Evoke plc (EVOK) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the 888 Holdings plc Interim Results Investor Presentation. [Operator Instructions] The company may not be in a position to answer every question received during today's meeting itself. However, the company can review all questions and will publish any responses where it's appropriate to do so on the Investor Meet company platform. Before we begin, we would like to submit the following poll. And if you would give that your kind attention, I'm sure the company will be most grateful. And I'd now like to hand over to Chairman, Lord Mendelsohn. Good afternoon.

Thank you very much. Good afternoon, everyone, and thanks for joining us today. I'm Jon Mendelsohn, and alongside me Yariv Dafna, Group Chief Financial Officer; and Vaughan Lewis, Chief Strategy Officer. So as we move on to the presentation, on Slide 2, you can see the agenda for today's presentation. I'll be providing an overview of key developments during the first half before handing over to Yariv and Vaughan to take you through our financial and strategic progress in more detail. We will then take your questions. Now Slide 3 reaffirms our key priorities as a Board, against which we have made good progress in all key areas in the 4 months since our full year results and Q1 update. Firstly, I was delighted to announce the appointment of Per Widerström as Chief Executive Officer a few weeks ago. Per was the clear standout candidate for the Board after an extensive process with a wide range of high-quality individuals. He is an inspiring and proven leader with extensive industry experience, including in public companies and a very strong track record of executing value creation plans in omnichannel global betting and gaming businesses. Now across the business, we continue to reinforce and strengthen our teams with excellent external hires and internal promotions. Overall, I am extremely confident that we are building a world-class team to deliver our value creation plan. Our second priority is ESG and sustainability. As a Board, we remain resolutely focused on sustainability and compliance, which is fundamental to the business we are building. The actions that we have taken to enhance our compliance framework have had and continue to have an impact on our revenues. But we are confident that these are the right actions for the business to create long-term sustainable value. All of these actions are changing the shape of the business, leading to a much higher quality and much more sustainable platform for future growth. In Q2, 95% of our group revenues came from customers in locally regulated or taxed countries. The Board's third priority is execution, which I'll address in more detail on the next slide. So on Slide 4, this is how we are executing the strategic plan that we outlined at our Capital Markets Day last November. You can see on the chart that 888 is a business that was historically relatively subscale and overweight in its offshore market mix. Through a significant acceleration in growth, we embarked on an ambitious M&A plan to transform our scale, and I'm pleased to say we are making good progress towards our 2025 target for at least GBP 2 billion in revenue. While this is a complex global business with multiple technology, regulatory and competitive dynamics at its heart, there are 3 key drivers: revenue, marketing and our operating expenses. Starting with revenue. We have been taking quite radical actions to change the mix of our revenues to provide a higher quality, more profitable and more sustainable revenue mix that provides us with a strong platform for growth. Secondly, marketing spend. As 2 separate businesses, William Hill and 888 had different marketing plans and strategies. In markets like the U.K. with the strength of the combined business and with 2 leading brands, we have changed the marketing strategy to focus on driving sustainable, profitable returns as a portfolio of brands across the market. And thirdly, operating costs. Our principle here is to achieve the scale benefits in our combined businesses by removing duplication and delivering best-in-class and scalable shared functions to support our global ambitions. This reflects our overall plan to create a customer-focused organization with high growth potential. We have seen the foundations of this take shape in the first half with higher customer volumes, lower average spending levels, lower marketing ratio and higher profits. This is our platform for the future for sustainable value creation. And with that, I'm going to hand over to Yariv to walk us through the financial results in more detail.

