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 Pascal Chaffard, Executive Vice President of Finance, Performance, and Strategy. Please go ahead, sir.

Thank you, and good evening, ladies and gentlemen. You might have read the press release published after the close of the market. And this presentation is also available in the Investor Relations section of our corporate sites. I'm very pleased to comment on our activity for the third quarter to the end of September 2022, and I will present our adjusted upward guidance for the whole year. My presentation will be brief, yes, to allow as much time as possible for the Q&A session. So let's move to Slide 3. The good trend observed in H1 continued in Q3 with a 12% increase in revenue, both in the quarter and the first 9 months. I will comment now on the Q3 early revenue amounted EUR 592 million. And not -- sorry about that, EUR 529 million. There is a typo at the end of the first page of the press release. Sorry again about that. The Lottery revenue increased by 14%, supported by an imported number of high jackpots on EuroMillions compared to a low Q3 2021 comparison basis. For the record, we call high jackpots, those over EUR 75 million, and we had 16 of those in the quarter versus 6% in 2021, same quarter. It's not -- it's important to say that it's not just a matter of luck, but above all, the result of the marketing work and the mechanics of the game that we have so much a high number of high jackpots because in some cases, we create those jackpots by adding EUR 130 million jackpot created by us. Sports betting revenue was stable after an H1 decline of 5%. We told you in July at the offer stage that we had to wait and see how activity would play out with the redemption of the championships from August. Well, the printers are there when games offering is attractive, and I will come back to this a little bit later. Stakes were up 6% point of sales and 35% online, and we are really delighted with this performance. It's important for us to continue to record growth at point of sale, even if online growth is, in essence, much faster. Over the first 9 months now, revenue increased by 12% also to EUR 1.8 billion. I would like to remind you that we have benefited from a significant catch-up effect in lottery in H1, estimated at nearly 2/3 of the growth with all point of sales opened in 2022, while 10% of them were closed in the first half of 2021. Based on our performance at the end of September, we now expect revenue growth of more than 8% and an EBITDA margin around 24% for 2022 as a whole. Before covering the details of these figures, a quick comment on the fact that revenue growth is stronger than the growth in stakes. In Q1 alone, the player payout ratio of sports betting was stable, but that will also decline by 1.2 points because the mix was more skewed towards draw games, as LOTO and EuroMillions grow rapidly. Over the first 9 months, the lag between revenue and stake growth is due to both lottery and sport betting player payout ratio. On sports betting now, the 9-month player payout ratio is 1 point lower than 2021. And this situation is good for FDJ. We have saved player payout before the World Cup, as we know that this kind of event usually drives a higher level of player payout. It's important for us to be competitive during this competition, which is key for recruitment. Let's now consider the Q3 details by activity, lottery, and sports betting. The 12% growth was driven by lottery with revenues up 14% to EUR 478 million. At the H1 stage, we told you, as I said before, that 2/3 of this growth in lottery was related to COVID catch-up. In Q3, this catch-up phenomenon has faded, with only a minor impact on the sedentary path, but it's really minor compared to what happened in H1. The growth is driven first by draw games, plus 17%, which benefited from many EuroMillion jackpots as I have already commented before. Instant games also boosted dynamic growth of plus 7%, thanks in particular to the success of the different launches and relaunches of our games. We already talked about Cash in February, but other games as X10 or X20 in June and also the fifth edition of Mission Patrimoine in August have been a big success. I will talk about the dynamics of online lottery in a couple of slides. If now we look a little bit at sport betting. Sports betting revenues were stable in Q3 at EUR 97 million. July suffered from a high 2021 comparison basis with the end of the Euro to both championship. But since August, notably thanks to the beginning of the different European Football Championship, stakes have grown by 9%, 9% on August and September. This is really very good news after a difficult H1. The growth is back and stronger as a point of sale and even stronger online. On the 9 months revenues, the increase is 12%, EUR 1.8 billion on the basis of stakes up 9.5%. This performance reflects that of lottery with stakes up 15%. In sports betting, H1 decline in activity was greatly reduced after the good recovery observed in August and especially September, as I have just mentioned, with a strong Q4 with the FIFA World Cup, we expect that H2 will globally erase the decrease of H1 on [indiscernible]. If we take a look now at the details of stakes by distribution channel, in both Q3 and over 9 months, our 2 channels are growing nicely at point of sale, first plus 6% in Q3 and plus 8.5% over 9 months. Even without the COVID catch-up already mentioned, this growth reflects good intrinsic dynamics of games and the health of our 30,000 point-of-sales network point of sale network. On the online, the growth is very strong, plus 35% in Q3 and 17% over the 9 months. In Q3, online stakes accounted for 13% of total stakes compared to 10.5% in Q3 2021. Over 9 months, they represented 12% of total stakes against 11% for the same period 1 year ago. Online lottery was very dynamic, which stakes up 39% in Q3 and 22% over 9 months. In Q3, online lottery stakes represented 12% of the total lottery stakes, 2 points higher than year-on-year. And important to mention that this performance is totally responsible as almost exclusively based on the increase in the number of players with nearly 5 million players in the 12 months to the end of September. The player base expansion has obviously benefited from a favorable context in draw games, especially EuroMillion, which I already mentioned, which is an important recruitment tool for the lottery. For sports betting, we do not yet have the market data for Q3, but players online, which has largely outperformed the market for the last several quarters, recorded a very strong increase in Q3, probably outperforming the market again that we will have -- we'll be sure of that in a few weeks, but I think we have beaten the market. Now if we look at our financial performance at the end of September, it came in higher than expected, and the overall environment remains favorable so far despite the difficult economic environment. To date, we have not seen any impact of a potential drop in consumption related to a reduced purchasing power from customers in France. During our IPO roadshows, we explained that we were a resilient business as cyclical, we said, based on more than 25 years of continued and steady growth of FDJ. For example, the 2008-2009 financial prices had no impact on the FDJ activity. In 2008, stakes slightly decreased. It's right, but it had nothing to do with the financial quests. It was in relation with the impact of the smoking ban in our point of sales. And in 2009, gross return strongly. Nevertheless, the 2022 environment is not comparable with the 2008 crisis. I cannot say that we will never have any impact. But we know that LOTO business is based on a large number of players with a small spend per player, reducing the risk of consumer arbitrage on our business. During the fourth quarter, FDJ will benefit from the FIFA World Cup. But for lottery, the year-on-year comparison basis is very high with numerous high jackpots in drug games in 2021. Our Q4 projection reflects revenues almost stable with stakes up 5%. This gap between stakes and revenue is explained by an expected increase in the player payout ratio attributable to both sport betting with the World Cup and lottery with a more balanced mix between draw and instant games. Thus, over the entire year, we are really happy to adjust upwards our initial forecast, and FDJ is now anticipating an increase in revenue of more than 8% instead of 5% that we said at the beginning of the year. This growth will be entirely attributable to lottery, about 11% growth. Half of the growth of lottery comes from COVID catch-up and also from what we can call our normative growth pace of a little bit more than 5%. The EBITDA margin will be at the end of the year, close to 24% instead of more than 23.5% that we announced at the beginning of the year. This exceptional level of growth and especially EBITDA margin is the result of both the online momentum and we know that online lottery is accretive, but also the result of point-of-sale operating leverage with a significant marginal contribution. This shows also that FDJ's performance should be analyzed on a medium-term perspective rather than only on a quarterly basis. We will have the opportunity to come back to our medium-term perspective, our strategy on lotteries for betting, online gaming, international, our environment, our performance, including extra financial performance during our Investor Day that we will organize and you can already pencil your diary for November 17 from 4:00 p.m. CET. It will be [indiscernible] by physical and online to allow a maximum of you to attend this event. And thank you for your attention, and I'm now ready to answer your questions. Thank you.

