Super Group (SGHC) Limited (SGHC) Earnings Call Transcript & Summary

Good day, and welcome to the Super Group Second Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Brett Milotte, ICR. Please go ahead.

Good morning, everyone, and thank you for joining us today to discuss Super Group's results for the second quarter of 2024. During this call, Super Group may make comments of a forward-looking nature that are subject to risks, uncertainties and other factors discussed further in its SEC filings that could cause its actual results to differ materially from historical results or from the company's forecast. Super Group assumes no responsibility to update forward-looking statements other than required by law. On today's call, Super Group may refer to certain non-GAAP financial measures. These non-GAAP financial measures are in addition to and not a substitute for measures of financial performance prepared in accordance with GAAP. Super Group has provided a reconciliation of the non-GAAP financial measures to the most comparable GAAP measures in the press release issued earlier today and available on the Investor Relations page of Super Group's website. In addition, Super Group will speak to its financial results and metrics in 2 parts: highlighting Super Group's profitable and cash-generative global business separately from its investments into the U.S. This aligns with the annual guidance that Super Group has provided for 2024 and is consistent with both how Super Group views its business internally and how Super Group will report going forward. Super Group recommends that investors refer to supplementary presentation posted to their website. On this call, I am joined by Neal Menashe, Chief Executive Officer. And during the Q&A session, we'll be joined by Alinda Van Wyk, Chief Financial Officer; and Richard Hasson, President and Chief Commercial Officer. I will now turn the call over to Neal.

Thank you. Good morning, everyone, and welcome to Super Group's Second Quarter 2024 Earnings Call. Q2 was exceptional, our strongest quarter ever and one in which we set some new records. Total revenue ex the U.S. hit a quarterly record of EUR 408 million, reflecting 9% year-on-year growth. Adjusted EBITDA ex the U.S. also set a record of EUR 98 million, representing growth of 11% year-on-year and a very strong margin of 24%. This year, we have been prioritizing operational efficiencies, including the successful integration of the Apricot sportsbook. During quarter 2, we incurred redundancy costs of EUR 3.3 million. Adjusting for these costs and the associated salaries, our margin would have been 26%. Our strategy of being nimble and decisive is paying off, and we are well on our way to consistent EBITDA margins of over 20%. We continually assess and optimize our footprint, ensuring that capital is deployed into markets that generate the highest returns, and this is leading to further investments into core markets across the globe. We obsessively tailor our offerings to each local market, which includes a continued rollout of our leading casino brand, Jackpot City into new and existing markets. In markets where we don't see a path forward, we pivot. We weren't happy with the status quo in the U.S. And after an extensive review, we announced last month that we plan to exit the U.S. sports betting market. We aren't, however, totally divesting from the U.S. We are maintaining our iGaming presence in New Jersey and Pennsylvania, where we plan to operate 2 brands, including Jackpot City from our Spin portfolio. Our focus on high gaming aligns with our non-U.S. business in which about 80% of our revenue is from iGaming. Like any other parts of the world, we are open to expanding our U.S. footprint for the right opportunities. In terms of costs, we estimate that the cash costs of shutting down our U.S. sportsbook business will not exceed EUR 45 million, the bulk of which comprises existing contract obligations and redundancy costs. This figure is easily manageable within our existing financial resources. We are just beginning the exit process, and we'll provide an updated figure of the shutdown costs in Q3. 2 days in 2024, the U.S. business has incurred an adjusted EBITDA loss of EUR 39 million across both sports and iGaming. And looking ahead to the rest of the year, we expect to incur an adjusted EBITDA loss of EUR 20 million for iGaming only operations. We have recently announced 2 new and exciting brand marketing deals I'd like to highlight. Betway becoming the official title sponsor for South Africa's premier soccer league, which is now known as the Betway Premiership. And in the English Premier League teaming up with the current Champions Manchester City to become their official global betting partner. Adding this iconic team to our brand portfolio further solidifies Betway's global recognition across the world's most popular sport. Branding is only one part of our multichannel marketing strategy, a key driver of growth across the business. This quarter, we spent 23% of our net revenue on marketing, a figure which is higher than industry average and reflects our long-term approach to the business. However, we are also focused on this number to ensure that we are extracting the appropriate returns from every euro spent. Moving on to the balance sheet. Our financial position remains strong. We ended the quarter with unrestricted cash of EUR 307 million and no debt. In June, we announced our first cash dividend of EUR 0.10 per share, paid in July. We intend to maintain this dividend and will consider paying a larger dividend if business conditions allow. Finally, given our strong performance for the first part of the year, we are raising our 2024 ex U.S. adjusted EBITDA guidance to greater than EUR 300 million, representing a margin of over 19%. We feel confident about the remainder of the year and look forward to making 2024 a super year for Super Group. I'll now turn the call over to the operator to open the call up for questions. Operator?

