FDJ United (FDJU) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for joining us for the FDJ conference call. I now hand over to Stephane Pallez, Chairwoman and CEO. Madam, please go ahead.

Thank you. Thank you very much. So good afternoon or good evening or -- ladies and gentlemen. So as was said that I'm Stephane Pallez, the Chairwoman and CEO of FDJ. And I'm with Pascal Chaffard, Executive Vice-President in charge of Finance, Performance & Strategy. So I hope you're well. We're going to comment on the press release that we published at the close of the market today. So the presentation that we're going to comment is going to be available online in the Investors section of our corporate website. We will, therefore, have a brief presentation. And we'll -- of course, we'll leave you some time to -- for Q&A session. So in terms of key highlights, I think we can say that we are in a good business momentum. We have achieved a strong first half of 2022, with revenue and EBITDA up, respectively, 12% for revenue and 18% for EBITDA. And some EBITDA margin of 25.4%, up 130 basis points. So of course, these positive results the -- illustrates the success of our games with the public and is reflected in the nearly 10% increase in stakes, which is both true at point of sale and online. We'll come back to that. But I want to draw your attention on the fact that this level also reflects a significant COVID catch-up impact. When -- particularly, you remember that nearly 10% of our point of sales, especially bars, were closed until June 2021. So therefore, we have a base effect when we compare to this 2022 semester to the first semester of 2021, particularly since these closures had very strongly impacted our Amigo games, which were down 50% in H1 2021, but also our instant games. So therefore, we have definitely this strong effect that might explain, I would say, 2/3 of the growth of the Lottery in the first half of the year. So we have, of course, a very good growth of the Lottery, but maybe even higher due to this base comparison effect. So therefore, the trends that you see, of course, cannot be just extrapolated to the whole year, but of course, we'll come back to that, especially with Pascal's presentation. I want also to strengthen that in the same -- at the same time, we've also been strengthening our CSR commitments as we always do. Of course, we've been beefing up our excessive and underaged gambling prevention. I will also come back to that. We've also been giving a specific grant to restore French forests after the big burn that we had, and we worked on our environment strategy, and especially we obtained a new carbon rating. And in terms of further developments and investments in our future growth, we also made 2 small acquisitions to accelerate the development of our payment and service strategy. We'll also come back to that. Also, I want to state, but I'm sure that you will ask questions anyway, that in fact, there were no further developments on the side of the European Commission. So of course, I'm sure you will ask questions, but actually, there are no news on that at this point. So it will be more, I think, in the first -- in the second half and that we will get more into this. So to give you little more details about what I said in terms of CSR being at the heart of FDJ's business model. So I only mentioned that we have decided to give a specific grant to the French National Forestry Office. This is in the context of our biodiversity strategy, which is actually one of the commitments that we have in our environment strategy. Of course, and this is a continuous effort, we have strengthened the prevention of excessive underage gaming, with the launch, particularly, of the large TV information campaigns entitled The Player Rules (sic) [ Gambler's Rules ] in 4 films that reminds the good gaming practices, specifically, be over 18, set a budget, monitor gaming habits with, I think, a very nice and well-done campaign. We -- of course, this is in the context of our commitments to allocate 10% of our advertising and promotional campaigns budget to responsible gaming campaign, which means actually a significant increase as of 2022. We have also strengthened our initiatives to fight against underage gamings in our retail network. This is very important for our regulator. It's important just because it's the law. So we have -- we are conducting a new campaign to control our point of sales. We have a new information for the public, and we have applied some sanctions to our retailers to definitely enforce this law. And as I said, we have developed our environment strategy. And we have been recognized as being part of the very good company by a new index that has been published recently by Vérité 40. So to turn to what I said in terms of acceleration of our strategy in payment of services, I want to explain you a little bit in the context in which we develop this strategy. As you know, this is 1 of the 3 diversification activities alongside international B2B and entertainment in which we invest to get future growth, future profitable growth. We have already started to develop this payment and service business, with a clear ambition to become the leading proximity payment and collection network in France. We have -- we are using our assets. Of course, our large network of 30,000 points of sales, our know-how in transaction management. We have, as you know, in 2019, won a tender to be the partner of the French Treasury to offer a point-of-sale payment services that has been developing quite well since we have 13,000 points of sales that distributes this service. And we aim at extending this service to other private billers such as water and energy supplier and landlords. We have all the authorization also granted by the French regulator, ACPR, and we have created our own brand to develop those services. We had the opportunity, and this is what I want to mention now, to acquire 2 rather small but interesting assets to complement our internal assets, particularly to be able to provide point-of-sale system to our network. And to complement the network to which we can develop these services with an extended network, cafe, hotel, restaurant, that is quite comparable. So we acquired Aleda and L'Addition. We actually just signed those acquisitions. Aleda is a specialist in payments and collection equipment and services for local business, notably tobacconists, bars and newsagents. And L'Addition is a specialist in payments and collection equipment and services for cafe, bar, hotel and restaurants. Those acquisitions will be completely definitive in the next weeks, and we will integrate them in our strategy. To answer already to one question you might have, the total amount of those acquisitions is a little above EUR 50 million for both of them. So it's not transforming acquisition, but it's a nice way to strengthen our expertise and capacity to develop those services in the short term. So now I will hand over to Pascal that will comment more deeply on our financial figures for this H1. Thank you.

