Evoke plc (EVOK) Earnings Call Transcript & Summary

Good morning, and welcome to Evoke plc's H1 2024 Trading Update. We are here today with the Evoke management team. And I will now hand over to Chief Executive Officer, Per Widerstrom.

Good morning, everyone, and thanks for joining us today for our H1 2024 trading update. I am Per Widerstrom, and I joined as CEO of this great business in October last year. Today, we will discuss our first half 2024 trading performance, the outlook for the rest of the year and our continued commitment to our strategic framework and value creation plan. I'm going to hand over to our CFO, Sean Wilkins, to run through the financial update, and then I will talk about our strategic delivery. Over to you, Sean.

Thanks, Per, and good morning, everyone. On Slide 2, I'll talk about our trading in the first half of 2024. We expect group revenues to be approximately GBP 862 million in the first half. This is 2% behind last year, but encouragingly, is 4% ahead of the second half of 2023, with the business back into our underlying growth. Within the divisions, it was pleasing to see the U.K. & I online segment return to positive year-on-year growth, and we're increasingly positive about the outlook here. Our retail business has been robust and stable for the last 4 quarters, but with tough prior year comps, it does mean that it was 8% behind last year. International revenues also returned to positive growth in Q2, with really strong momentum in our core markets as we continue to see real improvement in the mix of business towards sustainable profitable revenue growth. While it's really encouraging to see the business return to growth, we had expected to see a stronger improvement in revenue in Q2 from our planned overspend on marketing and promotions in Q1. As a result of revenue not coming through as planned, this means we now expect adjusted EBITDA for the half and the year to be about GBP 35 million to GBP 40 million below our initial plans. While this is obviously a disappointing start to the year, I am pleased to say that the health of the business has been improving strongly, and our expectations for the second half of the year as well as for 2025 and beyond are unchanged. Turning to Slide 3, and just to touch on cash, liquidity and leverage. You will recall that we issued GBP 400 million of sterling fixed rate bonds in May to refinance the term loan A. This has benefited the overall debt profile with extended maturity and a better mix in terms of -- both in terms of fixed and versus floating and currency. Crucially, it was also cash interest neutral versus the original term loan A. Alongside this, we increased our RCF by GBP 50 million at the same time. The net impact is that I'm very comfortable with the debt profile and our liquidity. Given the transformation and turnaround we are in, this does mean leverage will be temporarily elevated above 6x at the end of the first half. We're very comfortable with this given the liquidity and given the profitability profile into the second half. With the changes we are making in the business to improve long-term profitability and drive growth, I am comfortable that we will begin delivering significant excess cash flow in 2025 and beyond, supporting rapid deleveraging towards our medium-term target of under 3.5x by the end of 2026. Turning to Slide 4. I will explain why the first half is behind our plans and the actions we have taken to ensure that the second half is back on track. There are 4 main reasons why we're behind plans in the first half. Firstly, the return on our marketing has been lower than expected, primarily in U.K. online. We've changed our commercial leadership team and implemented more robust return on investment tracking and are already seeing improved results here. Secondly, we were targeting suboptimal customer segments, primarily in U.K. online again, particularly with our mass market offering, Cheltenham, which has not delivered the expected returns. Thirdly, we saw an extended impact from some of the actions taken in the second half of the year, including regularly making tactical changes to the customer proposition in terms of pricing and promotions and reduced marketing. This was focused on trying to drive short-term benefits in response to wider business pressures from regulatory and compliance headwinds, with the expectation that any impact would be limited to the short term, but this hasn't been the case. Since then, we've been working at pace to build our strategy and clear brand propositions, with our customer value propositions with a focus on consistency over time, not short-term reactive changes. Finally, in retail, we were pursuing an in-house solution for gaming cabinets and software. The rationale for this was clear to drive differentiation. However, the test showed poor results, so we have pivoted this plan and we're rolling out best-in-class third-party solutions from Q4 this year. As a personal reflection, I joined this business in February, and was impressed with the clear strategy that we finalized and outlined in March. Since then, I've been really impressed with the improvements we've made in terms of our capabilities. But on reflection, our U.K. plans, both online and retail were far too optimistic, particularly in terms of expected online marketing returns. And as you can see, we've taken decisive action to address this. Despite the weaker than planned results in the first half, I'm really confident that the actions that we've taken put us back on track for the second half and beyond. On the right-hand side, you can see the big elements that give me this confidence. Firstly, marketing was always planned to be front-loaded this year, and we will spend around GBP 35 million to GBP 40 million less on marketing in the second half. By focusing on the right target customers implementing our CVPs and with the increased rigor we've implemented, I'm confident this will drive higher revenues with better returns. Secondly, our costs will be about GBP 5 million to GBP 10 million lower, reflecting the phasing of the GBP 30 million cost savings we announced at the end of last year. These cost initiatives also give us confidence in 2025 as we get the full year effective, and we are consistently reviewing the cost base for further efficiency savings. Thirdly, we have a strong pipeline of product initiatives, which will further enhance our revenues and drive operating leverage. At the full year, we provided the details of our strategy and our value creation plan, with medium-term targets of 5% to 9% revenue growth and 100 bps EBITDA margin improvement per year. We are still committed to these plans for 2025 and beyond. And it is important to note that while we're revising our full year 2024 outlook, the improvements we are witnessing in revenue give us confidence we're on the right track. We are confident in our strategy and our ability to deliver mid- and long-term value to our shareholders. And I will now hand over to Per to outline the strategic progress we've made and why we're confident about the future.

