Flutter Entertainment plc (FLUT) Earnings Call Transcript & Summary

Good morning, and welcome to the Flutter Entertainment Q1 2023 Trading Update hosted by CEO, Peter Jackson; and CFO, Paul Edgecliffe-Johnson. [Operator Instructions] But now I will hand over to Peter.

Thank you, Jess. Good morning, everyone, and thank you for joining our Q1 trading update call. I'll take the opportunity to run through the highlights from our trading update and then host our usual Q&A session. However, before I start, I'd like to welcome Paul Edgecliffe-Johnson, who is with me here this morning for his first trading update since joining as CFO in March. Paul's experience in driving long-term sustainable growth and in strategically allocating capital positions us well for our journey ahead. It's been great to see how Paul is settling into the business, with a very busy couple of months out and about meeting the divisional leadership teams across the group, including trips to Australia, America and all around Europe. Our call this morning provides a great opportunity for Paul to share some of his initial observations as he's been getting to know our people and businesses. Firstly, however, I'd like to talk to you about some recent developments of the group before touching on our Q1 performance. Last week, we welcomed the publication of the U.K. white paper, which has set out the government's framework for safer gambling in the U.K. We believe this is an important and necessary development for the industry to ensure all operators raise standards and make responsible play a priority. We at Flutter have already taken a leadership position on safer gambling across the group in recent years. Positive play is embedded at the heart of our strategy through the Play Well pillar of our sustainability strategy of Positive Impact Plan. To demonstrate how important this is to our future growth, we've set ourselves a challenging target to have 75% of all customers using a Play Well tool by 2030. And I've been really pleased with the progress we've made to date, with usage of over 40%. In the U.K. and Ireland, our Affordability Triple Step approach and proactive steps to build a more sustainable business have meant that our customer base has materially changed in recent years to be far more recreational. We've led the industry in this area as evidenced from our performance in the U.K. and Ireland in recent quarters. There will be a number of subsequent consultations. However, importantly, we believe that the white paper provides a clear framework to understand the impact on our business. We've assessed this as a potential GBP 25 million to GBP 50 million EBITDA impact, with half in 2024 and the rest in 2025, largely as a result of the proactive actions we've already taken. We look forward to further contributing to the process, along with the industry, the government and the Gambling Commission to develop a sustainable framework for the future. Last week, you may have also seen that the resolutions have proved the addition of the U.S. listing to the Flutter Group received overwhelming support from our shareholders at our AGM, with 99.99% voting in favor. We expect to add our U.S. listing at the end of 2023. And over the coming months, we'll be considering our approach with respect to our existing Euronext and London listings. We will provide an update in due course and have no further comments on that today. Turning now to our quarterly trading update. Our Q1 trading was excellent, delivering 29% revenue growth on a pro forma basis as we continue to execute against our strategic objectives of delivering profitable growth in the U.S., growing our gold medal positions and investing for leadership positions across international markets. A 46% increase in average monthly players, or AMPs, to 12.3 million underpin this revenue performance as we continue to focus on recreational growth. We believe these numbers demonstrate the benefits of both our clear scale advantage and the benefits of the Flutter Edge, empowering our brands to win in their respective markets. This has translated to very pleasing market share gains in our key markets, including the U.S., one of our newest, as well as the U.K. and Ireland, one of our most mature. Looking at each of our divisions in a little more detail. In the U.S., the 3 tenets of the FanDuel Advantage we talked to you about at our Capital Markets Day in November, sustained our strong performance, with revenue up 92% including sportsbook revenue up 147%. Importantly, growth in existing states, i.e., those that launched pre-2022, was also very strong, with revenue almost doubling in the quarter. Firstly, our efficient customer acquisition drove a 20% increase in new players, combined with improved player values as we focus on acquiring higher-quality customers. We also achieved #1 positions in both the new state launches of Ohio and Massachusetts, and we look forward to the launch of Kentucky later in 2023. Secondly, strong retention rates delivered through our market-leading propositions also drove AMPs, up 46%. And thirdly, Q1 customer value grew as we delivered significant structural net revenue margin improvement year-on-year, in line with our strategy to reach 12% gross win margin by 2025. We did this by meeting customer demand for entertaining and engaging products to our market-leading and higher-margin Same Game Parlay offering. We now have a 50% market share in the U.S. sportsbook, up 15 points year-on-year, which positions us well for long-term market leadership. Our iGaming strategy is also delivering great results, with product improvements driving AMP and revenue growth. This, in turn, has delivered gaming market share gains in the quarter, growing to 23% of the iGaming market. In the U.K. and Ireland, as I previously mentioned, our online businesses continued to take share and delivered a really strong performance, with revenue growing 17% year-on-year. This performance demonstrates the reshaping of our business to focus on recreational customer growth in prior years. Product improvements across both sports and gaming led to strong retention of World Cup players as well as good customer acquisition levels, with Flutter brands holding a 56% share of Cheltenham gross gaming revenue. In our retail estate, we also took share in both the U.K. and Irish markets as our leading product and customer proposition resonated well with customers. In Australia, our increased investments in promotional generosity ensured we continue to grow our customer base in a competitive market. Sportsbet delivered a resilient performance in line with our expectations against some challenging COVID comps, with revenue down 4% but AMPs up 9% year-on-year. Our International business continued to leverage the Flutter Edge to accelerate performance of its brands, delivering pro forma revenue growth of 6% while AMPs were up 14%. Consolidate and invest markets, which are the markets where we see the best returns on our investment and make up 77% in International division's revenues, saw pro forma revenue up 20% in the quarter. This included an excellent performance in Italy, where our newest acquisition, Sisal, saw its market-leading player proposition continuing to drive strong conversion of retail customers to online as well as to multiproduct play. Sisal is an excellent example of our strategy of adding gold medal brands to our business and then help them achieve their potential using the Flutter Edge. In India, Junglee was the fastest-growing Rummy brand in the market and continued to deploy exceptional digital marketing capabilities to acquire and retain customers, driving revenue up 65%. The Indian market is very well positioned for long-term growth, and we've already established a great position from which we will continue to grow. I'm really pleased with how 2023 has begun and look forward to the progress we will continue to make during the year. And now I'll turn it over to Paul to take us through some of his initial observations since joining the group.