Thank you. [Operator Instructions]. We have the first question from Leo Carrington from Citi.

Firstly, on online mix, clearly going in the right direction. How much of this is the organic natural change in consumer habits and how much is to do with your own marketing efforts? On the same point or a similar point, can you just confirm the launch of Poker is still on track, pre-World Cup? And then second question, the ZEturf acquisition. Can you just expand on the specific appeal of this and also confirm the approximate consideration? I assume it's all cash that you would pay for this acquisition.

Okay. Thank you for your questions. It's hard to say which part is from organic natural change and which part is from marketing efforts. It's both the 2. But if I may say, without marketing effort, we cannot really leverage the natural organic change. What we see with the -- for online lottery on the quarter, 39% growth. It is driven by the appeal of the EuroMillion jackpot that, as I explained, we organized the game to have those jackpots to drive people to our offer and to play to our games. This is why now we have something like 5 million people playing on an annual basis to our games online. I think that if we don't -- if we are not good at marketing, we would not have this kind of growth. It's not enough to rely on the natural change to capture new clients online. It's an effort because they have to give their IDs. They have to put their CB card, et cetera. And they will not do that if it's not easy if we don't have a good experience online, it will not possible to do it. So I think, yes, there is a natural change, but if we don't accompany it by a really good marketing, marketing team and also good games, it will not possible. So I think a big part of that is due to the quality of the marketing team of the FDJ. And we are confident that we will be able to continue to have this double-digit growth on online lottery. On sports betting, it's -- we have a good pace of the market coming back in Q3. I don't know exactly, as I said, the numbers that will come from the market. But I'm quite sure that we have beaten the market on Q3. And the question is how FDJ is able quarter after quarter to beat the market. It's because we have invested on all the capacity that is important for the customers to find in our offer, a good offer, good odds, a good experience, and so on and so on. And we are better and better. And this is why we are able to have this gain in market share on sports betting, and we will continue to do so to continue to improve. To answer to your question on Poker, yes, we still aim to launch Poker before the end of the year and before the -- even before the beginning of the World Cup. It will be set by the end of October to the decision of the regulator to authorize us to do Poker. So yes, we will do so by the end of the year, for sure. And on ZEturf if the closing -- maybe ZEturf, we have to precise something. We are still in exclusive negotiation and we will give you some more information when we will talk to you in the Investor Day on November 17. But let's assume that this exclusive negotiation leads to a signing and leads to closing if it would have been done today, we would have financed that with our cash.

