Entain Plc (ENT) Earnings Call Transcript & Summary

And welcome to Entain's Q3 call. I'm delighted to be speaking to you again and sharing another pleasing update on Entain's performance. Joining me today are CFO, Michael Snape, and our Investor Relations team. On our call this morning, I'm going to begin with the headlines of our Q3 performance. Mike will then provide more details on trading and our outlook for the rest of 2026. And then we will open it up to your questions. So turning to the headlines. Entain performed well during Q3. Not only does it mark our tenth consecutive quarter of online growth, this consistency demonstrates our ever-strengthening operational execution and how that is translating into resilient performance. Importantly, Q3 highlights the strength of our diverse and globally scaled business. Not all markets or results will go our way all of the time, but the breadth of our portfolio and the product offering enables Entain to consistently deliver growth while also navigating headwinds. During Q3, we continue to see broad-based momentum across our business. In the U.K., our hard work and investment is driving market share gains and part offsetting the increased tax burden. Whilst elsewhere, Spain, Canada and New Zealand, all continued to deliver double-digit growth. This helped us absorb the headwinds of particularly customer-friendly sports results in August and September and the ongoing volatility in Brazil. Excluding Brazil, Q3 online NGR grew 5%, driven by volume growth of 7%, affirming the strength of our underlying momentum. BetMGM also continues to perform well. As you heard from Adam and the team earlier this week, they remained focused on their execution and continue to lean into BetMGM's competitive strengths. BetMGM delivered a solid quarter and remains on track with guidance for the year. Across our markets, our continued focus on improved product and customer experiences is driving consistent top line growth. At the same time, we're making good progress with our initiatives to improve efficiency, increase agility and become best connected to capture our scale advantages. Despite our resilient performance and ongoing optimization initiatives, our industry is already navigating a more challenging U.K. tax environments. The speculated further tax hikes this time on gaming machines threatens the viability of many of our shops with significant consequences to jobs, local communities, the U.K. high street as well as the racing industry more widely. So whilst we will continue to strongly urge the government to fully consider the broad economic impact of any tax decisions, Entain must also remain focused on delivering what is in our control. With our strong foundations, global footprint and disciplined allocation of capital, this ,supports our confidence in delivering our group's guidance for 2026 and see Entain well positioned to be a long-term industry winner. Thank you. Over to Mike.

