Evoke plc (EVOK) Earnings Call Transcript & Summary

Good morning, everyone, and thanks for joining us today for our first half 2026 results. I am Per Widerstrom, and I'm joined today by Sean Wilkins, our CFO. Starting with the agenda on Slide 2. The format today is deliberately short. I will begin with a brief overview of the context for today's presentation and the first half performance. Sean will then take you through the financial results and cash flow in a bit more detail before we open the line for questions. Starting with Slide 3 and before getting into the performance, I want to briefly discuss the recommended acquisition by Bally's Intralot, which we announced a little over 2 months ago. The announcement followed a comprehensive strategic review initiated by the Board after the significant U.K. duty changes announced in November 2025. Having evaluated a broad range of alternatives, the Board concluded that the recommended acquisition represented the most attractive and deliverable proposal available to evoke and its shareholders. The acquisition remains subject to the relevant shareholder, regulatory and other approvals, including our own shareholder vote next Monday, the 17th of August. I am pleased to tell you that progress with the relevant filings is going to plan, and we still expect to complete in the fourth quarter of 2026 or the first quarter of 2027. As a result, we are keeping today's presentation focus on the reported financial and operational performance. We are not providing a forward-looking financial guidance. And during the Q&A, we won't be able to add anything on the transaction beyond the information contained in the published announcement and other formal documentation. Operationally, our priorities are unchanged. We remain focused on maintaining momentum, serving our customers, supporting our colleagues, meeting our regulatory obligations and managing the business with discipline through the completion of the transaction. Turning to Slide 4 and the first half performance. This was a period that really demonstrated the resilience of the underlying business in what was materially more challenging external environment in terms of increased duties in several of our core markets and most notably in the U.K. Group revenue was stable at GBP 888 million and increased by 2% on a like-for-like basis, accounting for the 270 store closures versus the prior year. In terms of profitability, the first half had GBP 46 million year-on-year headwind from increased gaming duties. Against that backdrop, adjusted EBITDA of GBP 150 million was down 10%. While down GBP 16 million year-on-year, the result also shows that the mitigating actions we set out early in the year are working and are offsetting a meaningful part of the duty impact. The second quarter saw a continuation of the Q1 trends we outlined at our full year results and Q1 update with the strongest performance coming from U.K. and Ireland online. Revenue grew 4% and adjusted EBIT increased 28%. This despite the additional duties kicking in from April. Willam Hill Vegas continues to perform very well, supported by the change we have made to marketing, promotion investment and customer value to produce better returns. Retail are also making good progress. Like-for-like revenue grew 4% and adjusted EBITDA increased 5% despite smaller estate and continued inflationary cost pressure. The closure of structural loss-making shops has improved the economics of the remaining estate, while trading following the machine rollout and improvements to self-service betting terminals has been encouraging. International was more mixed. Italy and Denmark continued to grow strongly, but that was offset by weaker revenue in Spain, Romania and the rest of the world. Profitability was also affected by duty increase in Romania and Italy and by a greater proportion of revenue coming from higher duty markets. We have plans in place to address several of these areas. And in Spain, for example, we have made significant product improvements recently, although these had only limited impact on the first half results. Overall, the business has responded decisively to a substantial increase in our cost base. Our focus remains on the areas we control, commercial efficiency, cost discipline, cash generation and consistent operational execution. I will now hand over to Sean to go through the financials.

