Tabcorp Holdings Limited (TAH) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by and welcome to the Tabcorp Holdings Limited Full Year Results Call. [Operator Instructions] Just please note that today's conference is being recorded. But I will now hand the conference over to your first speaker today, Mr. David Attenborough. Thank you, and please go ahead.

Good morning and welcome to Tabcorp's results announcement for the 2020 financial year. And I'm David Attenborough, Tabcorp's MD and CEO, and I'm coming to you from Sydney. Also joining me on the call today from various places, starting in Melbourne, are our CFO, Adam Newman; and MD of Wagering & Media, Adam Rytenskild; and our COO of Gaming Services, Paul Carew; and then we have in Brisbane our MD of Lotteries & Keno, Sue van der Merwe. And we'll take you through the presentation lodged with the ASX today, which should run for about 35 minutes, and then open the call for questions. And you'll be aware that we've today announced a 1-for-11 pro rata accelerated renounceable entitlement offer. And there is a separate presentation lodged with the ASX on that. We are legally restricted from discussing any details around the equity raising other than the basic terms referred to in the announcement and related presentation. So I kindly ask you to limit any questions on this call to the specific details of the equity raising. And as a result of the entitlement offer, Tabcorp shares have been placed in trading halt pending the completion of the institutional entitlement offer. The COVID-19 pandemic has certainly been one of the toughest challenges many of us have faced in our careers. And I'm proud of the way the team of Tabcorp have responded. And we've done it with the primary focus on the well-being of our people, our partners and our customers whilst managing the financial and earnings impact at the same time. So if I can turn firstly to Slide 3. The group's diversification helped us manage the market challenges, and group revenue was down 4.8% and EBITDA down 11.5%. And we can clearly see the value of our recent investments in the integration of Tabcorp and Tatts and in our digital transformation coming through in the performance of our lotteries business and the strong digital growth in wagering and Keno. However, the COVID measures introduced in late March to restrict movement and nonessential gatherings had a significant impact. In particular, the closure of the licensed venues and TAB agencies affected our Gaming Services, Keno and wagering operations. And in wagering, COVID is possibly accelerating the structural shift that we've been seeing for some time from retail to digital. We manage the financial impact on the group by taking action to reduce costs, preserve cash and ensure we have strength and flexibility in our balance sheet. As part of securing covenant waivers and amendments from our lenders, the Board resolved not to pay a final dividend for FY '20. And this helped preserve liquidity in a time of uncertainty. Today's announced entitlement offer is a further step to strengthen Tabcorp's balance sheet, provide greater flexibility in the current operating environment. And we're pleased that the integration program is now substantially complete given that we've successfully executed one of the biggest pieces of that program: the migration of ex-UBET account customers to the TAB platform. Slides 4 and 5 show our group results where we have reported an NPAT before significant items of $271 million, down 31.6% on the pcp and a statutory net loss after tax of $870 million. And this follows the deduction of $1.14 billion in significant items, primarily the result of noncash goodwill impairments charges relating to the Wagering & Media and Gaming Services businesses. And these charges reflected an assessment based on underlying assumptions, which took into account a number of matters, including the direct impact of the government and other measures to address COVID on these businesses' operations; the possible acceleration of retail contraction and uncertainty regarding any longer-term impacts; the level of competitive intensity and structural changes in Wagering & Media, particularly in a digital-centric market; and the potential decline in consumer confidence and increased economic uncertainty. There is also a further $51 million in significant items. And these are outlined fully in Appendix 1 and included combination -- include combination implementation costs and Racing Queensland top-up payments. Slide 6 illustrates the component parts of the 11.5% year-on-year decline in EBITDA. And you can see that the biggest drag on EBITDA came from the impact of retail closures in Wagering & Media, Keno and Gaming Services. And while Lotteries & Keno VC declined $29 million in the second half, lotteries was cycling a prior period of substantially more attractive jackpots for players, 41% lower in the pcp. The VC move masked a strong underlying lotteries performance with lottery game sales up between 15% and 30% on a like-for-like basis since the COVID restrictions commenced in late March. You can also see our efforts to conserve cash through cost containment initiatives that delivered close to $50 million in EBITDA benefit. And we also derived $11 million in synergy benefits. The group took a range of actions to manage the onset of COVID, summarized for you on Slide 7. Part of our approach from day 1 was to work with our venue partners to help them manage the impact to their operations. We need our venue partners to be successful and sustainable, and many of them are family-run hotels or small community clubs. Closing their doors or restricting the number of patrons had a massive hit to their cash flows. The lotteries retail network was not impacted as heavily with the majority of newsagents and convenience stores essentially trading throughout. That wasn't the case for the hotels, clubs and TAB agencies. And that's still the case in Victoria, where the stage 4 lockdown means their doors are shut again. We have foregone more than $100 million in contracted fees to these venues so far, essentially waiving things like equipment charges, Sky Racing subscriptions and other fees. These actions, together with active support from our retail teams, have ensured that most of our venue partners have been able to weather the temporary closure of their businesses. We are pleased that the majority of venues outside Victoria have now reopened and are recovering well. Thankfully, the racing industry in Australia has done a remarkable job to keep the racing -- to keep racing going. And I want to once again publicly thank all of the participants. They've done a great job maintaining COVID-safe operations, as have the major sports leagues in Australia. And it was only back in April that Belarusian football was one of the few professional sports taking place worldwide. Our cost response also affected our people. At various times, we have stood down our employees where there was little or no work for them. Gaming Services is a good example where the closure of venues has meant there has been no need for our field services team to be out on the road servicing gaming machines. While we were able to access $4 million in JobKeeper payments for a section of our Gaming Services workforce, we also made ex gratia payments to them, which meant JobKeeper had a negligible net benefit to us. JobKeeper was not able to be accessed in other areas of the group despite parts of the workforce being stood down. Other actions included a period where our people were working no more than 4-day weeks and driving down their annual leave balances as well as a reduction in the CEO remuneration and the Board fees. Maintaining the employment and morale of our workforce has been a key focus throughout this period. And I'll now hand you over to Adam Newman, our CFO, for Slide 8 and an update on our integration and optimization program.