Thanks, Jon. Good afternoon, everyone, and thank you for joining us today. Starting with Slide 5. We show the main item in the bridge between 2022 actual to pro forma results and then to our 2023 actual results. On the left, you can see the revenue bridge between -- the revenue bridge starting from reported revenue in H1 2022 of EUR 332 million. Including with William Hill result and excluding the Bingo business, the pro forma revenue would have been EUR 943 million. Retail revenue of $16 million higher, reflecting the positive trend across the high street and the benefit of the CapEx spend in the last 2 years. U.K. online revenue are $35 million lower, reflecting both the impact of the shift toward lower spending customers and the short-term top line hit from the removal of unprofitable marketing spend. International revenue of $43 million lower, reflecting mainly the impact of regulatory and compliance changes, including the suspension of VAP in the Middle East, but also the refined focus on our core and growth markets. In the core markets, Italy and Spain, we saw strong year-on-year growth. On the right-hand side, you can see the same bridge for adjusted EBITDA. The important point to make here is that while you see the revenue declines, EBITDA is up mainly in the U.K. online where margins are significantly higher, leading to an $11 million increase in EBITDA. On Slide 6, we present the revenue and adjusted EBITDA by segment on a pro forma basis. We operate the business in 2 main segments: the U.K., which includes our U.K. and Ireland online businesses and our retail business, and international, which include all our businesses outside of the U.K., including the U.S. For the U.K., pro forma revenue were down 3% in H1 '23, reflecting strong trend in retail more than offset by the structural changes we have been making to our online business. For our international business, revenue were down 14%. The main driver of this was the closure of our Middle East VIP in January, which explain a little over half of the drop and further changes to our dot-com compliance framework, which negatively impacted our revenue. Excluding these regulatory and compliance changes, international revenue are broadly stable. We have effectively rightsized the business and improved sustainability significantly with only 5% of group revenue now coming from nonlocally regulated or tax markets. This new position sets a strong base for future growth with an increased focus on our core and growth markets. Moving to Slide 7. We have made good progress on our 3 core financial priorities that we laid out at our Investor Day. Our first focus is execution of synergies. We delivered additional $66 million of cash synergies in H1 '23, mainly across operations and marketing, and we now expect to reach the $150 million target by 2024. We continue to optimize the business and seek out efficiency that can benefit the customer experience and plan to reinvest any additional saving opportunity in accelerating growth. Our second priority is improving our adjusted EBITDA margin. As we have been executing on our integration plans and delivering the improved ROI on our marketing spend, we have confidence in our plan to deliver an adjusted EBITDA margin of 20% in the full year 2023. And our third priority is deleveraging. We managed to reduce our leverage multiple from 5.6x in December 2022 to 5.1x at the end of June. I expect to end the year at slightly below 5x, and we continue to target below 3.5x in 2025. Moving to Slide 8. I would like to provide an update on our outlook for 2023. We see no change to our expectation of low to mid-single-digit revenue decline for the full year. Following a 7% drop in H1 '23, the decline is more likely to be at the mid-single digit of the range, reflecting the slower-than-expected pace of recovery in the Middle East. We also remain on track to deliver an adjusted EBITDA margin of 20% this year. We delivered a margin of a little under 18% in the first half and with the phasing of marketing investment and synergies, we have good visibility on this reaching 20% for the full year. Overall, this has been a good first half, reflecting our strong financial discipline and delivering on our target to increase profitability and drive cash generation. I'm pleased with the progress we have made, particularly with reducing the leverage and with good visibility of slightly less than 5x at the end of this year as we continue to progress toward our target of 3.5x or below in 2025. I will now hand over to Vaughan to run through the strategic highlights.