Thank you, Stephane. And good evening, everyone. Let's have a look at the key figures of the first half. Revenue rose by 12.1%, more than the [ current stakes ], which rose by nearly 10%, which is a drop in the player payout ratio to 68% from 68.7% a year ago. And this decrease is totally attributable to Sport Betting, which I will return to later. EBITDA, it has been said by Stephane already the level of the EBITDA. I don't reiterate again. And as Stephane mentioned, in addition to our historical normative growth trajectory, if I may say, this very good performance reflects also a favorable comparison. This is linked to the health context in the first half of 2021, which was still considerably disrupted. Now let's look at the performance of each business in detail. For Lottery, the plus 17% increase in revenue to EUR 946 million is based on identical growth in stakes, supported by both draw games and instant games. Stephane spoke to you earlier about the COVID catch-up. We estimate that over 2/3 of the growth in Lottery is attributable to this, most of the Amigo growth and the part of instant games growth also. The remaining 1/3 is attributable to the sole success of our [ games drew by ] marketing initiatives, both on draw games, including new revenues with boosted jackpots and instant games with the launch and relaunch of games, notably Cash, the most emblematic of the range in February. Draw games were up 19%, driven mainly by Amigo. And if we exclude Amigo, growth rates were up by a low single-digit figure. And instant games increased by 15%, also benefiting from 2021, which is impacted by U.S. closures. For Sports Betting, the decline in the player payout ratio to 75 -- 76%, sorry, versus 75 -- 77.5% in H1 2021, explains the variation difference between revenues minus 5% and stakes minus 11%. This player sales ratio is one of the lowest recorded on the semester. The change in stakes mainly reflects 2 things. First effect is a high comparison basis due to UEFA Euro Soccer Championship, which started on June 11, 2021. Excluding this, Q2 2021 stakes would have been nearly unchanged. The second effect is the less busy schedule and less attractive offering in H1 2022, amplified by a low player payout suffered from December 2021. Globally, in France as well as internationally, the current online sports betting market dynamics softened. You may have seen the recent financial communication from certain of our peers. The good news for FDJ is that end of May, figures on our online sport betting were about 10 points ahead of the French market, so we continue to gain market share. Given the World Cup at the end of the year, already Q3 with a busier schedule than usual on football. And then Q4 will be key to determine annual performance. It's a good thing for us to enter the second half of the year with the player payout level that will allow us to have an attractive offering over the competitive period. This is a very good thing for the second half. The growth in stakes of nearly 10% was driven both by point of sales and online channels. In point of sales, stakes grew by 9.8% with a return to normal, both in terms of footfall and number of point of sales open. On Lottery, the increase in point-of-sale stakes was higher than we had anticipated. Online stakes grew by 9.1%, representing 12% of total stakes. After being stable in Q1, in Q2, online stakes were strongly up compared to Q2 2021. We said that we expected Q2 will be much better than Q1, and that's what's happened. The rebound in Q2 online lottery stakes of plus 31% visible in the graphic on the right is entirely driven by the growth in the number of players. It means a healthy growth over a rolling 12-month period to the end of June 2022. More than 4.5 million players have played 1 of the games offered online. The overall momentum in Q3 should continue to be strong. As you know, online lottery benefits from a very good elasticity of stakes in high jackpot levels, especially EuroMillions. And when we have seen -- and we have seen this again in recent days with EUR 230 million jackpot leading to a year-to-date online lottery stake growth above 20% end of last week. For Q4, the comparison basis is more challenging. Q4 2021 has benefited from exceptional long cycles, so we will see. We saw in the key figures that EBITDA increased by 18%, represented a margin of 25.4% up 130 basis points. Let's see how the main cost items evolve in H1 