[Operator Instructions] The first question comes from Jed Kelly from Oppenheimer.

Couple of things. Can you just talk about where you are globally with sports betting? And just interpreting some of the results, I know you exited India. How is that trending ex-India and then just with your sport results? And then there is some chatter about Alberta potentially legalizing sports betting. Can you just talk about how we should be thinking about if that market goes legal and just given your experience in Ontario?

Jed, it's Neal here. Yes. So listen, sports betting is going well across the globe. Obviously, our casino part within our business is still consistent -- almost 80% of our business is iGaming. But we think sports results have been fair to us. So that's really good there. In Canada, obviously, there is regulation coming in Alberta. We are super ready for it. We -- everything we did in Ontario, we've learned, we've learned how to do it even better. So the teams are ready and waiting when Alberta regulates. And across the board in all these markets, we are optimizing everywhere. So Canada, Alberta would be no different, same as Ontario, same as our business in Africa. So listen, from this quarter, we are super happy of our results and how our cost efficiencies are dropping down to the bottom line.

Okay. And then just as a follow-up, your obviously record EBITDA ex U.S., you're generating a decent amount of cash flow implementing the dividend. Can you just talk broadly how we should be thinking about just your capital allocation policies? Do you want to do more acquisitions like Jumpman, target international markets? Just can you give us just an overall update on your capital allocation strategy?

Jed, Richard here. So like we said previously, we are constantly looking for potential opportunities for acquisitions, and we keep doing that across potentially new markets and also within existing markets. On the broader capital allocation, as you would have seen, the dividend that was announced and paid, we mentioned there that it would be our intention to maintain at least that dividend going forward. And that's all part of it. As we generate cash, we'll look for the best uses of that cash. If there is nothing more advantageous, we'll continue to look at ways of returning that to shareholders.

Okay. And then just my final question. Just as we think about the back half, anything we should be thinking about in terms of comps in terms of some markets opening, some markets closing. And I think in October last year or maybe it was September, you had favorable outcomes in European football. So just anything you can talk about there and how we should be thinking about the whole comps.

Okay. So I think for the second half, obviously, we had, as I mentioned, quite a bit of redundancy costs in quarter 2 and some in quarter 1. So obviously, those are one-offs. So we should get good optimization in the second half. Again, the second half just depends on sometimes in some of the months that we had last year. You can have a bad sports margin. But we're hoping with a bigger customer base, we should be able to even that out. But I think from our point of view is even into July, July continued the momentum of April, May and June. And the very important part that I said is we have got a large marketing budget of EUR 400 million. We are optimizing that. We are looking at that. We are turning over every campaign there to make sure that we can make that as effective as possible. And with that, with all the rest of optimization, we hope to even bring more to the bottom line, hence why we increased our EBITDA focus.

Yes. Alinda here. And just to add to that on the question on new markets, we're continuously assessing the market and investing always back into markets, which has high margins on the long run. And there is a few movements, extra markets in Africa. But we've also looked at 1 or 2 smaller markets and have no profitability for us, that was eliminated. But this is a continuous assessment of marketing spends, like Neal said, and where we will have the highest return on our investments.

The next question comes from Michael Graham from Canaccord Genuity.

A couple of questions, if I could. The first is on -- just talk about the decision that you made to keep your iGaming presence in the U.S. and maybe just frame it out, if you could, in terms of the unit economics, how your cost of acquisition is different for iGaming compared to some of the other markets you operate in? And related to that, do you think we could see your iGaming footprint expand to more states over time if what you have currently goes well?

Michael, Richard here. Yes, as Neal mentioned, we completed a very extensive review of the full footprint and ended with the view of remaining with iGaming in New Jersey and Pennsylvania. Like we said before, and like we apply to all markets, we need to obviously see appropriate returns being generated in those markets. And so far, July running according to what we were expecting in the budget -- in the forecast. But, of course, we'll track that on a continuous basis going forward. So no different, but it's just a focus on iGaming. And that's also very much aligned with the rest of the business where about 80% of the revenue is generated in iGaming. In terms of the footprint across the rest of the country, for sure, yes, if we see appropriate opportunities to expand the footprint within iGaming within the U.S., then we will look at those as and when other states regulate.

Okay. That sounds good. And then can I just ask for a comment on the competitive environment? Over the recent quarters, we've seen some of your mature markets, some regulatory changes like U.K., Canada and the Netherlands. Just wondering if you can comment on generally how the competitive environment is evolving in some of those markets.