The next question comes from Eddie Young from Morgan Stanley.

The first one was on the sports offer. I think historically, you've talked about liquid acquisitions because you felt like there was -- the offer for sports was about the level of some of your peers, but you were quite positive there that you talked about the offer, the investment you've made. So do you think you've caught up on a stand-alone basis and any acquisition will be bonus or expand into new verticals like horse racing? Or do you also think there's a capability improvement that you can see? My second question was just to clarify. You said you are creating opportunities for these large jackpots. Do you seem to be in terms of game design and payout levels that you're designing games to have more long cycles? Or was I understanding you're suggesting there was some overlay you are putting in to stimulate some of these? That's not what I understood, but a double tech that. And then third of all, the routine question, please, if there's any update on the EC investigation.

Okay. Thank you for your question. So yes, you're right on the sport offer. We can say that we are at the level of the market at a good level today. We have improved on every aspects of our offer. And this is why our market share is growing since our market share is not at the level of the best of the top 3 of the market. If we go to the end of our acquisition with ZEturf, it will improve our market share in sports betting and also give us the capacity to operate on another vertical of what is allowed in France on online gaming, which is horse race betting. And as I commented with the previous question, we will also have a Poker offer. And we think it's important to be a winning actor on this online gaming activity to have a presence on the 3 activities authorized in France, sports betting, poker, and horse race betting. And we will achieve that if we go at the end of our were in negotiation with ZEturf and when we will have launched Poker. So we have a good basis, and we will have a good level, a good scale. It doesn't mean that we are not interested by growing again more rapidly and doing some complement M&A. As you know, this activity on mind gaming is an activity that is a scale activity. There is a lot of consolidation in the world and in Europe on those type of activity. We are only present in France. So we will look at other opportunities to grow faster in France, if possible, and out of France if possible also. So we think that we will arrive at a good level, but still, if we want to have more scale effect. If we want to have a more important place in this activity in Europe, we will have to continue to look for opportunities to grow. Question about EuroMillion. Clearly, we don't have overlays on EuroMillion so no risk on EuroMillion. What we have done with the mechanic of the game is to monitor how fast the level of the different steps between the different level of jackpots are going, how fast it is growing, how the jackpot is growing, and this is a question of mechanic of the game. Other thing 2 years ago, we have modified a little bit the game to make less probable the fact to win the higher jackpots and to have more opportunity to have draws without winners. So we have -- we have more high jackpot because we have less probability to have a winner. And the third thing is that we have invented some years ago, and it's a very good opportunity, some percentage on the game that are allocated to the capacity to organize high jackpots by ourselves, the community all in all not only FDJ but the community all in all. So 3 to 4x a year, maybe 5x sometimes, we have the opportunity to have what we call the mega jackpots. Jackpot of EUR 130 million that we propose directly. It means that we are directly above EUR 75 million. We are directly at a high jackpot level, and it's more probable that we arrive to something like EUR 200 million when you -- when the first step is EUR 130 million, then if we come down from EUR 70 million. These are all the -- all what we have done by them in what I call the mechanic of the game. And really, it works very well. Update on the European Commission, sorry, no update. So this is the same story we told when we disclosed our H1 results. I'm afraid that we will have all to wait until first half of 2023 to have a decision of the European Commission. But still, I say it again, we are -- we think that we are in a good position that we have good arguments. So we -- it's no problem. We are confident, sorry for this. We are confident, but we had not have any news flow on the European Commission.

The next question comes from Jaafar Mestari from BNP Paribas Exane.

I've got 2, if that's okay. Firstly, on the guidance upgrade. In H1, you beat consensus EBITDA by EUR 35 million. You didn't touch the guidance and today you're increase...

Sorry, Jaafar. Sorry, we cannot hear you very well. Is it possible to maybe on [indiscernible]? The line is poor.

Is that a little bit better?

Yes, a little bit better.

Apologies.

If you can just repeat, sorry about that.