Thanks, David. Good morning, everyone. Thanks for joining us. And I hope you and your family are all well in these unusual times. As David has mentioned, the integration of TAB and Tatts is now substantially complete with $87 million in EBITDA cost synergies delivered. We remain on track to deliver our targeted $95 million in total cost synergies by the end of FY '21. In terms of revenue synergies, given the impact of COVID on our revenue base, the measurement and reporting of these synergies at this time is not considered to be meaningful. That doesn't mean we aren't pursuing and completing the relative initiative in order to ensure that we drive the identified business improvement from integration, such as the retail uplift in ex-UBET states, which form -- which forms rather the final phase of the integration at FY '21. Our one-off pretax costs incurred to the 30th of June are $103 million, and our previous guidance of $135 million remains unchanged. The residual costs relate primarily to restructuring and the retail uplift. With integration now substantially complete, we are now moving into an optimization phase. Starting on an enterprise-wide, 3-year program that will target key cost reduction levers, this is our operating model, process simplification and redesign, data and digitization improvements as well as maximizing spend -- value from spend with our vendors. We will be targeting both substantial cost savings as well as enhancing our operational capability and overall efficiency. On to the 3 businesses now, and their results are summarized for you on Slide #10. At a group level, for FY '20, you can see that our OpEx declined 6.7% versus the pcp. In H2, we saw OpEx decline 13.5% versus the pcp. David has already talked to the main drivers to this reduction being noncash cash preservation and cost reduction measures that were undertaken. Our people have really leaned in during this extraordinary time. A large proportion of the mitigants relate to a reduction in our employee costs. In addition, we're able to reduce discretionary spending in areas such as advertising and promotion, travel and entertainment and sponsorships. If we look at underlying OpEx, excluding mitigation actions and synergies, these increased 2% for the year. Lotteries & Keno demonstrated its resilience as a business and, in fact, contributed close to 3/4 of group EBIT. I'll now pass on to the business' MD, Sue van der Merwe.

Thanks, Adam, and good morning all. We'll move to Slide 11 now. The results for Lotteries & Keno demonstrate strong underlying revenue growth on the back of a record year of step change performance in FY '19 and despite Keno venues being closed in the second half of FY '20. Our track record in lotteries game portfolio management once again delivered with a successful change to our Set for Life game in March, ongoing benefits from the Powerball change and active management of jackpot offers to maximize performance of the portfolio. The business is in a strong position with a well-balanced revenue portfolio and healthy distribution channels. Investments in customer-led improvements are delivering better customer experiences and strengthening the alignment between retail and digital. The launch of the omnichannel program was a significant milestone with retailers earning higher commissions against performance criteria and customers enjoying an improved membership program and omnichannel experience. Digital growth of 22% on the back of last year's exceptional growth benefited from data-led capability, customer personalization and the introduction of initiatives such as PayPal. On the OpEx line, we kept a tight rein on costs despite increasing contact center resources directly linked to supporting the growing digital channel. A new and extended reseller arrangement with Jumbo was negotiated on better and more sustainable commercial terms. On to Slide 12. Strong growth across the game portfolio, together with resilient performance during COVID and a new record in active registered players, is a testament to the strength of our lotteries business. The changes made to Powerball in FY '19 continue to pay dividends with 2 new Division 1 records set as the game jackpotted to $110 million and $150 million in FY '20. Oz Lotto returned to a more expected level of jackpot with sales at each jackpot level strong. The change to Set for Life was well executed and has delivered the increased visibility in winning that it was designed to do, building player engagement and increasing sales. During FY '20, an extra 400,000 Australians became active registered players, taking the total number to a new record of 3.7 million, an increase of 12%. With the onset of COVID, the business moved quickly to maintain momentum, secure critical processes and adapt customer communications to be appropriate for the time. Digital saw strong growth through this time, reaching 30.9% contribution in the fourth quarter despite a relatively low jackpot environment, ending the year at 28% versus 23.5% in FY '19. It's also been very pleasing to see the retail channel hold its own, and it remains a dominant distribution channel for lottery products. Finally, Keno was having a very strong year with revenue tracking at record levels prior to COVID. However, the closure of licensed venues impacted second half revenues. Strong digital growth helped address some of the retail decline, and digital share grew to 11.9%. Active digital customers underline this trend with year-on-year numbers in excess of 37,000, an increase of 54% on the pcp. Slide 13 now, which highlights the focus areas for FY '21 across games, customer experience and distribution. In line with our strategic management of the game portfolio, we will be implementing a refreshment of Saturday Lotto in October. Saturday Lotto is an important foundational game to the portfolio. And this change will keep players engaged. It will deliver bigger Division 1 prizes and more winners. It aligns with player motivation and will be supported by a 15% entry price increase. We have a continual focus on improving the customer experience, and personalization is key here. As we build on and enhance our omnichannel model, we are also looking to bring retail and digital even more closely together in a way that drives customer acquisition and supports our retailers. Our already sharp focus on omnichannel has become even more important as customer shopping habits continue to shift, with these trends quickening in a COVID world. Thank you. I'll now hand you to our MD of Wagering & Media, Adam Rytenskild.