Thanks a lot for that, Sean. So I start on Slide 5 with a reminder of our new strategy, which is focused on mid- and long-term profitable growth and value creation. This involves investing in our capabilities and transforming the business. And we should be under no illusions that this is a complete reset of this business. We have made both decisive changes to almost every area of the business in the first half, and this is delivering positive results and will enhance our operational efficiency, leading to a bigger, more profitable and more cash-generative business. Our strategy defines what good looks like and how we get there. I mean no journey is ever simple, and we have learned a lot already this year as we pursue our goals. While the first half financials are behind our plan, the underlying health of the business is getting stronger, and the corrective actions we have taken make us even more confident that our strategic approach is sound and will drive sustainable success. I'm really pleased with the strategic progress we have made here to set us up for profitable growth in H2 2024 and beyond. Turning to Slide 6, and a little more detail on some of the changes we have been making. As I said, I mean, this is a major transformation in this business, and the scale of change required is significant and will take time to produce results. Put simply, we will drive higher revenues with a clear focus on delivering quality products and offers for our customers. And we will do this with lower cost by building our one company team, our one company organization and leveraging AI and automation. While the financial results were behind plan in the first half, I'm delighted to say that we have made significant progress building enhanced capabilities, which will become our competitive advantages. Our competitive advantage will be, firstly, operational excellence driven by data insights and in tenant automation. I mean we have made some exceptional hires from leading AI-powered businesses. We are transforming our operating model to enable us to here use our growing capabilities even more effectively across the business. I'm really excited about how we will both improve customer experience and drive operational efficiencies with these improvements. Secondly, a winning culture. I have completed a restructure of our leadership team, bringing in exceptional talent from within and outside the industry. Our new operating model is well advanced, delivering the full GBP 30 million of cost efficiencies that we targeted. We are building a fit for purpose and future-proof operating model, and I have no doubt, Evoke will be the business that the most ambitious people in the industry come to grow their careers. And thirdly, ensure we are driving improvements in our leading distinct brands and products. We have completed the repositioning of our Mr Green brand, and are well advanced with our William Hill repositioning, with our top price guarantee landing well with raising customers and our new Betbuilder being a real success with football punters in the euros. Alongside these strategic initiatives, we are driving a step change in capabilities through our other 3 strategic initiatives. I look forward to telling you a lot more about these at our interim results. I will now talk through some of the key drivers of each division and why we are even more confident about future success. So turning to Slide 7, and a few words about our biggest division, the U.K. and Ireland online division. As you can see in the chart, the rate of revenue growth has been gradually improving by quarter, and I was pleased to see we returned to positive year-on-year growth in the second quarter. Within this, gaming revenues are performing well, up 6%, and we see this continuing into the second half, driven by continued improvements in our product and promotions. Sports has been a little slower, but we have made several improvements here and are already starting to see the benefits of this with a really strong Euro football tournament with our new Betbuilder product lending really well with our customers. Turning to Slide 8 in