2022. Cost of sales are mainly made up of retailer commissions, which increased by 10% to EUR 474 million, in line with point-of-sale stakes. Marketing and communication costs include advertising, communication costs and as well as those related to the development of the games and service offering. It is these last components that largely explains the overall 16% increase. And the tight control of our general and administrative expenses is reflected in the decline of 4% of those costs. In the second half, the Football World Cup in November, December should result in higher payer payout ratio than in H1, higher marketing and communication cost, too. A World Cup is an investment period to recruit new players and gain market share. The costs will be visible in 2022 and the return in 2023 with the value added by the new recruited players. Moreover, the new sponsoring deal with PSG is beginning in H2 also. So we anticipate also higher cost in -- of sales in H2 with the beginning of the deployment of the new visual identity in our point of sale in comparison [ for industrial activity had ] not totally resumed in H2 2021. And we will reinforce our investment in IT context of the development of the omnichannel experience. And also in our Acceleration Business Unit is at a higher level than before. For example, we'll prepare to enter to new tenders with extended operation service portfolio. So now let's have a look at the breakdown of EBITDA by business units on the left-hand side graphic. For Lottery, the contribution margin is EUR 346 million or a rate of 36.6%, with a rebound in advertisement and promotion better distributed throughout the year than last year. For the whole full year 2022, Lottery contribution margin should be close to the H1 level that's above the 35.9% of 2021. For Sport Betting, the contribution margin was EUR 69 million, hence, the rate of 29.5%. This cannot be extrapolated over the year. As we said it before, the player payout ratio in H1 is low, and it will not be the same in the second half of the year. And in addition, we will have some specific advertising information costs for this World Cup and also the launch of our book offer in second half. Acceleration Business Unit contribution margin is negative by EUR 10 million, and all the costs are broadly stable at EUR 97 million. If we now look at the year-on-year EBITDA margin bridge -- sorry, on the graphic on the right, we see that the EUR 48 million increase in EBITDA, EUR 48 million obviously, between H1 '21 and H1 '22 is mainly driven by Lottery. Let's now detail the EUR 308 million EBITDA bridge to the net income of EUR 160 million with mainly 3 items. Depreciation and amortization, cost of EUR 63 million are stable. The financial result deficit is -- of EUR 22 million reflects the highly volatile financial markets. Thus, the valuation of the group's various financial assets at fair value generated a negative effect of EUR 20 million in the first half of the year compared with an income of EUR 3 million in the first half of 2021. We had EUR 14 million on the bond portfolio, EUR 8 million on the equity and EUR 2 million on the diversification portfolio. Importantly, more than 1/3 of this mark-to-market is attributable to delegated bond funds, which the group intends to hold until maturity during 2024, in which case, there will be not any impairment finally. And the tax charge of EUR 58 million implies a tax rate of 26.8% that can be extrapolated over the full year. Before commenting on the slide, I would like to remind you that it's not appropriate to extrapolate the half yearly net cash surplus over the year as there is a strong calendar impact at the end of the year with an advanced payment in December for the public levies for the month in addition of those for November and a possible accounting for a large price not yet paid. You know this bridge. Now let's go -- let us go through the main points. One of the indicators of the group cash position is a net cash surplus, which is EUR 891 million at June 30 compared to EUR 915 million -- EUR 916 million at December 31, 2021. Our available cash still stands at a very high level of nearly EUR 900 million. And after considering our other investment securities and our gross financial debt, the net cash surplus reached an almost identical level close to EUR 900 million. So thank you for your attention. And Stephane and I are now available to answer your questions.