Thanks, Per. Turning to Slide 6, I'll now take you through the financial performance for the first half in a bit more detail. Firstly, I'd say performance overall has been in line with our expectations. So it's been a decent start to the year, all things considered. That said, the story continues to be mixed across markets and brands, driven by the actions we've been taking to drive growth and improve profitability. Total online revenue increased 1%. Within that, UK&I online grew 4% with gaming up 7% William Hill remained the key driver, particularly gaming, where William Hill Vegas continues to grow double digits and go from strength to strength. 888 revenue continued to decline as we maintained a deliberate focus on profitability and customer economics rather than pursuing low-return volume. International revenue declined 2%, but the picture varied significantly by market. Italy delivered another strong period with revenue up 21% and Denmark grew 13%. These performances were offset by declines in Spain, Romania and the rest of the world. In Spain, the improvements made to product and marketing are taking time to translate into the level of performance we want. Romania continues to be affected by the combination of a weaker economy, higher taxes and the growth of the unregulated market. We have responded by managing marketing and promotional investment carefully to protect returns. Retail revenue declined 3% on a reported basis, reflecting the smaller estate with 270 fewer shops than the prior year. On a like-for-like basis, revenue increased 4%, supported by the continued strength of the gaming machines and improvements to self-service betting terminals, including 2,000 new ones being installed, leading to good underlying market share trends. Turning to adjusted EBITDA. The group delivered GBP 150 million, down GBP 16 million year-on-year and broadly flat across the operating segments, excluding the increase in corporate costs, most of which is bonus accrual and balance sheet timing. This is despite the significant headwind of an additional GBP 46 million in gaming duty costs year-on-year. Our original guidance was that we would offset around half of that gross headwind. In the first half, we've actually offset more than half of the headwind, albeit the U.K. changes were only effective from the 1st of April. We've achieved this through lower but more productive marketing investment, improved promotional efficiency and operational cost savings. You really see the impact of our mitigation efforts in the UK&I online adjusted EBITDA, which increased 28% despite the gaming duty headwind. The full detail is in the appendix, but we have seen good savings across both marketing and operating costs, driving a much more efficient operation. International is where we are more disappointed with the start to the year with adjusted EBITDA down 20%. The reduction was driven primarily by the higher duty rates in Romania and Italy, the shift in revenue mix towards higher duty markets and weaker revenue in several markets. While these external factors have compressed gross margin, it nevertheless remains the highest margin of the group segments, supported by leading positions in several attractive regulated markets. Retail adjusted EBITDA increased 5% despite the reported revenue decline and ongoing wage and cost inflation. The decision to close shops is never taken lightly. However, in the current external environment, it was necessary to address structurally loss-making locations. The performance of the remaining estate demonstrates the benefits of concentrating resources on a more productive shop portfolio. Corporate costs increased to GBP 26 million, with the largest drivers being staff bonus accruals compared with no accrual in the prior year period, together with the timing of certain balance sheet movements in both the prior year and current year. The bonus accrual will ultimately reflect the relevant full year performance outcome. We're not commenting on current trading post period end other than to say we continue to trade in line with our expectations. Clearly, one call out worth making is on the World Cup, which was really successful from an operational point of view in terms of product delivery, commercial plans and driving customer engagement. It also exceeded our revenue expectations and provided a good springboard as we go into the upcoming football season. Turning to Slide 7 and our cash flow. This is our usual bridge, taking you from opening to closing cash, excluding customer balances. The business generated GBP 85 million of underlying free cash flow in the period, but with exceptionals and other one-off outflows, net debt increased by approximately GBP 37 million. Together with the lower LTM EBITDA, this meant leverage was up to 5.6x. Touching on a few of the key moving items. Working capital was a GBP 14 million inflow, primarily reflecting higher gaming duty accruals with U.K. duty paid quarterly in arrears. CapEx of GBP 51 million was slightly front-loaded given the retail closure program and some of our product investment, and we'll continue to be disciplined in terms of capital allocation as we go through the year, ensuring we see sufficient ROI on our plans. Exceptional costs of GBP 27 million include GBP 5 million for retail closure program and GBP 7 million for the strategic review as well as the ongoing integration and transformation program we've discussed before. Within other, this includes the repayment at par of the remaining GBP 11 million outstanding on the 2026 William Hill bonds, together with the ongoing TLB amortization of around GBP 2 million. We also paid GBP 11 million in relation to the historic Austrian gaming tax liability, where the final assessments have now been made and the remaining balance is currently being paid at approximately GBP 2 million per month. At the period end, cash was GBP 106 million, and the group had GBP 43 million of undrawn RCF capacity, giving total liquidity of approximately GBP 150 million. As Per said, we'll be disciplined with our capital allocation and focused on cash generation and balance sheet strength as we move through to completion. Finally, just to say, I think this slide and the increase in leverage really illustrates the constraints created by the group's existing capital structure, particularly following the significant increase in gaming duties. The Board considered these constraints carefully as part of the strategic review, alongside the investment required to continue improving the operating performance of the business. The recommended acquisition provides a clearer path to a more sustainable capital structure, which is an important factor in the Board's unanimous recommendation. With that, we'll move to Q&A.

[Operator Instructions] Our first question from today is from Ricardo Chinchilla at Deutsche Bank. U.K. and Ireland online EBITDA increased 28% despite materially higher gaming duties. Could you quantify the contribution from revenue growth, marketing optimization and operational efficiencies within that bridge? And secondly, international EBITDA declined 20%, while revenue was only down 2%, which specific geographies contributed most significantly to the margin compression beyond Italy and Romania due to the increases?