our International segment. This division went through significant disruption in 2023, with significant regulatory and compliance changes as well as our increased market focus leading to a smaller but higher-quality revenue base. We also continued to see a mix shift here with double-digit growth in our core markets, as we continue to build sustainable market-leading positions across Italy, Spain and Denmark, with ongoing market share gains in this group. These markets make up around 60% of our international revenues now. I'm pleased to say that overall international revenues returned to growth in Q2, accelerating from Q1 on a year-over-year basis despite the normal seasonal drop sequentially. As we look forward, I'm confident that this trend will accelerate, driven by both our commercial focus and our group-wide initiatives as well as these ongoing positive mix shift. In our optimized market, revenues were lower, reflecting our clear strive to focus on profitable growth, including through actions like exiting the U.S. B2C business, which reduces revenues but increases profits. Looking forward, the second half will benefit from a series of product improvements such as improved payments, a wider range of sports betting markets and customer benefits, including the benefits from our customer life cycle management model. Turning to Slide 9. Retail was our best-performing division in 2023, and it has continued to see really robust and consistent trading, with revenues around GBP 130 million per quarter consistently. While this stability is encouraging, we had planned for some improvements as we are lapping a strong period last year, and it does mean that revenues were lower year-on-year. From a competitive perspective, we have lost ground in our machine offering. We have around 26% to 27% market share of sports betting, but only around 19% share of gaming, and we see substantial upside potential to our gaming revenues as we improve our gaming offering. The business had previously been focused on creating its own proprietary retail gaming platform, but the reality is the data simply did not support this plan. Part of making bold decisions is being able to realize when you are off track, and we have changed course here as a result. I'm pleased to say that we have signed a multiyear deal with Inspired Gaming in June, and we will roll out 2,000 terminals by the end of this year, completing the rollout of an entire new estate of around 5,000 machines in the first quarter of next year. This will be the first significant new gaming hardware for over a decade in our state, so a major step change. With our strong William Hill brand customer proposition coming through, a completely new gaming machine estate underway, improved self-service betting terminals, better payments and enhanced sports broadcast offering, I expect to see good improvement in retail performance. So turning to Slide 10. A few reflections before we take questions. So revenues were behind our plan. And together with some planned over spend on marketing that didn't deliver the returns we wanted or expected, we are around GBP 35 million to GBP 40 million behind plan on EBITDA in the first half. This is disappointing, and I do not take this shortfall lightly. And I've been working with all of my team to address this. But despite the shortfall, I've been really pleased with the improvement in business health and the clear signs this strategy is working. This is a new team undertaking a complete transformation of a business, and we must continue to relentlessly focus on mid- and long-term value creation. Revenue growth is improving, and in the second half will be in line with our midterm plan of 5% to 9% growth. Alongside the improved revenue trends, we have made substantial progress with our cost base and operational efficiency. We are implementing our new global operating model, with lower cost and faster pace of execution. We are sticking with our plan. And with the enhancements we have made, we are even more confident about the future. So thank you for your continued support, and we are now ready to take your questions.