Thanks, Yariv, and good afternoon, everyone. So as Jon and Yariv have both touched on, we've made excellent progress against our priorities during this period. 2023 is a key year in our position and plan potential road map, and we've taken rapid and assertive actions to change the mix of the business to drive sustainable value creation. And that will allow us to evolve from a focus on integration to a clear focus on driving growth. On Slide 9, we can see a few examples of the proactive actions in practice in our biggest market, the U.K. So the summary of the first half for the online business in the U.K. is higher volumes, higher player volumes and higher market share of players, lower ARPU as the business is remixed towards the most sustainable, lower spending player groups and higher profitability as we focus our marketing investment on building sustainable returns. On the left-hand side, you can see continued growth in our active player base. This growth is coming from lower spending, recreational cohorts as we continue to grow market share of players. While we are growing share of players, our market share of revenue is lower. This reflects the dynamic in the middle of the charts, with significantly lower average revenue per user as our business mix shifts towards the lowest spending recreational players. You can see our average monthly revenue now across over 1 million players a month is GBP 44, so just about GBP 10 a week. This huge and growing recreational customer base gives us real confidence about our plans to grow market share in the coming years. And what's even better, we're driving this growth even more efficiently. And you can see on the right, we're seeing much more efficient marketing from being able to target our brands more effectively. So this is a year of transition in the U.K. that really sets our platform for future growth. Turning to Slide 10 and a few words about our international markets. Our core international markets, which are Italy and Spain saw double-digit growth in the period. Our growth markets were up double digits, excluding Germany, where we've seen significant regulatory change. And overall revenues are lower in the period though, and this reflects the significant reduction in dot-com revenues that Yariv already covered. We've been delighted with the progress in our pipeline markets with our Africa joint venture going from strength to strength. We launched in September and at the end of our 10th full month, we've already passed 1 million customers and are seeing continued strong revenue growth with a 25% month-on-month growth rate so far this year. The success here gives us real confidence about the value creation, and we recently completed the acquisition of BetLion here, further supporting our expansion plans in Africa with some excellent front-end technology and adding further license jurisdictions. We're looking forward to accelerating growth here with future market launches over the rest of this year and into 2024. So overall, this has been a period of strong strategic progress with our products, brands and customer focus, building a strong platform for future growth. I'd now like to hand back to Jon to conclude.

Thank you, Vaughan. Turning to Slide 11 to conclude with a summary of the huge progress we have made in the first half as we look to unlock the huge potential of this business. We have made tremendous progress with integration, delivering GBP 66 million of synergies in the first half of this year and accelerating our plan such that we will have achieved our target run rate of GBP 150 million within 2024, a year earlier than planned. We have delivered on our goal of improved profitability with adjusted EBITDA up 9% and margin improving by around 2.6 percentage points. Our leverage in just 6 months, we've already reduced this by 0.5 turns. The speed of deleveraging in the first half was partly helped by some favorable foreign exchange movements, reducing our net debt, but we remain committed to bringing the leverage down continually and effectively through to our 2025 target of less than 3.5x. And we have positively changed the mix of our business, reducing risks and providing a higher quality, more sustainable platform for future growth. With the appointment of Per, I'll be handing over to a world-class CEO and look forward to updating you soon with the CFO appointment as we continue to strengthen our team and execute our plan to deliver enhanced shareholder value. And with that, I'd like to hand back to the moderator for questions.

That's great. Jon, Vaughan, Yariv, thank you very much indeed for updating investors. [Operator Instructions] I'd just like to remind you that recording of this presentation along with a copy of the slides and the published Q&A will be available via your Investor Meet Company dashboard. Thank you, firstly, to everybody for your engagement this afternoon. Jon, Yariv and Vaughan, we have received a number of questions. If I may start with the first one, which was pre-submitted ahead of today's event, which really as follows. Is the economic priority to reduce the leverage of this business? If so, what is your guidance as to the time lines? And what is the longer-term right leverage as a ratio to EBITDA?

Yes. So as I mentioned in my presentation, so it's indeed a priority to deleverage. We managed to reduce in the first half from 5.6% at the end of 2022 to 5.1% at the end of June. We expect this to go below 5% at the year-end and to be 3.5 or below at the end of 2025. We set that target for 2025 because that's what we believe is the right level for us. Just as a reminder, the Board also agreed that the dividend will be resumed only when leverage will go to the level of 3x.

