Entain Plc (ENT) Earnings Call Transcript & Summary

Thank you for joining the Entain PLC conference call to discuss the acquisition of Enlabs. Can I just remind you that this call is being recorded. [Operator Instructions] I'm now delighted to hand over to Chief Executive Officer, Shay Segev. Please go ahead.

Thank you. Good morning, and thank you for dialing in this morning. Happy New Year, and I hope you are all keeping safe and well. I'm joined on this call by Rob Wood and David Lloyd-Seed. This call is to discuss our offer to buy Enlabs. As you are all aware, there are certain rules and regulation regarding takeovers, so I'm afraid I will not be making any comments regarding the situation with MGM Resorts, and we will not be taking any questions relating to this. So we will run through a quick overview of the transaction Enlabs itself, what the opportunity and what part of Entain this will be fixed with. And Rob will take you through the full year EBITDA upgrade we have also announced today. At Slide 4 as you have seen in our announcement, we are offering SEK 40 per Enlabs share in cash. This is a good premium where the shares has been trading over the last 6 months. This value Enlabs at around GBP 250 million. Based on analyst forecast, this translates to a multiple of around 12x of Enlabs 2021 EBITDA. So a pretty full price and at the top end of what we would like to pay, but we see this as a long-term strategic investment and a platform for new markets aligned with our growth strategy. There are obviously a number of steps we needed to go through as the public offer. But this subject to regulatory approval and shareholders accepting the offer, we would expect transaction to complete at the end of the first quarter. Rob can talk more about it in a moment. But we have a strong balance sheet, and this only adds slightly to our leverage. And so we are financing the acquisition out of our existing cash resources. The Board of Enlabs say this is a good offer to shareholders. They can see how Enlabs can flourish as part of Entain and so they have recommended the offer. As part of that, around 42% of Enlabs' shareholders have undertaken to accept our offer. Moving to Slide 5. Enlabs is a great online sport betting and gaming business headquartered in Riga in Latvia. It operates in a fast-growing locally regulated and taxed market. Indeed, Enlabs has delivered significant growth in NGL and is expected to continue to do so with compound annual growth rate of NGL from 2017 to 2021 of around 40%. And as we set out in our announcement, it is expecting to deliver EBITDA of around GBP 20 million this year. It has a leading market position in markets like Latvia and Estonia and now has around 25% market share in online gaming across the Baltics. 90% of its operations are online with the balance being a small omnichannel retail offering in Lithuania and Estonia. In November, it completed the acquisition of Global Gaming, which gave it further firepower to expand across the Nordics as well as potentially other fast-growing markets like Belarus and Ukraine once regulated. It's got some great brands like Optibet, Laimz and Ninja. But what also attracts us to this specific business is the strong management team and the local expertise. This is led by Niklas Braathen with a great track record of growing businesses in our industry and specifically in this region. I'm very pleased that if this transaction completes, we will have the benefit of Niklas and his team in leveraging powerful combination of Entain and Enlabs lapse to deliver a further growth when they join forces with us. Niklas is so confident in what we can achieve together that has even agreed to invest in significant amount of capital in buying Entain shares. Moving to Slide 6. This is a great acquisition for us. And perfectly in line with our growth strategy we set out in October last year. It gives us access to fast-growing locally regulated markets. It has strong brands and great management team. It provides a platform for further growth and market expansion into markets such as Belarus and Ukraine, which are expected to grow strongly. But it also provides a platform to expand not just Enlabs brands but our own existing international brands such as bwin and partypoker. We see opportunities for synergies not just in cost through our scale efficiencies by true revenue synergies driven by product expansion, digital marketing, and I've just mentioned accelerating organic growth. Player protection is in the heart of Entain and in October, we launched our ARC, our Advanced Responsibility and Care program, and we can take these important technologies and skills into this region as well. Being part of Entain would enable the Enlabs brands and customers to benefit from not only from this investment in protection but also into technologies and products to give them more exciting and relevant content. This is a great acquisition for us and I'm really excited about what we can do with the Enlabs team, which give access to a new region. With that, I will hand you over to Rob to take you through the current trading comments.