[Operator Instructions] And our first question comes from the line of Ed Young from Morgan Stanley.

Two questions, please. First of all, can you just talk a little bit about any short-term noise in the numbers on the positive side? You've not really talked about the Euro Football Championship or its potential influence. You've talked about sequential growth quarter-on-quarter and year-on-year, but could you help perhaps just understand the impact on what's getting margin or volumes and how you disaggregate that in the underlying picture? And then second of all, on your comments that you're seeing good underlying health in the business, can you, again, perhaps give some KPIs around what it is that's giving you the confidence that you're going in the right direction or that you're so confident in the second half picture, given obviously the H1 has come in a little bit under where you wanted it to?

Thanks, Ed. I'll take that one. Just as an overall picture, sports margins were pretty consistent in Q1 and Q2, in line with plans and in line with prior year, so no short-term noise really. I'm just addressing your specific question about the euros. You'll all know that euros were definitely bookie favorable results. Offsetting that and bring us back to that kind of original bigger picture that I set out, we saw lower margins on horse racing during the period as well. So those 2 things have offset and basically brought us back to the bigger picture of basically in line with expectations. On the second question, good underlying health. Look, we're expecting a return to 5% to 9% revenue growth in the second half. The things that we're seeing there, we've seen plus 3% growth in U.K. online, and this is the key engine of the business. So seeing that come back to growth has been fantastic. And within that, obviously, the biggest part of that is gaming and seeing that at plus 6%, again, a really good proof point. Within our international business, the core markets, which make up more than 60% of that division, we've seen grow at double digits. So pleased with that. Just in terms of the other drivers of revenue, we've got a new Chief Commercial Officer. We've got well targeted marketing and bonusing being driven by our CVP. Another proof point is our product road map. Betbuilder, our new product, Betbuilder dropped just before the euros. And we were delighted to say that over, in fact, 20% staking was on Bet Builder. And there is a road map of deliveries from product during the course of the second half. We didn't really have that as a tailwind in the first half because we are focused on compliance, but we're seeing some really, really good things drop in the second half. And then a further proof point is we've already signed the deal with Inspired Gaming to bring in cabinets during Q4. But all of those things then drive the top line, which will also drive operational leverage, thereby improving the margin. I mentioned 2 or 3 things there. You'll appreciate that within the business, we've got a long list of deliverables, both on the revenue and the cost side, which I keep a very forensic eye on as we go through the weeks. The other thing worth mentioning there, Ed, is marketing costs, just to reiterate the point that I made on the call in the initial remarks. We always plan for our marketing to be first half weighted. It's GBP 35 million to GBP 40 million lower in the second half than it was in the first half. And that's not because we've got lower than normal marketing in the second half. It's a sensible marketing investment, but we had -- we put significant investment in Q1. And the other thing is that our GBP 30 million cost saving that we announced right at the beginning of the year, that's significantly second half weighted. It's almost entirely employment cost, and it takes a while to land that. And given that it's GBP 30 million in year, actually, the second half over the first half is going to see GBP 5 million to GBP 10 million more savings. So that's another proof point that's kind of supporting this guidance that we've given for second half.

The next question comes from the line of Richard Stuber from Deutsche Numis.

Three questions, please. The first one is, could you confirm whether you have sort of annualized now all the U.K. regulatory headwinds, such as affordability limits? And within Q2, did you actually see a sequential improvement in growth? Or could you maybe give us an exit rate in growth for the quarter? The second question, put it being a little bit pedantic. I know you talked about GBP 35 million to GBP 40 million behind EBITDA. On Slide 2, I think you said GBP 20 million from U.K. and Ireland, GBP 10 million from retail. So does that imply the sort of GBP 5 million to GBP 10 million shortfall also in international? And the final question is in retail, could you confirm whether the drag was mainly machines or was OTC also down?

Thanks, Richard. So I'll take those. So starting with the regulatory headwinds, we've now lapped the implementations that we made to be in line with the requirements from the regulator. You all know that we took a cautious approach and I've talked about it before. A good example of that is that we implemented GBP 5 limits on slots, and so are broadly in line with changes that we're going to see later in the year. And if anything, we see this as an improvement, particularly around the customer experience to make sure that the safer gambling journeys that we're implementing are customer-friendly. On Q2 over Q1, largely flat is the answer to that one. The -- I think your third question was of the GBP 35 million to GBP 40 million miss, where did it lie, you're quite right, GBP 20 million online, GBP 10 million retail and then there's GBP 10 million elsewhere. So yes, that does square the circle. And then on retail, it's been a mix, but the vast majority of the miss has been on the gaming machines. I was in the retail estate over the last couple of weeks, and it's obvious that the investment that some of our competitors have put into the gaming machines have meant that our gaming machines are suboptimal, and we've take an immediate action. It takes a while to get these manufacturing shipped. So they're not arriving until Q4, but we took immediate action to close that commercial disadvantage.

And actually, can I just clarify the -- my first question again. What I meant was did you see a monthly sequential improvement during Q2? So was the exit at June, was the growth much higher than the 3% that you reported for the entire quarter?

I see what you mean. Yes, we did. June was actually very encouraging. The only watch out of course there, Richard, is that that's kind of euros versus no euros, but June was very encouraging.

We currently have no questions in the queue. [Operator Instructions] We have no further questions, so I will now hand over to Rachel for some webcast questions.