That's great. Let's turn to the next question submitted during your presentation. You referenced future growth projects in today's announcement. Could you expand on what these look like? And if so, how they may be funded?

Yes. So there's a combination of projects that we're talking about here. So if you take out what we call our growth markets, that's a small number of focused markets where collectively we look to operate these at breakeven. And the way we do that is by reinvesting the underlying profitability into more marketing, more customer growth and fueling the future market share gains in those key territories. We're always looking for new markets to join that growth group. What we look for in there is the right combination of market conditions in terms of regulation, tax payments and so on and the competitive dynamics and then our competitive assets. So how strong are our brands, how big is our product set, how good is our payments and localization operations and so on. So we're constantly looking to build new growth markets, and that can be either organically where we get the benefits of our tech migrations and the breadth of product and payments expertise that we have in the core business or that can be through what we call our pipeline investments. So these are typically low capital investment into new territories. A good example of that would be our African joint venture. So those are the types of investments we're talking about. They're either funded. But I think as they are already through the P&L. So we're already sort of seeing those investments or their relatively low capital requirements like our joint venture in Africa.

That's great. Turning to the next question. Given the William Hill acquisition, what's the appetite for further M&A? And do you want to land and expand in any new territories?

That's a good follow-up to the previous one. I think we've laid out a plan where in our core and growth markets, we're looking to get to 10% to 15% share in our core markets, 5% to 10% in our growth markets. Longer term, we're looking to expand the range of core markets and that's sort of the M&A plan at the sort of low capital level like the Africa project fits into that category to provide us with future growth and core markets. So we're not looking at a large scale M&A at the moment as we -- as Yariv discussed at the start, the priority is to reduce leverage down towards the 3.5% -- 3.5x target in 2025. Longer term, this is a consolidating industry. We do have the capabilities to benefit from M&A. And I think we're proving through the integration and the deliveries of synergies that we have the capabilities and the capacity to execute large-scale M&A successfully. So nothing in the short term, but longer term, I think it could be part of the plan.

That's great. Just turning to the next question, if I may. Does AI have any impact on the business?

Well, it does as AI has an impact on all businesses, but I would say that it will have a bigger impact in time to come. So it's not just about AI, it's about AGI, and that's about how you can operate a business better from the writing of software development to marketing materials, interaction with customers. So I think as we look to the future, we certainly will be one of those companies who will be looking in a very focused way, what we can do using not just AI and machine learning tools that are available there, but what else could be done with AGI. So I would say, at this stage, it was probably limited. But in the time to come, it will undoubtedly have a significant bearing on the entire sector.

I know you guys have touched on the African JV, but the question reads, what are the terms of the African JV? And what does 888 own and what funding has been committed?

So the current ownership is 19.99% or fraction below 20%. We -- you can see through the accounts that the funding has been a low to mid-single-digit million figure. We do have the option to take a majority control and ownership in time. And in time, we have the option as well to take full control for the ownership. So we wouldn't go into sort of details on the exact mechanics, but we would say that it's a low CapEx way route to grow scale in new markets, leveraging our assets and capabilities and brands with partners.

And I think we're at the final question, unless any more come in during your response. But question reads, can you give more color on issues in Germany? And if so, how much drag may that cause going forward?

Yes. So within Germany, there are new rules in place that make a number of requirements. One of the most challenging one is that for gaming, there's a turnover tax of just over 5%. So for players who place slot machines or who are typically used to playing machines with a kind of 95%, 96%, 97% return to player. That type of product is not possible when you're paying 5% of every spin in taxes. So the slot machines that work in or that have to work in Germany are more around the 88% to 90% return to player, which is fine if everyone is playing by the same rules, but what we're seeing is that there's quite a big black market in Germany, where customers are choosing to play with operators who still have the same slot machines at 95%, 96%, 97% RTP. So not paying tax and paying much higher payouts. So there's a bit of a lopsided sort of competitive dynamic going on at the moment in the market. Looking forward, we do think that there'll be more control on that and the regulator and rules will be enforced to ensure that only those operators like us with licenses who are paying taxes properly are able to operate. And as the market gets more normal, we'd expect to see our brands and our products cut through. So long term, we see this as a very attractive market. The drag that we've seen this year is largely cycling through. So we wouldn't expect to see significant further drag on a month-to-month basis, we're seeing an improvement and progress in that market.