Thanks, Peter. It's been great over the last couple of months getting around to various locations in the Flutter group. I can clearly see how the Flutter Edge is providing the group's many brands with access to Flutter's global scale and enabling those brands to deliver a more meaningful and powerful proposition in their local markets. And our Q1 market share gains are a very obvious validation of that powerful competitive advantage. As I think about the future of Flutter, I'm excited to be joining the team and in our opportunity to drive growth across the group through continuing to build and maintain leadership positions in our markets. Flutter's growth algorithm of driving sustainable revenue growth through both more users and higher spend with resource deployed from a scalable infrastructure platform and with relatively low capital intensity offers us the opportunity for both structural margin improvement and significant free cash flow generation. We're also in a position of being able to bolt on gold metal acquisitions like Sisal, which will drive high returns on capital employed. It's unusual to combine such a high market share with so much opportunity across the group for growth and margin improvement, and I look forward to working with Peter to deliver that opportunity.

Thank you, Paul. And with that, we'll turn it over to questions. As this is a quarterly trading update, we'll be keeping the call to around 30 minutes, and so we'd ask you to limit your questions to 2 to give everyone a chance. If we do run out of time, the IR team are on hand to help with any questions you may have. So Jess, over to you.

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

My first question is on Australia. There is a credit card ban being introduced. Could you just talk to your exposure to credit cards as a percentage of deposits, how you expect that to go and then the broader regulatory outlook with the Lower House also having a committee looking at the market? So what's the regulatory outlook in Australia? And then the second is just on capital allocation. You mentioned it there, Paul, and you've talked about sort of broadly. I wondered if you could just comment briefly on your kind of attitude towards M&A, whether it's bolt-on or something larger? I appreciate you did Sisal last year, which is quite a chunky deal. I was wondering if you could give any updated thoughts on use of balance sheet towards M&A looking forward.

So look, there have been lots of press reports into speculation about a credit card ban in Australia. And there's quite a lot of other speculation about other regulatory interventions. I think the thing I'd say in general, I think we've seen this happen all around the world is that as and when the regulatory changes happen, we grow through those typically, and it helps to reinforce the market leading position, which is, of course, what we have in Australia. And specifically around credit cards, only a small percentage of our customers use credit cards only. And so I think when we -- if we look at what happened in the U.K. when credit cards were banned here, we guided to a sort of 2% or so revenue headwind. And I think it's probably a reasonable estimate for you to use in Australia. In terms of capital allocation, look, you're right. We did acquire Sisal, and we've been very pleased with how that business is bedded in. I think the International team have got quite a lot on the plate in terms of big-scale acquisitions. But if we see bolt-on deals, of course, we consider them as long as they met with our strategy. But Paul, I don't know whether you want to comment on that.