[Operator Instructions] And we have our first question from Ed Young from Morgan Stanley.

I've got a couple. First one is on -- you said that you're not changing guidance for the year at this stage, given uncertainty in H2. That's obviously understandable. One of your -- elements of your guidance is growth of online stakes above 20%. It was obviously a bit below 10% in H1. So are you essentially expecting a similar kind of growth you saw in Q2 for the rest of the year? And yes, you've got some comps here and there. But is that the right way to think about -- you're basically expecting plus 30%, that's where that guidance still stands? Or was your comment around the guidance more around the revenue growth and the EBITDA margin?

Okay. So maybe to start, as you as you rightly understood, so we're not changing our guidance because -- well, because we think that there are, as we said, some elements of comparison in the first semester that you have to identify. And therefore, there is no reason, again, to extrapolate what we have in first half to the second half. Second, because there is -- I would say, as for any business, even if we are a business that has been -- used to be not very sensitive to macroeconomic environment, there are some incentives that are too high today to -- I would say, to take a firm view about what's going to happen. In terms of digital, I think that you have seen -- I think this is something that you have to take into consideration that our growth on lottery online stakes can be quite different from one quarter to another one because it is still quite well -- quite directly related to the growth of some of our digital offers. And specifically, to the loan cycle that we get or not in -- for Loto and EuroMillions. So we have here some elements of uncertainty also in terms of prediction of the rates quarter-by-quarter, which, of course, are mixed with comparison effect when we compare 2 quarters, when we add that type of effect. So all in all, what we think is that we are still in the type of growth -- we're still aiming at the type of growth that we have in our guidance for the whole year. But with that type of volatility, I would say, from one quarter to another one, with obviously quite a quarter in -- on this one, second one with over 30% growth, we are, of course, aiming at continuing at a dynamic trend for the third quarter. For the fourth quarter, we have a quite strong base to compare with. But at this stage, we believe that there is no reason not to continue to aim for that type of 20% growth, which is a kind of midterm guidance that we are aiming at anyway. Pascal, you want to complement that?

I can complement on the EBITDA margin, you talked about also. The EBITDA margin will be a little bit less high in the second half because we will have an effect on the sport betting activity. We have a particularly high margin in the first half, but it's not a good -- it's not the right way to think about this margin because it's a margin made of a very low player payout and also a low cost. And in H2, we will have, we think, higher player payout due to the World Cup, especially, and also more expenses due also to the World Cup and the launch of the poker. So this will have something like 1 point of margin effect in the second half. But really, the first half is exceptional. It's not that the second half is questionable. It's more that the first half is exceptional. And also, we have the usual effect that our margin in H2 is always a little bit lower than the margin in H1, something like 0.5%. And we also have some costs in H2. For example, we are beginning to deploy our new visual intensity in our point of sale. It will begin in September. It will cost a little bit. And we are also continuing to invest quite heavily in our IT and in our road map for diversification activities. So we are confident that we will be at the level of the guidance, which is, if you recall, more than 30 -- 23.5%, but it's too early to say if we would be higher. And we think we -- it will not be possible to be a lot -- much more higher on the -- on our revenue. We will have a clear view at the end of Q3 to know how we'll react to our customers in September. And I will react to the sport betting market when the championship will resume in August to September to see what is the dynamic of this market, and if we can extrapolate a little bit more than we have in our guidance. But it's too early, really too early to commit on something that will be higher than our guidance.

Understood. That's really useful. I guess what I'm reflecting on is that your online -- or your digital mix actually very slightly reduced in the half and yet you had very strong margin growth. You called out a lot of reasons, Pascal, all the kind of moving parts to think about. But if you are going to be doing ballpark 30% growth in online in H2, presumably your online mix is obviously going to go up. Wouldn't that also be reducing your cost of sales mix, wouldn't that be sort of accretive to margins? I'm just trying to think about what kind of impact that will have if it's sort of online and sort of behaves in terms of growth as you expect.