Thank you very much indeed. And that, I believe, maybe the final question for today's meeting. Of course, if -- actually hold on, there is one more. Forgive me. There's a lot of margin ground to make up in the second half of '23 to hit guidance. Can you describe in more detail cost-saving actions that will achieve this? Is there a risk that lower marketing spend and other cost saves will hurt revenue performance.

Yes. So when you look at H1 and what we expect to deliver in the second half of the year, so you need to consider a similar level of revenue, slightly better gross margin because of synergies that we will achieve in the second half of the year. So this will bring us a bit higher gross profit. Then we will have a lower level of marketing spend. The marketing spend is coming from synergies in part and also because of the -- normally, the second part of the year has less marketing than the first half. And then we will have lower OpEx. The combination of all these will make the difference in terms of profitability between the first and the second half. Now in terms of the marketing spend, so we are looking carefully into optimizing the marketing to the new strategy on how we address the market. And of course, we need to make the right balance between our short-term target and our long-term target for the next year and for the growth that we want to achieve in the next year.

A further question, if I may. Can you provide an update on the regulator's investigation into the gaming license in the U.K.

Certainly, we were notified a short while ago that we would be under review under Section 116-102. And it was in relation to -- the review is to consider our management, the licensees, management of risk to the licensing objective of preventing gambling from being a source of crime or disorder, being associated with crime or disorder or being used to support crime. It came in relation to some activities pertaining to some shareholders who bought into the company and with whom we've had some discussions in which we had closed off. The actual review itself is currently in design and the commission have not put a particular timetable or a series of requests at this stage, but it really does relate to events that are taking place externally in our ability to manage that risk. As a result of it, we do anticipate when the events that I think is really -- is related to, we'll play themselves out over a period. But there are no operating consequences for us in relation to this review. We are not under any particular operating investigation, and we won't be. And I don't think there will be any disruption or any particular consequence as a result of it. It really is about our risk to that licensing objective. It is utterly -- as far as I recall and to my understanding, this is a completely unique set of circumstances in which the Gambling Commission has issued a review, and it pertains to a very particular set of circumstances. And I think it should be seen in that context. So I don't think it will have anything particularly difficult for us as an outcome because I think that we have managed this risk particularly effectively. And I look forward to the Gambling Commission completing their review in due course and endorsing that.

Well, I think that is the final question of today's session. So thank you, everybody, for your engagement this afternoon. Lord Mendelsohn, Yariv, Vaughan, I know that investor feedback will be important to you, and I'll shortly redirect those on the call to give you their thoughts and their expectations. But I wonder before doing so, if I may, Lord Mendelsohn, just come back to you, just for a few closing comments, and then I'll ask investors for their feedback.

Thank you. Thank you very much. Just thanks again to everyone for their interest, encouragement and support of 888 Holdings and for being here today and also for your questions. We are committed to our plan towards 2025. And in a year of transition, we think we are able to report good progress. And the addition of Per gives us very strong confidence about how we will be able to take all of this forward. We look forward to updating you in due course of our continuing progress. And once again, thank you for being here this afternoon.

Thank you very much, indeed. Could I please ask investors not to close this session as we'll now automatically redirect you for the opportunity to provide your feedback in order that the company can better understand your reviews and expectations. This may take a few moments to complete, but I'm sure it'll be greatly valued by the company. On behalf of the management team of 888 Holdings plc, I'd like to thank you for attending today's presentation. That now concludes today's session and I wish you all a very pleasant afternoon.