Thank you, Sue, and good morning all. What I'll take you through on Pages 14 to 16 centers around 3 key themes. Firstly, in a challenging year, our operational execution and performance through COVID has been strong. Secondly, the UBET account customer migration is complete, and while it's early days, we're pleased with the customer response so far. And thirdly, the strategy we've been implementing over the last 2 years is well progressed and now puts TAB in the strongest competitive position that it's ever been in. As we look back to FY '20, there is no doubt it was a challenging year, and these challenges were exacerbated by COVID. The shift from retail to digital accelerated because of venue closures. And while we achieved strong digital growth, it wasn't enough to make up for the fact that our entire retail network was closed at various times due to the restrictions. Our operational response to COVID has been strong. In fact, we've used the disruption to continue to reshape the business, deliver on key strategic parts of our plan and emerge stronger. The temporary closure of our retail venues due to COVID effectively meant that the market was digital-only for the first time ever. The key point is that through this period, we've competed better than ever. This is because the strategy we've been implementing over the last 2 years to improve the competitiveness of the business is now having an impact and enabled us to respond strongly during COVID. The investments we've made for both TAB and Sky optimized the digital customer experience by strengthening the offers across brand, personalization, marketing offers and digital and venue. The combination of these investments is core to our vision to create a unique customer experience that sets TAB apart in this very competitive Australian wagering market. It's been important for TAB to improve its customer value position relative to the market. Over the last 2 years, we've invested in capability and in generosities to enhance TAB's position. TAB now provides competitive value, which is critical to retain customers and to attract new customers. In a competitive digital market where operators have scale, that's really important. But generosities are just one part of our value strategy, now tactically important at a time when the competition was targeting our retail customers. The percentage of generosities is elevated right now and probably will be in the short term. But TAB's now well positioned for however the market dynamics evolve. Both our gross and net yields for the year were around 50 to 100 basis points above our expectations, partly reflecting favorable racing results and the COVID-driven shift from sport to racing. Our strategy for retail is to integrate the in-venue experience digitally and leverage our large network to expand our digital customer base both in and out of venue. Retail is being transitioned from a traditional cash-focused business to one focused on driving and supporting digital growth in a social environment with unique product offers and media content. Our retail network largely consists of circa 4,000 pubs and clubs where our operating costs are relatively low and the offer is increasingly digitally integrated. We also have 330 stand-alone TAB agencies. And this is after we recently optimized the agency network by closing 64 of them. Media, too, is an important differentiator for the TAB customer experience. So signing deals with the major American sports strengthens our position in this fast-growing market and helps us appeal to a broader demographic that loves U.S. sports. We're pleased recently to secure our Queensland racings media rights for the next decade, underpinning Sky as the long-term preeminent racing broadcaster. Our strategy is to cement Sky as the undisputed racing aggregator in the market and across all distribution channels. To achieve this, we are prepared to undertake commercial deals with other digital wagering operators for the Sky 1 and Sky 2 channels. But importantly, we will also retain unique content for TAB digital customers. The BetEasy vision agreement has been amended and extended with Sportsbet post-year-end, and that is a multiyear extension. The media landscape is changing significantly, and Sky is changing its offering and model to ensure it maintains a strong position in the market for the long term. Finally, on Slide 14, I wanted to talk about the migration of UBET account customers to the TAB platform, which was completed on the 28th of July. This was absolutely the most important milestone for wagering and the integration program. UBET will now leverage all of what we've created for TAB to compete digitally. It's early days, but to date we've transitioned and retained the active customers, and we've acquired new customers. In fact, from the 28th of July to the 15th of August, ex-UBET active account customers were up 25% on the prior corresponding period. We now expect to compete strongly in the ex-UBET states and grow our account customer base. On to Slide 15, which shows how our account turnover and revenue rose significantly through COVID. This was supported by transfer from retail closures. But importantly, in a digital-only market in arguably the most competitive period, Q4 was our best quarter for digital performance relative to the competition. The loss of revenue share across the full year mainly reflects greater relative yield benefit for our competitors as they're coming off a lower base. It stands to reason that our revenue share reduced as fixed odds pricing increased across the market given our higher starting point and the fixed yield nature of tote betting. But these increases mean that our fixed odds pricing is now more competitive while also ensuring our level of yields can be maintained and help underpin the sustainability of the business. Our sophisticated trading capability helps deliver market-leading yields as shown by the lift in UBET yields post integration. The combination of higher yields and a growing account customer base is really positive for the ex-UBET business. Our Web retailers reopened. So far, we've seen retail turnover return to pre-COVID levels. And digital growth has remained strong. However, it's far too early to say how the market will settle following the significant category and segment shifts we've seen this year. And as you can see on Slide 16, our priorities in FY '21 are focused on delivering our vision to creating unique customer experience that sets TAB apart to win. We're doubling down on our points of difference. These center around integrated digital retail and media, personalized customer offers and engagement and product innovation, including creating structural change to underpin sustainability of the tote. We're in a very competitive sector, but we are now in a much stronger position to build from. And with the UBET account customer migration now complete, the investments we've made in TAB over the last 2 years are now very important to grow the digital business nationally. It's been a huge effort to get to this point, and we're now really looking forward to the year ahead. I'll now hand you over to Mr. Paul Carew. Paul is our Chief Operating Officer of our Gaming Services business.