On -- we -- yes, you're right, the online mix when it is better is good for the margin. But as you see in H1, we had also some other things that are good for the margin. For example, the growth in point of sales, which is really interesting also in terms of margin. On the online margin, what is also important is to see that we are doing a lot of efforts to recruit new players. And it has a certain cost also. So it has to be seen not quarter-by-quarter, but on the global trend. This is what we explained when we explained our midterm guidance. It's really not to be seen quarter-by-quarter, I think it's not the right way to see it.

Okay. And then a final question. Just wondered if you could talk a little bit more about poker. I think you were reticent to say much at Q1 because there was various things yet to be finalized, but obviously, it's launching in H2. You mentioned there will be some marketing cost attached to it, but I just wondered if you could give a bit of a view over your ambition to that business, what you expect and just, for us, how to think about how that might affect the shape of your -- I guess, it will be booked within Sports Betting Business?

You're talking about poker, online poker. So I think what we announced and it is still absolutely the case is that, yes, we are working to be able to have an online poker offer that would be up and running before the end of the year. So it's not going to -- I think, to change our business for this year. It is really a midterm strategy that we are putting in place in order to be present in a more comprehensive way on the online market and particularly to be able to -- I would say, to manage and retain our customer in a more efficient way. So we'll give, of course, more details when it will be launched, but it won't be material in terms of, I think, business very much ahead of the end of the year. But it will be done definitely before the end of the year.

So we have another question from Kiranjot Grewal from Bank of America.

Just a couple of questions from me. Firstly, on the cash, I know you've been aiming to do an acquisition. If you still don't find something which is suitable, what do you think you'll be doing with the balance sheet? And then can we talk about inflation and, particularly, cost inflation? I realize given your sort of point-of-sales model, it puts you in a relatively better position to deal with inflation. But as you focus on online and growing out that business, how are you seeing cost inflation developed there?

Okay. So on the -- I think your question on cash is a -- kind of a classic question. So we are going to give you a -- kind of a classic answer, if I may. So we are -- at this point, we are still actively pursuing some -- I would say, some opportunities that we might find to use our cash and balance sheet in a profitable and strategic way. So we are still on that base, and we have not changed. I think we also explained in a previous call or meetings that we have -- given the level of our accounting reserves, we don't have anyway much margin to redistribute a large amount of cash given the structure of our balance sheet and accounts, and we could come back to that. So basically, there is no change to that. And no change in visits at this point. Of course, we'll come back to that, and you will ask us to come back to that in the next meetings. But at this point, no change to our willingness and optimism about our capacity to invest in a profitable way the level of cash that we are generating. To your second question which is about inflation, just maybe one note to -- just to say that at this point, we have basically no direct impact on inflation. Not to say that we're not going to get some in the future. So actually, we are more working on assessing what -- the potential impact that it might have in 2023. Why are we protected at this point? It's -- well, first, because inflation is definitely lower in France than in other European countries and in the States. So I think we don't have exactly the same type of impact -- of potential impact. Second, because our business is, I would say, in -- our costs are not in majority directly impacted by inflation. And third, because the parts of our costs that are impacted by inflation are, at this point, have been protected by the type of contracts that we have specifically with our providers of tickets. So again, we might get some impact, but not at a very high level, and they are not visible yet. I don't know, Pascal, whether you want to comment.

Yes, it's exactly that. It's very low in 2022. In 2023, it will be a little bit higher, but it's manageable and it's -- it is not putting in danger our guidance, our midterm guidance, clearly. And maybe to -- once we -- maybe another reason why we are less -- more protected than other business, in France, there is quite a protection of customers. And with a recent law that has been voted to protect the people from the impact of inflation. It will cost a lot to the government, principally on -- in energy. So we think that it's quite an important view when you compare the French context to other context in other countries. And our Lottery Business, at least as demonstrated, is relative resilience in the past on economic crisis. Maybe we have to be more cautious about Sports Betting, and we will see in the next months. But to date, no impact.

So we have another question from Andrew Tam from Redburn.

Just tacking on that last question on inflation. To what extent do you have the ability to pass on price rises on your tickets? Or are they on fixed contracts as well? That's my first question.