Thank you, Jess. So the first question is from Monika from JPMorgan Asset Management. She asks, can you please outline the revised guidance for the full year of 2024, revenue, EBITDA and leverage?

Sure. Let me take that. Thanks for the question. So in the presentation, we've outlined where we were in the first half on revenue, which is minus 2% year-on-year. And then revenue for the second half, we're expecting to be 5% to 9% growth. On EBITDA margin, we've outlined in the presentation 13% to 14% in the first half and we're expecting around 21% in the second half. Then on leverage, we are expecting to end the year -- well, let's start with half 1. So half 1, I'm expecting to nudge above 6% given the results. But also given the revised but consistent guidance for the second half and the proof points that I've set out, I'm expecting leverage to be down from the half year, and I mean it will be marginally up from where we started the year.

Great. Thank you. The next question comes from Amarveer Singh from CreditSights. She asks, it appears that full year 2024 guidance points to a 17% to 18% EBITDA margin, about the same as 2023. That would imply a 2 to 3 percentage point increase in margin for full year '25, which seems a bit higher than the 100 bp improvement you were targeting. How confident are you about achieving that?

We're strongly confident in achieving that. It was helpful to have Ed's question at the beginning there, where I was able to talk through the revenue growth and the proof points for the revenue growth and also the actual plans that are dropping in half 2 to drive that revenue growth. Of course, revenue growth drives margin because of operational leverage. We also will annualize all of the work that we're doing on cost backs. So where we've got the marketing costs half-on-half and also where we've got the revised approach to marketing and targeting different cohorts, et cetera, and the efficiency that we'll get in marketing, those things will annualize. And then, of course, the cost savings that we announced at the beginning of the year, the GBP 30 million cost savings in the year will also annualize into 2025. So yes, confident that we'll be able to achieve what we're expecting in fiscal '25.

Great. We have another question from Jemma Permalloo from JPMorgan. Her first question is, did you see any upside from the euros in the last 2 weeks of June? How much upside do you see in the second half from both the euros and the Olympic Games? And the second question is, you mentioned that the guidance for 2024 was perhaps too optimistic in hindsight. What gives you comfort for 2025, hence the unchanged guidance?

Okay. So absolutely, we saw, as I said to you a bit earlier, actually, the margin on the euros was good. It was definitely bookie-friendly. I suppose the one caveat to that is, of course, when you do have bookie-friendly results, that does prevent that recycling back into turnover and staking. So turnover and staking was kind of in line whereas the margin was high. The upside that we see from the euros, there's definitely some. I mean it's a good recruitment tool for customers and first-time depositors, and so there's some from the euros. Olympic Games, I'm not expecting anything particularly for -- we haven't worked anything into the plan, so that would be a good upside. And again, the question about confidence into 2025, I'll just point back to my answers to Ed and then the later question around revenue growth driving operational leverage as well as the annualization of the cost savings that we've made over the course of the year. All of those things will drive towards '25 -- delivering 2025.

Brilliant. Thank you. The next question comes from Robert Huczko from Betplay Capital. He asks, what was the sportsbook margin in Q2 2024 comparing to Q2 2023?

Yes, I won't be giving out the exact margins. But I think, again, I've answered this question already. In the Q1, Q2, fairly consistent. It was in line with our plans and consistent with last year. So nothing really more to say on that.

Great. The next question is from Joe from EGR. With 60% of international now made up by Italy, Spain and Denmark and focus firmly on those markets, is that ongoing reviews of the viability of remaining in existing smaller optimized markets?

I can take this one. So thanks for the question, Joe. To start with, very, very happy to see the double-digit growth we see when it comes to Italy, Spain and Denmark, with some very good momentum there. And when it comes to the other optimized markets, we are absolutely relentlessly focused on driving underlying cash flow, operating cash flow and profitable growth. So here, we will, when we see the right paybacks of our investment, the right level of return on investment, we will scale up as we will scale down initiatives and investments when we don't see the underlying growth profitably to come. So we are constantly obviously revising and optimizing the way we go to the market, also the optimized markets.

Thank you. The next question is from Karen [indiscernible]. Are the targeted GBP 30 million in year cost savings, which you mentioned to be H2 weighted, still expected to be reinvested in U.K. marketing?