I guess the first point is this business is obviously highly cash generative. So there will be plenty of fuel for investment in the business. And with EBITDA growing, the leverage will pretty quickly come down. First priority is always going to be to invest organically to take advantage of the very significant opportunities that we have to continue to grow the earnings profile of the business. But beyond that, as Peter just said, yes, there are opportunities, and Sisal is a great example. We bought that for less than EUR 2 billion. And if you look at the 2022 numbers, then that's translated into less than 7x EBITDA multiple. So fantastic example of what we can do, and it will generate a very high return on capital employed. So those are the sorts of opportunities that exist out there. And exactly how we allocate capital over the coming years, we'll have to see, but it's great to have the range of opportunities that we do have.

The next question comes from the line of Monique Pollard from Citi.

Just a couple of questions from me. The first was just on the phasing of growth in that U.K. and Ireland online business. Obviously, phenomenal growth in the first quarter. Just wondering whether in March and April, that rate is continuing to run at around the 17% mark or whether we should expect it to slow a bit as we're lapping some of the new product launches that you had brought in last year. And then secondly, on the U.S., obviously, your iGaming market share, really impressive, been improving consistently every quarter. I was just wondering if you could give some examples of what's driving that, in particular, what impact the Reward Machine, that free-to-play product, is having, it's been a similar impact to what you've seen in the U.K. with the Paddy Power brand, whether you've got to the 90% of the top 25 games that customers care about that you've mentioned in your Capital Markets Day yet and any update on retention and direct iGaming customers.

Okay. Monique, so look, we are really, really pleased with how the UKI business is performing. I think I said back in March, I felt like we had our mojo back, and you can see why I was talking about the business so positively. And I'm really pleased with what the team are doing. It's a terrific job, up 17% in the first quarter. When I think, at best, the market will be flat and probably have gone backwards. So we're taking share. They've really indicated about the proactive approach we've taken for safer gambling and our strong focus on recreational customers. But of course, I think it's also important to recognize that we've made a lot of product improvements as well. And I think I'd estimate around half of the growth we're seeing is being driven by that. We introduced the Betbuilder into early Q2 last year. So I think by the time we get into the second half of the year, we'll see a degree of moderation in the growth as we start lapping some of those product improvements. But look, I think the business is trading really well. In iGaming, you answered your own question, right? So the -- a lot of the benefits are coming from the Reward Machine. We've been really pleased with the way in which U.S. consumers have engaged with it, and it's working very, very well for us. I think what's particularly pleasing for us is that actually most of the market share gains we've been seeing have come from the direct-to-casino acquisition channel. So this hasn't been just from the cross-sell piece. And so -- look, we know that there's further product enhancements to come. The team are doing a great job. We always plan that this is the year where we get to sort of product parity with the market knowing that we were behind last year and then we could get ahead next year. We've got patent recognition. The team are implementing and have sort of well-trodden path for us, and I'm very confident that the business will continue to take share.

Excellent. And sorry, just on the iGaming retention rate, has that continued to improve?

Yes. Look, retention rates are very strong across sports and gaming, and that's what's helping contribute to the very strong AMP growth you're seeing.

Next question comes from the line of Clark Lampen from BTIG.

I've got 2, 1 on the U.S. and 1 on the U.K. On the U.S., I'm hoping maybe you can provide an update on what you've seen year-to-date in terms of competition in promo and customer acquisition dynamics. And does a collective change in those fronts lead you to feel any different or perhaps better about profit generation potential for the U.S. business this year? And then on the U.K. side of the business, you've been meaningfully outperforming local peers lately, and I was hoping you could provide us a little bit of detail on what exactly is driving that between product initiatives maybe relative to headwinds from safer gambling measures that you were earlier to implement and whether or not those things, I guess, are sustainable over the balance of the year. Maybe specifically the latter, how much of a gap, I guess, is there between where you guys are in terms of affordability measures and checks relative to your closest peers?