Thanks for that question. U.K. online EBITDA, obviously, we were very pleased with the performance there, adding GBP 17 million year-on-year. The main places that came from in spite of the headwinds of U.K. duty. We saw 4% revenue growth, and we saw a good operational gearing on that. But we also, I think, did a very good job in the first half of mitigating the duty increases. And the areas that we've really focused on to achieve those mitigations include significantly more effective marketing. Now our marketing year-on-year has dropped, but we've still managed to get that 4% growth. And that demonstrates, I think that we've been much more efficient. This hasn't just been a cost-cutting exercise. So we're very pleased with that as an outcome. The second thing place we focused on is retail closure. We've shut 70 stores in Q4 last year, 200 stores in Q1 (sic) [ Q2 ] this year. They were all loss-making stores. And so you can see in the results that retail has improved. We've improved the customer proposition, and we've also reduced our overhead. So all of those things have added to -- or allowed us to mitigate the impact of the U.K. duty and allowed us to achieve a good result in U.K. online. In international, I think the question is about margin compression, where have we seen margin compression. I think there's been probably 3 key elements to this. The first is Italy duty, which we saw increase in November last year. And then the second is Romania duty, which took a step up from 21% to 30%. And I think the third thing that's driving margin compression is that we've seen a change in mix of revenue to the higher duty and therefore, lower gross profit areas, particularly with the extremely strong growth in Denmark and Italy. Our volumes have moved over to the higher duty markets. And those 3 things are the things that are driving margin compression across the international business. I think Ricardo has some more questions, didn't he, Josh?

Yes. So next, William Hill Gaming remains a standout performer. What proportion of U.K. and Ireland growth is being driven by existing customer monetization versus new customer acquisition? And how are cohort economics trending? And group AMAs declined 6% year-on-year, yet revenue remained broadly stable. To what extent are you consciously trading customer volumes for higher value and more profitable players?

So first question, William Hill Vegas, is it coming from existing or new customers? The honest truth is both. which is good news, obviously. It's been a good opportunity. I know that the World Cup is a sports event, not a gaming event, but clearly, it's new customers to us, and that proved successful to us in terms of us recruiting new customers and those customers certainly get cross-sold onto the gaming. So we've seen both improvements in existing cohorts and new customers. In terms of actives, yes, we have seen that decline across the group. I think a couple of things driving that. One is we saw some difficult performance across a couple of our markets. particularly Romania and Spain. Romania has been impacted by significant external events, the increase in duty leakage to the black market plus economic negative growth. And Spain continued to struggle with product there, although the product has improved significantly over the last quarter. So 2 reasons there why active users has gone down. But I think the third thing, and you alluded to it in the question is we are working extremely hard, and we have been -- actually, it's been a key part of our strategy to make sure that we're getting significant value from our players and that we're driving ARPU and that we're also driving margin within driving ARPU. And those things have been effective. We've had this strategy in place now for 3 years, and it's definitely paying dividends. And it is -- the inference in the question is are we focused on driving higher value from existing players? And absolutely, of course, we are. Number one on our strategic pillars was always customer life cycle management, and this is at the heart of customer life cycle management. Is there a fifth there?

Yes. Sportsbook stakes declined 9%, but Sportsbook margin increased 60 basis points to 13.3% (sic) [ 13.2% ]. How much of the margin expansion reflects favorable sporting outcomes versus structural improvements in pricing, product and risk management?

Look, I don't -- my view is there wasn't any particular sporting luck factor in this. We have intentionally been focused on the higher-margin products, particularly Accas and Bet Builders. We've very significantly improved the product that we've got, particularly in the U.K., but also international around Accas and Bet Builder and higher-margin products. And so it's no surprise to us at all that the margin on Sportsbook has increased.

The next question is from David Brohan from Goodbody. Could you quantify the impact of the increased duties in Italy? And what is your view on potential future regulatory tax pressures in the U.K., specifically the impact of FRAs and the proposal of increased MGD in retail?

Why don't I take the first part of that? And then I think Per is probably going to take the second part on the outlook for FRAs. We're not really -- Dave, we're not really talking about second half and guidance, but I can tell you what the impact in the first half was, and it was nearly a GBP 10 million impact on EBITDA to us. We've been public about GBP 46 million impact of duty changes. We think GBP 10 million of that came through the Italy duty change. Per, do you want to comment on the FRAs?

Yes, I can comment on that. So the Gambling Commission has announced the implementation of FRAs, and it has recently made that announcement. It's going to be implemented through a stage process, which we do expect to be kicked off in the immediate short term. What the commission has initiated, which we very much are welcoming is that it's creating implementation groups in order to engage operators like ourselves. And we will obviously take an active part in working together with the Gambling Commission to make sure that whatever is coming out of the FRAs, it is proportionate. And also it is fit for purpose and future-proofing operational performance. And likewise, it's not going to have a detrimental impact from a customer experience and likewise, the regulated market. So we are actively taking part and will take part in the development of FRAs in the U.K. market. But it will happen and we are getting ready to introduce that.