Thanks, Stella. Good morning, everybody. As Stella said, we're really pleased with the Q3. It's another quarter that reinforces both the quality and value of our diverse portfolio and that ongoing momentum we're seeing across the group. Turning to the numbers. And as ever, all growth rates are referred to at constant currency. Overall group NGR grew 2% with online up 3% and retail flat on a like-for-like basis. Those headline growth rates belie much stronger underlying performance due to both particularly unfavorable sports results weighing on the margin as well as continued challenges and deliberate actions taken in Brazil even before the ban introduced in September. Excluding Brazil, online NGR grew 5%, supported by strong volume growth, up 7%. Year-to-date, that puts us up for online ex Brazil up 8%, reassuringly ahead of our 5% to 7% guidance. Coming back to the margin. It's a very different picture for sports and gaming this quarter. Gaming delivered yet another strong quarter, up 8%. So we're very happy with that result and fantastic delivery by the teams. Sports, however, was down 3% due to these sports results, particularly football in August and September, which more than offset a strong finish to the World Cup in July. As you remember, Q3 lapped a weak sports margin comp prior year, and the quarter was broadly flat versus that. Compared to a normalized plan margin, Q3 sports results were roughly a 4% drag on the quarter online growth. Similarly, this was felt in retail with NGR down 2% despite volumes being up 2%. To add some color from the market, as usual, let's start with the U.K. and Ireland. U.K. and Ireland delivered yet another outstanding quarter as we continue to regain market share with online NGR up 14% driven by standout volume growth of 15%. Despite that heavy sports margin impact, online sports was still up 3%, while gaming accelerated to 17%. In retail, our U.K. business continues to be the strong proposition in the market and an integral part of the high street, where we proudly employ over 12,000 colleagues up and down the country. In Q3, NGR was up 3% on a like-for-like basis as both sports and gaming continued to perform well. That U.K. performance is a consistent trend and it's been driven by 3 things: improved products, whether that's choice, features or speed, increased disciplined investment as we've lent into market times driven by the higher gaming taxes whilst many others have pulled back, and of course, best-in-class execution. It's strong evidence that our returns-based focus alongside operational excellence is a winning formula. Moving to international. Again, some really strong performances weighed down by sports results and, of course, the ongoing situation in Brazil. Overall, NGR was down 4% and online NGR down 3%, reflecting the challenge in Brazil market and customer friendly football results in Europe. Just as we talked to at the half, even before the shutdown in September, the Brazil performance was a combination of both the market and the deliberate choices we've made to not chase unprofitable growth, unlike many of the competition. Excluding Brazil, international Online NGR was up 1%, so positive but still weighed down by those sports results. That margin impact was most pronounced in Italy, where the margin was down more than 3 percentage points year-on-year. But importantly, volume growth remains strong at 9%. That underlying growth provides a strong foundation to build on as we revitalize the Eurobet brand and strengthen the proposition. We have every confidence that the changes the team are making there will begin to shine through, and we see huge opportunities ahead in Italy as an integral part of our portfolio. Elsewhere in the world, Spain, New Zealand, Canada, all up double digit despite those adverse sports results. Australia continues to perform well with online growth in line with expectations. A final mention to Entain CEE, which continues to perform strongly with online up 4% alongside double-digit volume growth. In summary, we continue to perform in line with expectations through our returns on disciplined investment and operational excellence. Our diverse globally scaled portfolio continues to demonstrate we are well positioned to navigate any regulatory or market volatility and we are focused on controlling what we can control while strengthening the foundations of the business. I want to again emphasize as a final point. Behind continued growth and consistent execution, our priorities remain very clear: Optimize our cost base, improve cash generation and strengthen the balance sheet, all with an absolute laser focus on shareholder value. I'll now hand back to the operator for your questions.

[Operator Instructions] We have a question from Ed Young at Morgan Stanley.

First is on UK&I. Obviously, lots of initiatives across the 4 brands bearing fruit given the acceleration you're seeing. Can you help us with what you're seeing from a competitive set in the general environment, i.e., is the higher RGD finally sort of make impact on the competitive dynamics? And then a follow-up, you mentioned on Italy there. You sort of talked about the Eurobet revitalization. Can you give some color on what really lies behind that and reasons for optimism? So obviously, volume was better than the revenue number, but it's still sort of just there is some market share loss. So where do you see the big opportunities? And how should we think about that business into Q4 and into next year?

Thanks for your questions. I think let me just talk about the U.K. and Ireland for a little bit. Clearly, we have been doing a lot of initiatives to improve our customer offering. That was already in play 18 months or so ago, I guess, when we really started to see some of those improvements starting to get put together and then sequentially hit the market. But over time, we've been improving the coin economies on things like Foxy and Gala. We've now introduced a refreshed Ladbrokes app. We've got general improvements in the app that have been recognized by external benchmarking on both Coral and Ladbrokes. So these are all things which are moving the dial in the right direction, which is basically what we said we would do. So giving a more competitive offering, I think, is driving those market share gains, which clearly we're very, very pleased about. In terms of the impact of the tax coming into the market, I have to say it's still really early days. I mean it only started in April, and that was on gaming, and it doesn't start on sports until April next year. And in terms of the changes to the market, the investment by competitors, the impact of the illegal black market, it all happens kind of sequentially. So I don't think we've seen a huge change in the U.K. right now. I think there's some indications that things will be moving. There's a lot of activity by black market operators increasing their investment behind advertising and trying to secure players, which is as expected, and that's not going to go away. And so our strategy has to remain one of being a go-to preferred operator providing 4 really great brands here in the U.K. and using the benefit of having that visibility, both on the high street and online for both Ladbrokes and Coral. So that's really what we're seeing at the moment. Mike gave, I think, quite a good detailed answer on Italy, but I can hand back over to Mike if you just want to say a couple more words about Italy.