Thanks, Shay. Good morning, everyone. Another positive trading update from me this morning on Slide 7 of the presentation. I'm pleased to say that our online business continued to show strong momentum throughout the remainder of 2020 so much so that it more than compensated for the significant COVID disruption to our retail business during Q4. I'll talk about trading in a lot more detail on the 21st of January when we post our fuller trading statement, but safe to say we are definitely now up to 20 consecutive quarters of double-digit growth in our online business, which is some achievement. Q4 growth was partly helped by favorable sports results but it was primarily driven by volumes, and we'll look at that a lot more closely on the 21st. So as a result of excellent online growth more than covering retail impacts, we now expect full year EBITDA for 2020 to come out in the range of GBP 825 million to GBP 845 million, which is 6% to 8% ahead of our previous Q3 guidance at the midpoint. A couple of other quick updates for you. We did receive the proceeds from HMRC for our historic VAT claim just before Christmas, and we expect to end the year with leverage down to around 2.1x. And as a reminder, today's acquisition will add around 0.2x to that ratio going forward. So we remain on track to deliver our leverage target of 2x or lower over the medium term. And we retain the flexibility to continue our growth strategy and return to dividends in due course. With that, I'll hand back to the operator for Q&A.

[Operator Instructions] Our first question is from the line of Ed Young with Morgan Stanley.

The first one is on the organic growth rates of Enlabs. So I think it did 10% organic in Q3, 17% in October. The CEO has previously spoken about an ambition of 25% organic growth in 2021. I wonder if you could just help us bridge what's driving that acceleration or where you see the sustainable level of growth before your involvement? And then I guess, the part B of that is, what sort of improvement given your experience with Crystalbet or other acquisitions, what kind of improvement do you think you could drive on top of that? The second question is the company describes 80% of its revenue coming from what it calls sustainable markets. I'm not sure quite how that correlates with your view of regulated and regulating. But given your ambitions to be 100% regulated, are there any markets you'll have to exit as a result of the transaction? And then third, just in terms of the comments Rob made there about where leverage sits and the fact that you've had this deal quite swiftly on the heels of the Bet.pt deal, can you talk a little bit about where you'd be willing to see leverage go in the short term, your medium term, Rob spoke about a sec there? And what the pipeline looks like to be able to perhaps achieve that?

Thanks, Ed. So let me take the regulated and talk about the revenue synergies as well. And I guess, Rob, you take the organic projection of Enlabs and our leverage. So let's start with the strategy. As we laid it out earlier this last year is to focus only on regulated and regulating markets with our ambitions to be operating 100% in regulated markets by 2023. This did not change. If anything, this is pretty much aligned with our strategy. Enlabs give us access to additional 5 regulated markets with some potential of other regulated markets like Ukraine, Belarus. So it's pretty much aligned with this strategy. There is, again, from the due diligence we went through Enlabs, it's operating again primarily in Baltics, which are regulated, potentially in Sweden, Belarus. Again, Ukraine will be get regulated. And if there would be -- or if there are some markets which will not be regulating by 2023, then we would exit this market, again, in line with our strategy. So -- and we believe there is a great opportunity for us, working with Enlabs and supporting this strategy. In terms of synergies, I think, again, there are some cost synergies that we expect from this transaction. They are not large. This is not the reason or the catalyst for this transaction. It's mostly about allowing us, as in Crystalbet as you mentioned, to use the Entain know-how in terms of technology, our know-how, our access to game content, marketing expertise, our global brands like bwin and partypoker, and launch it to this region as well, together with the Enlabs team, which is the local expertise in this region, the licenses, of course, and already running a very successful business. And we believe that working with them, we can accelerate this growth, giving them access to our trading, as an example, in sport trading, know-how, more access to further content, more innovation with the CRM platform. And as important, of course, player protection technology as well. Rob, you will take the rest?

Sure. So the question around leverage. So yes, medium-term target 2x or lower. In the short term, where will we be prepared to take it to. I've always said 3x is an absolute cap. I think high 2s even is unlikely. We do want to get to 2x and below in the not-too-distant future. In terms of pipelines for further M&A, it does remain active. There are some other deals that we will look to do. Some are larger than others. The smaller ones, you can expect us to finance with free cash; larger ones, we would look at financing options as and when they arrive.

And just a follow-up on the first question, I guess, is can you help us understand what's driving the acceleration in the organic growth profile for the business? So just trying to understand, I guess, where -- how to think about where the growth is going forward. The CEO spoke about 25% plus. It was 10% in Q3, 17% in October. So is that geographical expansion? Is that product improvement? Is that just sort of fluctuations? Just trying to get an idea for how to bridge the change of where the growth was last quarter and where, I guess, the consensus projections have it for next year?