Clark, I think it is very early morning to you. So thank you for getting up and joining the call. Look, when we look at the U.S., I mean, look, there's a lot of confidence we have in our ability to make a profit this year. So -- and the question really for us isn't specifically how much we make. It's what the trajectory of the business will look like over the next subsequent years when we keep adding in layers of new customers who will, of course, flip from costing us money to generating very significant contribution and then that falling through to enhance our profitability in future years. I think what we've seen over the course of this year, we've been really pleased with the shift in our acquisition strategy to acquire customers of higher value. I think that the insights that the team had around acquiring customers in the run-up to the sort of Playoffs in the football rather than trying to acquire customers in the second half of the Super Bowl. So as I've indicated, the good work that the team is doing. And look, I think that in general, the levels of promotional generosity seems to have moderated somewhat in the market. We are though not really looking at what our competitors are doing. We're focused on what we're doing, and we're acquiring as much business as we possibly can whilst everybody will see this is the CAC-LTV dynamics remain as strong as they are. In the U.K., we are outperforming. I'm really pleased to see the performance. It's quite hard to sort of separate how much of that is product and how much of that is the competitors belatedly trying to sort of implement the safer gambling initiatives that we've already undertaken. Yes, I think if you had to sort of guess, you might say it sort of half and half or something like that. And I think from a product standpoint, with the 4,000 engineers we have globally developing product for us, I wouldn't want to be trying to catch up with us because we continue to raise ahead, and that is true in the U.K. as it is in America or the other markets in which we operate.

Next question comes from the line of Joe Stauff from Susquehanna.

I wanted to ask about your AMP growth in U.S., a big number, 46%. Just less than 0.5 million or so of that you attributed to -- or that is 20% of the growth is from Ohio and Mass. And I'm wondering if it's fair to assume that's going to continue, say, into the second quarter given that you only have 3 weeks really operating in Massachusetts. What's the right way to maybe think about that into 2Q as well?

Do you have any follow-up questions, Joe, just while we answer it?

Sure. Yes. And then the follow-up question is Kentucky Derby is this weekend. You have a new content deal with Churchill Downs. Wondering if that's going to be as big a customer acquisition event as you have, say, in Cheltenham as well?

Okay. Well, look, I think in general, we'd call out the very strong retention performance that we're seeing across the business as something that's helped supporting the AMP growth. And I think that's down to the quality of the product that we have there for customers. If I very specifically answer your question about growth in Massachusetts as opposed to Ohio, I think you're never going to get the same level of penetration in the market when you're outside of the football season as you do when you got football for people to bet on. And so I think inevitably, there will be further sort of penetration we'll see in Massachusetts later on in the year when football restarts. And look, as it relates to the Kentucky Derby, look, I'm really excited about it. It's the sport of kings. It's the coronation of King Charles this weekend. So I'm feeling really good about it. There are 33 -- there are people living in 33 states in America who can bet on the Kentucky Derby using the FanDuel Racing app. So all those Californians who are desperate to get a bet on can open their FanDuel app, and I think we're going to give people a $20 free swing. So we hope it will be a big opportunity for us to acquire customers and showcase the great innovations that FanDuel bring to the market.

The next question comes from the line of Ryan Sigdahl from Craig-Hallum Capital Group.

Two questions from us. The first on FanDuel, just congrats on that #1 GGR share in Massachusetts in the first month despite several of your peers having unique competitive advantages relative to whether it's local roots or owning a retail casino, et cetera. But curious how you guys attack that market, whether it's the same playbook you run in another state or if you change that strategy relative to those factors there. And then secondly, international, so new Morocco sports betting contract. Is there opportunity for Sisal to expand into other -- whether it be North African countries or elsewhere? Or is that kind of a unique one-off opportunity for the Sisal brand to expand?

So look, we were really pleased with our performance in Massachusetts. And you're right, we were #1 with GGR. But I think the team have done a fantastic job in refining the new state launch playbook that we have in each market. And when I look at the success we've had in Kansas, in Ohio, now Massachusetts, we've been very successful in the new states, but we also continue to take share in the very earlier stages we launched in as well. And look, it's a combination of factors, a lot of which we discussed at the Capital Markets Day, so things like the refer-a-friend campaign where the sort of national scale of us helps. Of course, we use our DFS base as well to help sort of drive the business. But then it's also leveraging the sort of local personalities in the different markets and, frankly, a bunch of other things that we don't want to tell our competitors were doing as well. So look, I'm really pleased with how the team are doing. Paul, do you want to pick up the International piece?