Thanks, Adam, and good morning, everybody. A key point to note in our gaming business is that it's a pure B2B operation. It has no digital earnings, and Gaming Services is reliant on venues being open for trading and gaming machines being operational to derive our earnings. After being turned off in March, we saw gaming not reopen until June. And in the case of Victoria, our licensed venues are still not trading. As David mentioned earlier, we suspended fees for venues that weren't open, and that essentially meant the business did not have revenue during the period. But strategically, it was important for us to support our industry. This, combined with the nonrenewal of the Telstra PayCo contract, which generates circa 10% of revenues, drove the results posted in the Gaming Services business. The bulk of this impact came in the second half. In response to this, we focused on reducing OpEx with workforce standdowns in line with venue closures and annual leave provisions. We also took around $3 million in costs out of the leadership structure. We reduced around $40 million in capital by the reprioritization of projects and removing the contractors that were associated with delivering those projects. We've made good progress on our NPS, or TGS as it was formerly known, contract extensions, and they've lifted from 40% in 2019 to 50% in financial year '20. Pleasingly, key groups such as [indiscernible] have extended their relationship with MAX. Our negotiations continue with the Victorian RSL network on a venue-by-venue basis versus the collective agreement that was negotiated in 2010. Again, it's important to note that these venues all remain contracted until August 2022. Finally, on Slide 17, it includes D&A for one-off impairment of older gaming machines and supporting systems of those machines. As we move on to Slide 18. At the half, we flagged that the business was under operational review, and that's now being implemented across the 5 areas shown. I'm very realistic about what's required to improve this business. We know we need to lift performance. We know we need to achieve an appropriate return on capital. And that includes a simplified operating structure, a refined product offer, lower costs and a leaner capital base. As an example, we're implementing a new and more flexible offer in our MAX Venue Services area. Particularly with growth in the Northern states in mind, in that business we no longer buy the entire gaming floor upfront from a new customer. But rather, we can phase things in based on the natural replacement program of machines at each venue. That's potentially a more attractive proposition for the customer and also lowers our upfront capital investment. We've also engaged a third party to assist with the review of our field services model with a focus on process improvement and efficiencies, which is underway now. Lastly, the strategic review, which was announced in February 2020, has understandably been paused due to COVID. In closing, it's an uncertain time for the gaming industry, and this business has been challenged this year. Our number one priority remains on delivering the turnaround program in the Gaming Services area. On that, I'll now hand you back to Adam Newman.

Thanks, Paul. We'd now like to review capital management, and that's on Slide #20. Against the backdrop of the current trading environment and the uncertain outlook which we faced, we've taken what we believe to be the prudent step to revise a key capital management target specifically in 2 main areas: firstly, a reduction in our target gearing to 2.5 to 3x gross debt-to-EBITDA; and second, a reduced target dividend payout ratio, and this will be 70% to 80% of our net profit after tax before significant items when it is considered appropriate to resume dividends once again. The commitment to our investment-grade credit rating remains. And in that context, we've also announced today a 1-for-11 entitlement offer to raise approximately $600 million in equity capital. This will entail approximately 185 million new shares being issued under the entitlement offer, which represents 9.1% of our existing shares on issue. The net proceeds will be used to pay down existing drawn syndicated debt facilities and support the move towards revised target gearing. The equity raise is expected to strengthen our balance sheet, at the same time provide greater flexibility in these uncertain times. It will also provide additional credit metric headroom for covenant and credit rating purposes. If you look at gearing at 30th of June 2020, it was 3.8x, and this will reduce to 3.2x on a pro forma basis. In addition to the separate presentation and announcement that we've lodged today with the ASX, we also would anticipate making further announcements in due course in relation to the equity raising. This will be in accordance with our ASX continuous disclosure obligation. We'll also communicate directly with those eligible shareholders and investors with respect to their eligibility to participate. And as David mentioned earlier, due to legal restrictions, we can't discuss any further details on today's call. Before we leave this slide, I'd like to mention a few other things. Firstly, in relation to CapEx, at the results released in February, we indicated a spend of $160 million in H2 BAU CapEx. However, in response to COVID, we cut that to just $91 million by reevaluating all projects, particularly those in the most COVID-impacted businesses. There's some deferral in those numbers, but I'd like to highlight that the stated BAU CapEx target range going forward is $200 million to $240 million per annum. Non-BAU CapEx in FY '20 was represented by mainly integration and data center consolidation. I'd also like to highlight that interest expense in FY '20 included circa about $5 million in one-off fees that we paid in relation to the covenant relief that we obtained a few months ago. And FY '21's interest expense will also benefit from the planned repayment of debt following the capital raising. I'll now hand back to David on Slide #22.