I'll take that one. I mean, the point being that we -- when we started the plan at the beginning of the year, we had the plan to increase and upweight half 1 marketing track Q1 marketing, particularly in online, and that was the recycling of the GBP 30 million in-year benefit from the cost savings. So the answer to the question is no, we're not planning on doing it. It's effectively already done.

Great. Karen also asks, how shall we be thinking about the growth profile within international? Core markets seem to be growing well, but pressure from optimized markets will continue to persist. What will be the key growth drivers there?

So let me start and then perhaps Per could come in with that as well. We've gone -- we gave a really detailed update on our value creation plan, and particularly the 6 strategic initiatives, customer life cycle management and the customer value proposition, product and tech being the key drivers of the top line. These things -- the great benefit of the way we've set our operating model is that the benefits that those don't just land in core markets, they land in all markets. And our expectation is that adding these capabilities across both the U.K. and international will improve the performance of the optimized markets, with an aspiration to bring some of the optimized markets into core markets in the future. Per, I don't know whether there's anything you'd like to add to that.

As highlighted before, when we look at the specific performance drivers now for H2 2024 onwards, that also goes with optimized markets. I mean an excellent job done by the team to reposition Mr Green brand as the leading differentiated casino brand. We will -- that will reap the benefits in also optimized markets where we are. When it comes to improved payments across also optimized market, we should see that coming through as well. And as mentioned also in terms of improved sports offering powered by our global trading platform. And when we look at the -- as you mentioned there, Sean, the strategic initiatives that now -- I mentioned customer value proposition but likewise, customer life cycle management when we are investing into our capability, driving our insight-driven automated customer life cycle management in a responsible way. I mean that will definitely also help the performance in the optimized markets.

Okay. And we have a few questions from [ Jaco ] from SquareTwo. The first question is you confirmed H1 outlook in April, which was 2/3 into the first half. How come the issues were not obvious at this point? How do we feel confident with H2, which only 18 days into the quarter?

So thanks, Jaco. Look, so the performance for Q1 was reasonably on track. We started to see this in terms of the top line, we started to see the drop-off in Q2, particularly on the retail drag, as competitors were investing throughout Q1. So it became obvious from end of March, we couldn't see it. But yes, during Q2, it became more obvious. In terms of the second question, 18 days into the second half, how do I feel confident? Well, look, I pointed towards the proof points and just to be clear, we have seen 3% growth in U.K. online. We're seeing 6% in gaming, and we're seeing double-digit in our core and international. We're seeing product drops doing as well, if not better, than planned. We've had 2 key product drops so far, and they've both been really excellent. And we've got a new team and a new focus, particularly around marketing customer cohorts, but all of those things have given us the confidence for the second half.

Thank you. And the second question from [ Jaco ] from SquareTwo is, where we have not seen growth in H1, even with the euros and Copa America, how can we feel confident that growth is coming in H2?

Yes, it's largely recycling the same question. And I think I'll recycle the answer, which is all of the things that I just mentioned. New Chief Commercial Officer, well-targeted marketing and bonusing, key product road maps happening, upgrades to the retail machines, operating leverage. And then the marketing phasing and then also the cost savings phasing to first half, second half.

Thank you. And the next question is from Ines from PGIM. You mentioned liquidity is GBP 300 million, including RCF. Did you upsize the RCF?

Yes, it did. So we had GBP 150 million RCF, and I upsized it by GBP 50 million to GBP 200 million during the process of refinancing term loan A.

The next question is from Matilda. How much CapEx should we expect from the rollout of the new gaming machines in Q4 '24?

Guidance on CapEx remains the same. We've done an excellent deal with Inspired, which means that there's no impact on CapEx.

Thank you very much. There are no further questions from the webcast. So in that case, I will hand back over to Per for any closing remarks.

P Thank you so much for that. So I just want to say that, number one, we expect to perform according to [indiscernible] plan for H2 2024 and 2025. Secondly, I have strong confidence in our new strategy and us delivering the value creation plan, and I can see the proof points of improvement every day as we are operating the business. Thirdly, I have equally strong confidence in my new executive team to deliver the value creation plan. And fourthly, I just would like to say and finally, is that I want to thank our shareholders for their ongoing support in this fundamental transformation reset of our company as we will deliver substantial value creation going forward. Thank you so much.