So I think the competitive environment is always there, and we have to keep, and that's where it becomes in your marketing and your product, right? And we keep on honing in on it. I think probably in the past, we had too many countries that we were honed in, and so we closed a few of them, and that allowed us then to focus on the other ones. And that was the same process we took in the U.S. sportsbook. If we do not see a path to profitability, we'll rather go in other markets where we are seeing returns. Again, in these markets, the regulations make a big part of it. And in the U.K., they seem to be easing up a little bit, where obviously, the Netherlands was far worse. So the Netherlands, we decided not to go for, right? It's just not going to build your product. I mean the one that's probably been the worst and our results would have even been better if it hadn't been would be Germany. There, they've got [indiscernible], we've done all the work, but it's literally so onerous that the black market is just -- the customer just goes to the black market. So we can't compete as we could in the past. But I think over time, the regulator will get on to that, understand that they're losing the customers to the black market and be more reasonable with the people who are regulated. And that's always going to be a battle. And that's going to be the -- and that's been the story of our industry for the last 25 years.

The next question comes from Mike Hickey from The Benchmark Company.

Neal, Richard, Alinda, great quarter, guys. First, just on the U.S. exit, Neal, it looks like just running 2 states on iGaming, you're saying you're expecting a EUR 20 million loss for the second half of '24. You compare that to last year with the sportsbook, it looked like you lost EUR 28 million. So you said in incremental maybe EUR 8 million here. Just, I guess, one, I thought the savings would be a bit more. And two, with just the incremental EUR 8 million, is it worth losing the optionality, I guess, on sportsbook side?

Okay. It's Neal here. So a couple of things. The EUR 20 million is only for this next 6 months, right? But that's for iGaming and including the marketing spend in there. But, of course, as I said, we have to be getting the targets in each month. So if we do not get our net win target, then we have to reassess those 2 markets. As far as we're concerned, those 2 markets, New Jersey and Pennsylvania, are larger than Ontario. And we're going to give it a go there and then try and compete because we think that product can compete. We did say last year that overall it would be around EUR 80 million or EUR 90 million for the year. So the investment is coming down. We just had the redundancy costs now for the sportsbook. And in the U.S., we've literally halved our workforce. So I think we've got the right number of people to give it a good shot in the next 6 months. But again, like every other country we are in, each one, New Jersey and Pennsylvania by themselves as a country, and we will see is there a path to profitability or not.

I just wanted to clarify then, so should we think an annualized investment in the U.S. of EUR 40 million-ish here moving forward...

Yes, for 2025. Yes, yes. For 2025, yes.

Still feels like a big number. I guess, can sort of dig in on the path...

Well, we won't -- you won't actually get to that number if you're not hitting your monthly targets. So we set monthly targets, monthly net win, monthly EBITDA losses. And if it's not, then we would scale back, so EUR 40 million would be the maximum.

Yes. Just to add, Mike. So after 2025, when the forecast is just less than EUR 40 million investment, in '26, it would be significantly less than that. So that would be the max spend over the next 3 years.

And you said that in the U.S., you're going to continue to operate 2 brands on the gaming side. Can you walk us through the rationale? It seems like running 2 brands would be more expensive than just sort of focusing on one brand in just 2 states.

Listen, l mean, we've been in casino business, iGaming business for 25 years, you need more than one brand. So -- and also running the second one isn't really expensive because of the same teams who we run them, it's just the look and feel are slightly different. And in our Spin portfolio, we have Jackpot City, Spin Casino and a few others. And remember, 3 or 4 of the brands make up the bulk of it. So it's the same strategy. So from our point of view, that's how we've always done it. And then, you always need 2 in the race, that's effectively 4 to optimize your -- for your CPAs, et cetera.

But I think it's only quite clear if you look at this in the U.S. So, Mike, I'll just give you one other point. We said that EUR 40 million would be the most we would invest next year. Just to put it in perspective, the month of June, we almost made that profit in our existing business. So we are optimizing, we are clever. We are looking at the ways to bring this business to profitability. And if it cannot come to profitability, then we will have to pivot away, but we obviously are optimistic that we can make it work.

I guess last question on that topic. Pennsylvania and New Jersey, these are not new states here, right, Neal? I mean, they're fairly mature relative to U.S. expansion, which obviously is pretty new. I mean given the maturity of these states, how do you expect to sort of take share in this environment?