Yes. I mean so licensed regulated markets, especially again, where there are still some operators who are operating without licenses, are tending to grow faster than others. So these markets are still expected to grow, specifically the Baltics where, again, there's still a penetration, and again, the markets are still growing double digit. And again, given also product improvement, omnichannel, which is quite unique advantage as well that Enlabs brings specifically in Estonia and Lithuania. I believe that not only they will grow with the market, they would continue also taking there market share.

And our next question is from Monique Pollard at Citi.

Just a couple of questions from me, please. The first one was just on Enlabs. I just wanted to understand if they have their own technology platform or whether that's provided by a third-party at the moment? And then the second question on Enlabs. When I looked at the detail, it says Enlabs is doing gaming that is online but also it has some land-based operations and it's doing some media. I notice the majority of the revenues are coming from gaming. But if you could give us a rough idea of within gaming, how much is online versus those land-based operations and how much of the operations are to do with media, please?

Yes. So let's start with the tech platform. So Enlabs has its own proprietary platform that they developed. We clearly did due diligence of that as well, and we think it's a good platform. But having saying that, we do see a strategic rationale for this to our technology or our assets to be complementary to the Enlabs assets as well and accelerate that. As I mentioned before, we have access to quite a lot of exciting within Entain, exciting technologies of better trading tools, more access to game content, more CRM tools. So again, as in Georgia, with Crystalbet, we would see gradual integration between the Entain global platform and the local platform of Enlabs, which, again, from our experience, a few markets have been operating already in this model, it will accelerate growth, it will create value. Again, I don't think anybody can compete with 3,000 IT people that Entain employ and develop the platform and the product to a worldwide leader, which we see that in every market we deploy it's accelerating growth. I'm quite bullish that this will create as well. Again, as I mentioned before, the bwin and the partypoker brands are well recognized also in this region. So we see an opportunity for this team to take these brands and then with the combination of the 2 platforms, to launch it into this region, which creates further revenues as well. And as for the revenue mix, they have a mix of brands, sport brands like Optibet, more gaming brands like Laimz, for example, or is a bit more casual gaming brand. They just acquired the Ninja Casino brand, which, again, used to be a quite large brand in the Swedish market, which hopefully will be relaunched during this year, there's an opportunity. In terms of retail, I mean retail is pretty much -- I think it's less than 10% of the revenues. But again, we see it as complementary in terms of the omnichannel. And again, as we can see in digital brands, I mean both sports brands and gaming brands customers tending to use both products. So there is a mix between gaming, meaning casino, poker, bingo, mostly casino, I guess, and poker, and sport as well. I hope it answers. I don't know, Rob, if there's anything you want to add here?

Yes. I'll just add a little bit more detail. So retail consists of 31 shops. So it's very small across Lithuania, in particular. And the primary reason there is there's a requirement for retail in order to be able to operate online. And once you pro forma for the GG acquisition that they made this year, it represents about 5% of the total. So it's negligible really. And in terms of the other revenue streams that you mentioned, which I think, again, is about 5% of the total, they have a small marketing affiliates business. And there's also a little bit of B2B income where they leverage some of their tech products and sports fees, but it's all negligible in the grand schemes of Enlabs.

Our next question is from the line of Gavin Kelleher of Goodbody Capital Markets.

Shay, Rob, just one for me. I appreciate, Rob, you said you'd answer all questions on current trading at the end of the month. But just wondering, can you just confirm you said you benefited from margin. But did you say that the beat in online was predominantly driven by underlying growth? And maybe if I could just ask one question, how much of it was margin and how much of it was underlying growth, if you can give any sort of color?

Sure. Gav, happy to. So yes, so clearly more detail on the 21st, but to give you a flavor of it, if you take the midpoint of guidance, we're now GBP 55 million in front of where we said in Q3, and that's despite absorbing somewhere around GBP 50 million of adverse impact through retail businesses due to COVID. So therefore, give or take, GBP 100 million in front elsewhere, and the majority of that is, of course, our online business. There are often other bits and pieces but it's primarily online. And then within online, give or take around 2/3 of that outperformance I would associate to volumes, both sports and gaming, and around 1/3 margin. So it's easy for anybody following football at the moment to see that there are some pretty exceptional results going on. So we have continued to benefit from margin, but around 2/3 to 1/3 in favor of volumes.