Thanks, Adam. So as we come to conclude, let's move to Slide 22 and the July revenue. We know there's a lot of interest from investors and analysts in current trading performance given the rapid changing environment, and we provide this update for information purposes only. However, I must emphasize that this is information that is only for a single month, and it's being given because of the extraordinarily current situation pertaining to COVID and the resultant uncertainty. It should not be extrapolated beyond the month or considered indicative of future performance. It does not constitute formal or informal guidance. That said, they're generally positive. Group revenue was up 2.8% in July 2020. Lotteries & Keno was up 4.7% despite a strong jackpot sequence in the pcp. And Wagering & Media was up 6.8% with a significant increase in digital. Gaming Services is down 52.2% primarily due to the venue closures in Victoria. Finally, on Slide 23, COVID continues to carry uncertainty. But the group has the benefit of our diversified earnings. And in the context of COVID, that has never been more important. Our priority is to capture the value from the digital opportunity across lotteries, Keno and wagering as well as unlock the benefits of a more competitive TAB. Other key priorities are the Gaming Services turnaround and business-wide optimization program. And we'll continue to invest in initiatives that support our purpose of excitement with integrity such as our risk and compliance systems and customer care technology. And as well as executing strategies to maximize value for shareholders, we'll continue to manage our response to COVID with a focus on our people, our partners and our customers. Thanks, and I'll now open the line for questions.

[Operator Instructions] But your first question comes from the line of Matt Ryan from UBS.

I'm just interested in any structural changes that you think might play out, I guess, in a post-lockdown world. And maybe it's relevant just to talk about the states outside of Victoria at the moment. I think earlier in your remarks, Adam might have mentioned that you're seeing retail wagering back at pre-COVID levels. But is there any color that you can sort of share on that and I guess whether you think there's been a structural change that has occurred or not?

Thanks, Matt. Look, the shift to digital has possibly accelerated under COVID-19. And that's presumably the structural change you are sort of alluding to. And we won't really know until the whole of retail's reopened. But as we've highlighted, Tabcorp's competed well in that environment on the back of our investments in digital and the omnichannel integration. There's a lot of upside from the shift for lotteries, which now accounts for more than the majority of our group's earnings. If we look at wagering, our focus is on optimizing our retail footprint and maximizing the benefits of our integrated and differentiated offer, as highlighted by Adam. And where retail has reopened, it has seen some resurgence, but it's difficult to know where things will settle. The retail network is increasingly a driver of our digital business as we offer a broader service to customers and leverage the social connections in a way that our competitors can't. And in Gaming Services, we are implementing recommendations of the operational review to improve efficiency. So I hope that answer your question.

It does. But I mean specifically on retail wagering, when you say it's returned to pre-COVID levels, pre-COVID it was still declining circa 5%, a little bit more than 5% per annum. Are they the numbers that you've looked at over the last few months that you're seeing for the venues that have reopened?

I will ask Adam Rytenskild to give you a bit of color.

Thanks, David. If you look at New South Wales, it's probably the best proxy because retail has been open the longest. Retail is actually back to similar to last year's numbers, and digital growth remained strong. David's caveat and what I said as well is very relevant. It's -- we need to wait and see how this plays out, but that gives you a bit more color.

And I'm presuming you're talking about needing to wait because of the high yields that we've been seeing over the course of July?

Well, I just think it's only been a month or so. It's still a very fluid market. As I said, retail is back to last year's numbers or thereabouts in New South Wales, and digital remained strong. So to extrapolate that too far in advance, I think, is difficult to do at the moment. I think the important point for me is we're competing digitally very well through this period. And so whatever happens, we're much better placed than we have been because of everything we've been creating.

Okay. And just a question on lotteries. So just trying to understand, I guess, the operating cost base growth that you saw over the year. I can appreciate that a lot of it happened in the first half, but it looks like about 6% underlying on what ended up being about 2% revenue growth. So just wanted some comments, I guess, on how flexible that, that operating cost base is as sort of revenue does move up and down.

Adam Newman, you might want to take that one.