I mean without it being too broad brush, ED, it's across the piece. We've got a new team in Italy, who've really been doing drains upon the business and what to do with the Eurobet brand and really how we can realize its full potential, whether it's about operational execution in the retail, whether it's about online technology platform, deployment of marketing spend, bringing the best-in-class of tools from all across the group and applying them to that market is really going to pay dividends, and we'll be able to update a bit more on that on the full year.

Our next question is from Estelle Weingrod at JPMorgan.

So also 2 questions from me. The first one on Brazil. I mean it's been a very competitive market. I wanted to ask is it both like sports betting and iGaming. I mean we'd like to understand better where the weakness has been coming from. And I guess also if Bolsonaro was to win, OSB could be back on the table. How would you approach Brazil then as it's been challenging? And would you consider not entering again? And I just have a question on Austria. I know Austria is relatively small, but there's been a recent topic of discussion given the expected gaming sector overhaul in '27. What framework are you expecting at the moment? You would likely have to exit before year-end for a few months. So what's your best take on Austria and the likely impact it would have?

Thank you, Estelle. I'll take the first one on Brazil, and Mike is going to take the second one on Austria. So yes, obviously, Brazil is proving to be a volatile and challenging market. Clearly, the fact that the entire market was closed down with a provisional order on the 25th of September has had obviously a clear impact for many of us. Prior to the market being shut down, as I think I said in the presentation, we were always already taking what we would call pragmatic approach to making sure that we were investing in the right sort of customer and not chasing volume at any cost. And I think that has proven to be the right thing to do because the fact that the market can be closed down with no notice does put you at a degree of risk if one doesn't take a sensible approach. In terms of the market opening back up, clearly, we don't know what's going to happen. Presidential results will be on the 25th of October. I can't predict what's going to happen. But I think one of the things I can say is our brand, Sportingbet is a great brand. It's been around a long time in Brazil. It's got one of the best equities. And it's predominantly a sports brand. It's about 70% sports. So if the market came back and it was sports only, then I think we'll be well set for that. If it came back and there's advertising bans, then I think we'd be relatively well set for that because we've got long-term brand equity. So our intention is to reopen up Brazil, but seeing what the framework looks like when it eventually happens and making sure that we're doing it with the appropriate level of investment to be what I'd call proportionate and sensible. So that's really where we're at. So if I hand over on Austria.

Yes. I mean on Austria, currently, the cool-off period is drafted at 9 months, but everybody in the industry is lobbying against that. If it does pass, it will come in at some point in 2027. I think there are 2 important points. One is that the performance of that business in recent times, the EBITDA contribution has been weighed down by player claims. So whilst we might have an impact to overall online NGR growth, the impact on EBITDA is pretty de minimis. So it's not something that concerns us, but clearly, we would like to be able to get up and running. The second point is that we have followed all of the rules. We've done everything that the government could want us to do. We paid our taxes. We've managed player claims. We're in the best possible position to capitalize on that market. So if we see a return, we are going to be the most competitive person in that market when it regulates properly. So we've got optionality, which is always what we like to have.

Our next question comes from Ben Shelley at UBS.

I've got 3, please. One, you've reiterated your GBP 500 million 2028 free cash flow target. I appreciate some regulatory and tax uncertainty. But putting that to one side, can you outline the key drivers in getting there? What are the biggest swing factors or buckets versus 2026? And what should we be thinking about? Next, I wanted to ask about the cost base. As you've highlighted a number of optimization opportunities, it would be helpful if you could elaborate on where you see the greatest scope for improvement? And then along similar lines, should we expect a discrete savings program to be announced at some stage? Or is management more focused on delivering margin expansion through a broader, more holistic approach to group cost efficiency?