So, Mike, I think a lot of the revenue that we were seeing from those states while live with sports and gaming was coming from gaming. So that's obviously informed our decision and was part of our full review. The other thing is a lot of our internal forecast have assumed improvements in a number of KPIs from where we were at the beginning of this year. And we also are -- we're seeing those come through at the moment. So we're tracking in line with those forecasts, which we are seeing improvements in KPIs. And that's obviously from where we stand today from the previous operations in sports and gaming, now just focusing on the gaming part of that.

And it's Neal here. As you know, we compete in all the markets. U.K., we're seeing growth in all these markets, but not -- there's not really any market that's new for us, right? And if it's Canada, Ontario, everywhere -- we are completing everywhere. And remember, we just have to take extra revenue from other operators, which we see. And then in most of the countries we operate, that extra revenue is bringing our operating leverage. And that's why you see such good results for April, May and June.

What is your market share in New Jersey, Pennsylvania in iGaming?

No. I mean, time, because we just started. So let me have a look at the market share. All our care is all -- we're not 80% of the market. So we just go for -- have to get to a few million of revenue in each market to start making sure that, that market is working. But if you're not going to get to a few million revenue, 5, 6, 8, 10 eventually, your targets, then you're never going to get to profitability. But in other markets, if you take Spain, et cetera, you can be at a few million a month, and we are making good margins.

A follow-up on the cap allocation topic. Sorry, if you said this, Richard, I think you have a buyback authorized. You're obviously driving cash flow. Your business is expanding. You're confident on growth. Doesn't it make sense here to be buying back stock given where you're trading today?

So there is something that we considered as part of the return of capital to shareholders. We leaned away from it given the relatively low float that we have in the business and ended up proceeding with the dividend route.

Okay. That makes sense. The last question or topic, the -- you expanded the margin guide here to 19%. It sounds like, Neal, you've got some room here to move that higher. Can you give us a maybe more medium-term perspective on your growth opportunity and maybe your progression in margin over the next few years?

It's Alinda. See, what we've realized in the last couple of months was everything that Neal referred to about the operating leverage coming into full play now is that we're really seeing that margin consistently, being the EBITDA, being consistently over 20% month-on-month and more than 20%, so larger then. So what we've realized is that even at 90% our target has been always 20%, and we're reaching that much quicker. We just -- looking around the -- as you note, we also haven't -- we feel comfortable with the guidance for revenue. So we're just tracking that in the remainder of H2 as well.

And I will just add. Neal. And I have had a point is we've still got 25%, 26% marketing ratio of marketing to net win, so -- for the year. So -- and that's in there. And ideally, to make sure that that's efficient and stuff. So, of course, if we had to drop that down, then the margin would go up, which is I know lots of our competitors do. They come in at 18%, 19% marketing budgets. So we are looking at that and just -- but we feel comfortable that the investments we're making in marketing is returning long term, and that's how you're seeing it. The same investment from last year's marketing, you're now paying off this year. So we're just trying to balance those 2. But I have got -- but Alinda said we're going to get to that 20%, and that's what we're pushing for. And I think as these cost efficiencies and more efficiencies come through in our business, we -- that then should be a target we can easily exceed.

[Operator Instructions] The next question comes from Bernie McTernan from Needham.

This is Stefanos Crist calling in for Bernie. So recently, we've seen some other players sell their OSB licenses in certain states. Are there any opportunities for that across the U.S. business?

Richard here. So we are looking at the possibility of that, again, very much on a state-by-state basis depending on a number of access points, depending on who's active there, but it is something that we are considering. Part of the numbers that Neal mentioned was the sportsbook shutdown costs, in that, yes, those are still in early days. And, a, there's contract negotiations going on there; but b, the possibility of recouping some of those investments, and we'll update on that when we report on the Q3 numbers.

Got it. And then just wanted to ask on Latin America. Can you remind us what markets you participate in and maybe your expectations there?

So we don't normally give country-by-country breakdowns. I'll give -- Mexico is one example. Of course, Brazil is something which we're looking at. And we're going through the application process. But like any other parts of the world, if there's markets there that we think make commercial sense, we will look to apply for licenses and launch there. As part of the geographic -- the footprint optimization that we're going through at the moment, we're considering these a lot more carefully and making sure that wherever we do go live, there is a path there and sustainable path to profitability.

Yes. So like in market like Buenos Aires, this just wasn't a path to profitability. And the regs were just made, and the onerous way that the software has to work only in one city as opposed to the province, we decided that's not a market for us. So that's another side. Brazil, we're hoping the regulations come in that are favorable to regulated players, and then, so we're in that process. But if they turn up that they're not, well, then we won't do it.

This concludes our question-and-answer session, and the conference is now concluded. Thank you for attending today's presentation. You may now disconnect.