managed to achieve the success we've achieved to date, it has been through that really thoughtful and deliberate and targeted approach to investing for growth, particularly in D&D, which is always our first priority. And that's got us to the position we're in with the strong portfolio, and so we're committed to doing that going forward as well.

So we actually -- whilst we have been temporary in nature for FY '20 and some -- a good chunk of those costs will come back. There's obviously been a couple of initiatives you just touched on earlier in particular, Big Fish and the Land-based operations. Can you provide a little bit more detail as best you can currently, given the market conditions, just in relation to that, please?

Yes, sure. So if I start with the Land-based business, we were able to spend the time really reflecting and seeing how the market was returning and seeing what we really needed to focus on in the Land-based business. And so as we saw that, we worked through what do we really need going forward to run this business. So we were very deliberate about the areas we were going to focus on. And so there are about 150 employees that were impacted. So in the scheme of things, across the whole of Aristocrat, over 6,000 people, it's not a big number, but it was much more about making sure that we were coming out of this fit to fight and that we were building in those efficiencies. So that took place in early September. And then in Big Fish, we mentioned in our release in May that we could see that we had challenges with the Big Fish business in that this was a business that we hadn't seen the hit rate in terms of new game releases that we wanted to see. And we hadn't seen, if you think about the revenue growth and the profitability that we expect from all of our businesses and growing ahead of category, we could see that we had challenges there. And we also reflected on -- we're a Digital business of scale now and where we have scale, it's tending to be in these very concentrated areas where we've got -- we benefit from these low-cost jurisdictions, for example, with Plarium and with our live operations and so part of our business, which is based out of those areas as well. And so we looked at Big Fish, and we could see that we had this very high cost, very focused in North America in terms of the employee base, and yet it was very much a library business with those Legacy games. And so we said if we're really serious about growing this business and the future of this business, we want the capacity to be able to bring in talent and to be able to leverage those different jurisdictions that we operate in, and to be able to do these third-party deals where we bring great creative content. And so we wanted to build the capacity to do that. So we took those actions again in September. And that impacted about 250 people in the Big Fish business. And that's given us -- we're also hiring. We've also got new leadership in place in the Big Fish business, and we're also hiring to be able to scale up in the different areas that we're going to.

Fantastic. Julie, Trevor mentioned as part of the framework around our response to COVID, and one of that was around the balance sheet and liquidity. Can you touch on liquidity and where we are at, at this current point in time?

Sure. But as you know, Rohan, I'm not going to talk about where we're at, at this current time because we're kind of in blackout, and we'll be reporting on that in the future. But when we reported back in March, we did talk to the successes that we've had in terms of building up our liquidity. And on a pro forma basis, at the end of March, we had $1.8 billion in terms of liquidity across cash on hand and the revolver that we had available. So we purposefully, in the initial days of the crisis, we drew down on our revolver. We also increased our revolver and we then set about raising additional debt with our incremental Term Loan B facility that we talked about back in May. So we made sure that liquidity was the primary focus, and it remains our key focus. We are -- we monitor this very, very carefully, and we're very focused on how we can continue to preserve it. We've had, as you know, given we've had strong performance, as with reopenings coming sooner than we anticipated in North America and also with a strong Digital business, which is highly cash generative, we're in a -- we continue to be in a strong position from a liquidity perspective. And we're not facing challenges from that perspective in terms of our ability to invest and continue going forward.

Okay. We've received a live question, and it's just confirming around the 600 redundancies overall and I'll just take this one. The business started at around 6,400 people. Unfortunately, 200 people were let go as part of our COVID response and then you've seen a couple of initiatives, one, Big Fish at 250. And across the Land-based business, you're talking more like 100 to 150. Importantly, the business has a growth strategy. So the business is still hiring. So I would see it more as a reallocation of resourcing for the growth of this business going forward. Julie, this week, you're blessed in the U.S., you've got these debates going on. There's a U.S. Federal election coming on, lucky you guys. We're actually starting to receive increasing questions from the market around if there is a change of government in the United States, that there is proposed changes in corporate tax rates. Now whether that comes to fruition or not remains to be seen. But given Aristocrat has a significant U.S. presence, can you comment on how that would impact our tax position, both on an effective tax rate for P&L purposes, but also our deferred tax asset from our balance sheet perspective, please?