We go to the next line, which is Jack Cummings at Berenberg. [Operator Instructions]

Two if I may. The first is, evidently there was some articles that Enlabs surrendered their Swedish license but did have plans to return to the market given the fairly draconian limits that have been put in the Swedish market, do you still have plans to enter that market? And then the second one on Latvia specifically. Over the period of disruption, would have been Q2 last year, Latvia evidently puts a ban on its gambling market due to the lockdowns and restrictions on physical movements. Do you have any color whether there could be another ban brought in by Latvia or something along those lines? That would be great.

So in terms of Sweden, yes, I mean the plan is it is to operate in Sweden. It's a regulated market, which aligns with the strategy. And Enlabs acquisition of Global Gaming, specifically the Ninja Casino brand, is actually quite interesting an opportunity. They surrendered the license because it was not an active license. But within Entain is a Swedish license. We don't do much in Sweden with bwin brand. But again, this is exactly where this combination can show 1 plus 1 is 3, where we can bring some assets of the bwin brand and all licenses in Sweden and Enlabs with their local expertise in the Nordics and with the Ninja brand, which is well recognized in this region, can monetize and bring the Ninja brand back to that. In terms of Latvia, yes, you're right. And again, you probably can google it. There's been also a court case around it. And the court in Latvia has ruled that this ban was unconstitutional. So it's very unlikely for this to happen again.

A question now from Simon Davies at Deutsche Bank.

Two from me, please. Firstly, you talked about the potential opportunity in the Ukraine and Belarus. Can you perhaps give us a flavor for the potential scale of those markets and likely time frames in terms of opening up? And secondly, you made it clear this deal is not about the cost synergies, but there must be some. I presume there's some plc overhead savings. And can you talk a bit about the potential technology savings that might come as and when you migrate over to the Entain platform?

Sure, Simon. So cost synergies, yes. So there is a plan. I mean, again, this deal is not, as you mentioned and as I mentioned, it's not about cost synergies but giving both businesses the opportunity to maximize this region, give us -- give Entain opportunity to become a dominant player in the Baltics, in the Nordic, in the Russian-speaking countries as well with the local team, with the local expertise, with local brands and also bringing the global firepower for business like Entain. In terms of cost synergies, yes, we did identify probably single-digit mid-millions of cost synergies that we can probably achieve over the next 2 to 3 years. Some of them, again, will be quicker, as you mentioned, corporate cost, et cetera, and some of them probably will take a bit longer in terms of technology, et cetera. And again, as I mentioned, this is about growth stories, about taking the global brands of Entain and expanding into further regulated markets, as we laid out earlier this -- as we had laid out last year. In terms of Ukraine and Belarus. So Belarus probably can -- theoretically can move faster. I mean Enlabs already have a license in Belarus. It is an interesting market. It's quite difficult for me to quantify now the numbers. But again, I don't know, Rob, if you have numbers. We do have clearly a business case on that, but it's probably quite more. In terms of Ukraine, again, this is -- if you follow probably the regulatory framework in Ukraine, it should regulate, I mean I want to say any day now. It's been running for some time, but would -- probably will be -- I think it's high likely for this to get regulated in the next few months. And again, this is a capability which we are ideally acquiring for Entain to give us the opportunity to become also important player in Ukraine, which is a good market. We know that Ukraine is a good market. Even further, I mean, to expand to other Russian-speaking countries. This is, again, capability that we get. I don't know Rob if you have anything to add on that?

Only that, obviously I can't give forward-looking numbers, but we know that Ukraine is potentially a very interesting market, over 40 million people there. Belarus is smaller, but still over 10 million people. I'd expect it to be more of the 2022 -- more material in 2022 but getting live and making progress in 2021.

So that looks like it was our final question on today's call. I would like now to pass the call back to Shay for any closing comments. Please go ahead.

Okay. Thank you. As I hope you can tell, we are very excited about the platform for further growth that Enlabs will provide for us. So with that, many thanks for your questions. Keep safe. I look forward to speaking with you on the 21st of January. Thank you.

Thank you, everybody. You may now disconnect your line.