I'll take all 3 of those, Ben. I mean, look, this is a trading update rather than the full year where we'll talk about a lot of these things. We've reiterated the GBP 500 million because at the moment, that's the existing guidance that we give to cash generation. The reason we continue to reiterate that because we haven't recut it yet, we will do something at the full year to articulate that in a different way is we remain very, very confident about this business' ability to generate cash. I'm not going to get in ins and outs of it. I think I've said to people before that I'd like to be able to articulate that in a different way at the full year, which I'm not going to do now, but we remain very confident about our ability to generate cash. In terms of cost optimization, we won't be announcing any kind of Project Romer 2. Managing our costs, optimizing the cost base is a way that we're running the business. It's not a discrete project. It's something that we think about and do every day. It's something we Exco talk about alongside growth and it's a critical component in being able to generate cash in the long term. We'll obviously keep updating people, and you've already seen where we've made some headcount reductions and other initiatives, and we may announce things like that, but we're not going to announce a big project. It's simply not a one-off exercise. It needs to be sort of woven into how we run the business.

Our next question is from Jamie Bass at Citi.

I also have 2. First 1 is again on Brazil. From your understanding of the process as it goes through Congress, if it does go live again, as it stands, I understand that licenses have essentially been revoked. So would you expect that you would have to go through the licensing process again and pay a fee for the license again in Brazil when it reopens? And the second question on Italy. On the sports results impact, could you give any kind of breakdown of how much of that has come from customer-friendly results in Serie A versus the Champions League?

Okay. Well, let me just talk about Brazil. I mean, clearly, we don't know exactly what's going to happen. We don't anticipate that when it opens, we're going to have to reapply for our licenses. But we take whatever comes our way. At the moment, the provisional measure is for 120 days, at which stage it either gets ratified, changed or revoked. And so we are planning for multiple of potential scenarios. But in actually ask me for my best guess, I think the market will reopen in some form or another, and we will be back there. On Italy, we -- the football is very strong, very strong indeed. And Serie A, poor sports results, Champions League, poor sports results. So both of those facts were true. And we also were very strong in the south of Italy with Eurobet and in particular, the sports results for football were weak in the south of Italy. So hopefully, that answers the question.

Our next question comes from Andrew Tam at Rothschild & Co.

Just a quick one, part one on New Zealand. Can you talk about your confidence in the New Zealand auction process and the decision to bid for 3 licenses there given the notable absence of some of your main peers? And the second part of that, is there any risk that New Zealand kind of looks like Brazil post the liberalization of that market? And then finally, are there any potential impacts or flow on impacts from the Australian AUSTRAC action into the New Zealand licensing decision at all?

We were delighted to get everything that we wanted in New Zealand, and we feel incredibly confident about the opportunity there. It was surprising to us the mix that came through on the licenses, but I can't say that we're disappointed that that's the competitors that we now have. We're really excited about that market. I wouldn't ever describe it as something that could end up looking like Brazil. I think that it's going to be a really great place to operate. We already have a presence there, and we really enjoy working on the ground with New Zealand, and we look forward to taking that forward with gaming.

And then I think your other question was on AUSTRAC. I mean AUSTRAC is clearly an ongoing process. We're very transparent about that. So there's no new news here. This is something that we'll work out over time. And clearly, just to emphasize what Mike said, we have a very strong relationship in New Zealand already because, obviously, we are the sole provider of sports betting through TAB New Zealand. So we feel very confident about the opportunity there and excited about the fact that we have 3 labels.

Our next question comes from Pravin Gondhale, Barclays.

Could you chat about the underlying sort of volume strength here. I mean it was intensive through Q3, excluding Brazil. I mean U.K. was clearly a standout. But now from here, we have sort of slightly tougher Q4 comp, and there is no World Cup next year and then U.K. comp would also get tougher. So how sort of -- how do you think about sustaining that mid- to high single-digit online growth, excluding Brazil into 2027 and sort of broader underlying momentum on volumes and the top line there?