Yes. So when you look at the lotteries cost base, I think what you're doing is you're looking at that slide at the back where...

Well, I totally do.

We account for that in mitigations and the rating for synergies. So there were some areas in lotteries in terms of cost growth. One of them was in their call centers and data centers. So as we saw some significant growth with regards to digital, particularly during the COVID period, we had to beef up resources there. And you'll remember at the half year when we talked also, there was some reinvestment that was occurring from a people perspective that will also occur. And in addition, there's in there increased costs. There have been some changes in corporate allocation as well.

Your next question comes from the line of Desmond Tsao from Goldman Sachs.

Just a question on lotteries. I think the implied active user increase in the second half was only about 100,000, and that's off about 300,000 in the first half. Look, just curious in sort of any commentary you have around that because I would have thought the other 6 months to June would have been a pretty big tailwind in terms of active users in that sort of shift to digital. And so any color on that would be great.

Sue, you might want to lean in there.

Thanks, David. Look, the acquisition of customers was weighted towards the first half, and that really relates to the 150 and 110 new Powerball events that we had. So clearly, big events that are very powerful in bringing in new players. I guess outside of that, we have pretty high penetration already anyway. And so yes, we continue to achieve a greater uplift in the second half, but it was definitely skewed to the first half year, you are correct.

Okay. And just on -- if I may, just a quick one just on that. Like, what are you sort of seeing in terms of these new users coming to your sort of products? Are you seeing an increase in shift towards playing across the entire lotteries product suite? Like is there any sort of customer behavior difference between now versus pre-COVID that's comment worthy?

We are seeing people play across the portfolio. The other thing that is very interesting and very positive for us is the age demographic of those players. So they were spread across all the demographic groups. But the highest was in the 31- to 40-year age group. And just under 50% of the new customers were actually between 18 and 40 years of age. So very happy about that, very positive statistic for us. And in terms of the games that they came in and played, Powerball was definitely the highest. But Saturday Lotto did well as well and so did other games across the portfolio. So it's not all just weighted to Powerball.

Okay. Great. And then second question just around wagering. Thanks for all the disclosure today on that. Just picking up on that sort of structural, I guess, change that you guys have been calling out. Now just interested in your thoughts around -- I think on Slide 16, you highlight optimization and a leaner cost base. If you can perhaps just flesh out what you mean by the leaner cost base. Is that a further optimization of the retail footprint? I think you mentioned 64 was closed in FY '20. Can we expect more of that sort of going forward into '21?

I think I'll pass that through. It's a sort of combination of Adam Newman and Adam Rytenskild. So I'm not sure who wanted to go first there.

Adam Rytenskild here first. We're in the same room, so we can handle that one together. Look, cost has been in focus in Wagering & Media for a little while. So we're very focused on costs with all the disruption that was going on through the year. And that will continue to be a focus. In terms of the optimization of the network, the closure of 64 agencies was really a bring forward. It's something we would have anticipated doing in time. But with COVID, we decided to bring that forward. The continued digital integration with the overall network provides us with a lighter network in terms of cost or the potential for that in a much more nimble network. So that retail network is still very important for us, very powerful as it becomes more digitally integrated to grow our digital customer base. That's the way we look at it. And before I'll hand over to Adam Newman, I guess we'd see costs being a continued focus as part of the broader optimization program that Adam talked about.

Yes. Thanks, Adam. Look, I'll just add a couple of things there. So Adam has talked to the specifics, I think, if you like, in relation to Wagering & Media. We are -- I think it's a natural inflection point to pivot once we've come out of integration to now look to how we can optimize in terms of the running of the business and our overall cost base not only to bring our operating cost increases down sort of from what they've been in historical levels but also to enable us to be in a position to be able to reinvest back into the business. So we are in the process of -- we have kicked off a more enterprise-wide program. In addition to that, picks up technology, picks up other parts of the business at the corporate center. And we've called out on the slide there but that will -- there's been a lot of heavy lifting done already in the cost side through the synergies, and that will build upon in terms of have we got the right operating model, what are our spans of control, are we extracting the right levels of value out of our spend with our suppliers. And it probably also gets into areas like prioritization of capital and return expectations with regards to our spend on capital. We have a big contractor base in terms of the capitalization into that capital base as well. So it'll touch upon all aspects of the business, if you like.

Your next question comes from the line of Bryan Raymond from Citi.

My first one is just on wagering and the outlook and competition. I think earlier in the prepared remarks, you guys called out that you're expecting to see that increase a bit. I'm just interested in how you feel that's related to the BetEasy migration of the Sportsbet and whether you see that as either an opportunity to acquire some of those customers that'll inevitably leak out there or if it's a risk around the overall level of competition impacting the broader business. Just it will be great to hear your general thoughts around that transition, which is pretty meaningful for the industry.

That's Adam Rytenskild, please.

Look, the way I look at the combination of BetEasy and Sportsbet, we look to compete on our own terms. Our strategy has very much been about specific to us and how we can present something different in the market. That's been very deliberate. Sportsbet are already very good competition, and that won't change with the combination of BetEasy and Sportsbet. So I think we see it as -- we see a further consolidation. It's something we called out a little while ago. Our strategy has been built around building a much more competitive business. That's held us in good stead through COVID and continues to do so.