So I think in our business, there is no -- well, first, as we just said, it will be a little bit strange to have answered that we are not very much impacted by inflation in our costs and to argue to pass it to our customers. So that -- I could stop here at this point because it would be quite, I think, difficult to explain. In our business, I think we have a range of different games with different prices. And in fact, people do not buy one product, they actually buy several of our products. So I think if we were to -- just to pass inflation on one type of our product, it would probably have some consequence on the whole basket of products that people are buying through us. So I don't think it's really -- first, again, I don't think there is much sense in doing it at this point. And I'm not sure it would be a good strategy. So that's where we stand at this point.

The concept of price in our business is kind of different. There is no price, it's a relation between win and death. The price is [ the player part ], so it has not to be taken like other businesses. The question is whether our customers can -- if the value of the currency is going lower, are they able to adapt the volume of the euro that they put in our activity? And the answer is yes. The answer is yes on draw games between -- because a single bet slip on draw games is EUR 2 or EUR 2.5, depending if we talk about EuroMillions or Loto. And on other games, it's from EUR 1 to EUR 5, so they can adapt the price. On scratch cards, they can choose between tickets that are at a price of EUR 1 to EUR 10, so they can change their baskets as Stephane explained. And in Sports Betting, it's even better because the customer is choosing the level of bets. So we can adapt the level of bets. So we -- you cannot see this activity as a classic activity regarding impact of inflation.

Sure. Another question just on your guidance. Obviously, with this stronger first half, just to touch on Ed's point, obviously, firstly, is it fair to say that the second half will be weaker? And then if I wrap in your comments around continued momentum around the Lottery Business, is it fair to say that a lot more weakness will come through that Sports Betting Business then, specifically in the second half, despite the fact that there is going to be more activity in the space with the FIFA World Cup? Is that a fair comment?

Yes. The first half was quite weak Sport Betting and a very strong Lottery because also of the COVID catch-up. Second half will be more of the opposite. It will not be a weak Lottery but a weaker growth on Lottery because we will compare to an exceptional Q4 2021. And on Sports Betting, we expect a larger growth in the second half because we expect growth in the [ global -- here in the stakes ] as we are minus 11% at the end of a few -- of H1. It means that we expect a quite important growth in H2. You are perfectly right. But as Sport Betting is 20% of the total activity, the global mix, that will be a weaker level of growth in second half of the year. But it's not a problem, it's just the way the year is distributed.

And so how much -- you also mentioned "macro uncertainties" in terms of maintaining your guidance. And how much of that would potentially relate to potentially softer lottery sales heading in towards the back half of the year? Are you seeing any of that to date?

So -- again, as we said, when you -- first, we're not seeing any effect of that as of today. I think that's one. Second, when we turn to the past, actually, to a long historical series, we have not seen that relationship between lower growth and lottery sales in the past. However, we are -- I think we are cautious because we are entering, I think, into an environment that, in fact, is not easy to compare to other periods, with, as you say -- as you see higher inflation. And no one knows exactly how much -- how high it will go and how long it will last. Moral of the consumers is -- seems to be lower today. Again, even though we don't see any sign, as Pascal was saying, actually, we don't expect that to be much visible if it were -- if it would happen in the lottery. We believe sports might be a little bit sensitive to that environment. But actually, at this point, again, it's very difficult to see some impact of this in our current figures or activities. So it's really because as a lot of companies, we have very good results on one side in the first half, but we believe that the environment is changing very rapidly, so that's where we should be made cautious before thinking that things are -- will just stay the same.

So we have no further questions. [Operator Instructions]

Okay. Well, if there are no other questions...

I'm sorry, we have another question, but...

Oh, we have another one. Okay. Sure.

Yes, yes. But I don't have the name of the attendee. So introduce yourself and ask your question.

Yes. It's Simon Davies from Deutsche Bank.

We don't hear you. We don't hear you. Sorry.

Can you hear me?

Yes. Now yes. Now yes.

It's Simon Davies from Deutsche Bank. Just a couple of quick ones from me. You talked about the World Cup in sort of negative terms, i.e., reduced margin and higher marketing costs. But presumably, as an event, it should be accretive in the fourth quarter. I mean historically, the guidance has always been -- it's like the equivalent of an extra month of trading. Do you think that is a reasonable guide in terms of the level of staking you would expect from [Audio Gap]