Right. Okay. And then just on the upcoming Victorian wagering license, obviously a lot's changed since the last time you guys agreed to that deal. I'm just -- can you think about how that may impact your broader retail footprint in Victoria and then your thinking more across -- from a broad perspective across Australia around your retail footprint and where you go from here. You've obviously been closing some stand-alone agencies, but yes, is there a way you think you can become more competitive post that Victorian license being renegotiated?

So why -- Adam R. again.

Sure. Look, just parking the license for a moment, our strategy has very much been about combining our differences, and retail is very much one of those differences. So the digital integration with that retail network and specifically venue mode is really important for us. That was starting to have an impact pre COVID, and it's been important post COVID. And it's not just that innovation. If you think about the -- what we've been investing in data and personalization, the combination of this capability is really important going forward. Our retail network is largely pubs and clubs, 4,000 of -- venues of pubs and clubs. It's a relatively low-cost network, and much of that cost is variable. So the social environment in those venues is going to be important going forward. I've called out over time that our competitors have a good foothold in terms of digital play in those venues. And our strategy has been to make sure we own that experience with the venue operator across all channels, including digital. In terms of the license, we'll make sure, whether it's renewing new licenses or seeking new ones, that they are appropriate for the shape -- how we see the shape of the market going forward.

Okay. Your next question comes from the line of Anthony Longo from CLSA.

Just first one from me on the capital raising. So I guess what I was hoping to understand was you're asking investors to stump up more cash this time around. Just wanted to get a sense as to why -- or I guess what the spiel is to ensure that they do support you this time around, particularly in the context of the execution to date on some of those initiatives and also given the pending change in CEO who ultimately may have their own views on what a strategy may entail.

I'll let Adam Newman start on the actual entitlement offer, and then I might come in on what -- the future CEO and strategy.

So the capital raising was really, I suppose, if you like, a step that when we looked at our capital settings and we looked at the uncertainty that we're facing at the present point in time in the environment. It was an opportunity for us to take an immediate step to reduce our leverage targets. And I think it would be fair to say that both of these uncertainties and the impact that we have on the business, and we sat back and had a look at it, we felt that it was a good opportunity for us to derisk the balance sheet and provide us with a bit more headroom than we were operating under previously. So it is expected really to strengthen the balance sheet, provide us with better financial flexibility, if you like, to be able to deal with these uncertain times as well as provide some additional credit metric headroom for our covenants and credit rating agency purposes. And I think the size of the offer was really striking a balance, if you like, between strengthening now and immediately moving towards the revised target range without necessarily having to over-raise at the end of the day. So there's a rationale that really underpin the thinking with regards to the raise to reduce leverage. And I'll hand back to David to talk to implications from a CEO perspective. But from my perspective, I'd say that I would think that that's a prudent approach to take in the current environment and is appropriate irrespective of who's sitting in the big chair.

And I was going to reiterate that. I think any future CEO coming in will need to be taking the reins of a business that has been taking the correct approach to managing its balance sheet, and we think this is the prudent approach. We have a program in place that is operating the search or search process for the future CEO, and we have good strategies in place that are running in parallel with that for all our businesses. So the new CEO, when they come on board, will be taking the reins of a business that has clear strategies and a well-managed balance sheet.

That's great. And also the second question for me is just looking at the ROIC targets. I know pre the merger, they were obviously a lot higher but in the context of low 6s. With some of those improvements that you may have been speaking about and, I guess, drawing on those structural changes and shift from retail to online and optimization, is -- what's a reasonable return target that we should expect over the next sort of 3-or-so years? I appreciate there is a lot of -- state of flux at the moment, but what's a reasonable amount? And will you ultimately, in terms of return on capital basis, cover your cost of capital?

That's over to Adam Newman.

Thanks, David. Yes, there's a lot in that question. I think ultimately, if I start with the last bit first, absolutely, from a value perspective, you always want to be able to ensure that you're covering your overall cost of capital. But we are carrying significant amounts of goodwill that carry over from -- in earlier investments. And just the way the math works, that necessarily, at end of the day, takes time. I don't want to get into sort of setting out ROIC targets at this present point of where we're seated here at the end of the day, but I think it would be fair to say that now we've come through integration. And we will be sort of ensuring that from a CapEx perspective, we've got to raise our focus on getting appropriate returns for that capital that's being invested. No question.

Your next question comes from Larry Gandler from Crédit Suisse.

A couple of questions obviously. So first on lotteries, just if you guys can give us a bit more detail on the game change for Saturday Lotto. Can you talk about maybe what's the sort of normal jackpot size of that product? And how will it change once the game change comes in? And given Powerball's such a large business for you guys, maybe you could put Saturday Lotto in context of Powerball.

Sue, I think you can take that one.

Yes. Certainly. Thanks, David. So Saturday Lotto in the -- versus Powerball, Saturday Lotto is our second-biggest game. As you know, it's very much a part about -- what I talk about as our foundational part of the portfolio. So it's got a very large, loyal player base, and it's very important revenue earner for us. The game change is entailing a 15% price increase from $0.65 to $0.75 a game. The benefits that it will deliver will be that the Division 1 prize pool is currently $4 million. It will go to an estimated $5 million. And with the price increase, all of the dividends through all of the divisions will increase commensurate with the price increase. The other change is a change to the Division 6 prize table, which is changing what you have to match to win, and it's making it easier to win that. And that will mean that Division 6 winners will go from about $270,000 to about $700,000 per draw, and any win will go from 1 in 85 to 1 in 41. So similar to the changes that we've made on the other games, this will deliver a greater winnability across the game. It will increase that Division 1 prize pool. And in terms of jackpots, Larry, Saturday doesn't really jackpot. It only jackpots once in a blue moon if it -- but given the participation in the game and the matrix, it's not a jackpotting game. It's more -- sits at the base weekly offer. What we do have on Saturday is our super draw offers, and those are generally around $20 million, and then our end-of-year one, which is generally around $30 million to $31 million. So those will remain the same. And those have actually been performing quite well during FY '20.

Yes. That's what I was going to ask about the super draw. Okay, so it's -- stays at $20 million. End of year, just -- end of year is still around $30 million?

Yes. Yes. This is a -- this delivers a weekly benefit to the game.

Okay. Excellent. And my next question is on wagering. So I think for quite some time now, David, I've heard about the stay tuned for pari-mutuel. It's an area I've been asking a lot. And Adam, you've talked about your strategy as being -- combining the differences. You guys have a retail differentiation, and you have pari-mutuel differentiation. Two comments is -- or questions is, when are we going to finally see the actual strategy for stabilizing pari-mutuel? What does it entail? So please don't give me a stay tuned there. And second of all, the trailing commissions initiative with retail didn't really generate a lot of activity. So what is it about the combining the omnichannel strategy now that's really going to work?

Adam Rytenskild, do you want to lean in on that one?

Will do. Pari-mutuel, we have been talking about pari-mutuel for a little while. I appreciate that. There's 3 elements to what we're doing with it. One is pooling. And I know we've talked about pooling for a little while, but COVID has created a platform to accelerate that conversation. And we're well advanced in talking to the racing industry around the country about delivering greater liquidity through pooling. Whether that's 2 pools or 1 pool is yet to be seen, but that's very much in focus. It's a big thing to achieve. It's been talked about for a lot of years. So yes, all I can say is we've got absolute -- now that integration is largely done, the most important part of it, we're very focused on that. The other is new product. We haven't been able to unlock the true benefits of Longitude at this point. I'd call that out. I know that is -- we're still working on that. We need regulatory approval to be able to combine more than 2 pools for that to be effective, and then the benefits will unlock. But we've got other new tote products that will come in FY '21 that don't rely on Longitude. I think they'll be very good. They're well advanced in their planning, and they will come in FY '21. And then the third element is a combination of brand marketing and the data capability that we've built is now available to tote. The combination of those things will play a role in, I guess, the underpinning of tote. So some very specific things in FY '21.

I've got to say they seem -- other than pooling, they seem kind of marginal. It hasn't escaped me that fixed odds yields are now pushing the tote yields. Is tote -- are you noticing any improvement in the competitiveness of tote because fixed odds yields are improving?

Yes. I disagree with you that they're marginal. I can't talk to you about what the products are, but they are -- they're cognizant of the difference between fixed odds and tote and where some of the shortcomings are in tote versus what's been popular in fixed odds. And as I can talk to you about them throughout the year, I think you'll see that they're intended to be more than marginal. But again, it's the combination of those things. Personalization when it comes to offer and experience isn't marginal. New product that is -- materially addresses some of the things that fixed odds has as an advantage versus tote is not marginal. And if we can achieve pooling, which is very much in focus, that won't be marginal.

Okay, your next question comes from Rohan Sundram from MST.

Just a quick question on the July trading. Did anything surprise you in there? And this might go back to an earlier question. Is there any indication that the elevated online play might have some sustainability in it after some of the venue reopening?

So I'll comment on the July trading. We actually have actually delivered those figures and actually shared them because of the reopening of retail to give people a snapshot on what that looks like. We're certainly not surprised by the performance of the lottery business. We're very pleased with the way -- and Adam Rytenskild referred to it, the way retail has responded and come back in the states other than Victoria. And in fact, we were very pleased with the 6.8% increase in July in Wagering & Media given the retail is largely not operating in Victoria. So if any area that probably gave us a little bit of -- a real positive on the upside, it was the Wagering & Media result.

And on the wagering outlook, has any -- are you more positive? Or how should I say it? How is your view on the wagering outlook versus, say, 6 months ago given that since then, we've seen further consolidation, we've seen a boost in yields? How are you viewing the outlook versus, say, earlier in the year or last result?

So from my position, looking at it as a CEO, yes, we see that very uncertain environment, economic and that sort of impact of COVID. So we -- it's very difficult to actually have a firm view of the outlook. But what I am feeling positive about when it comes to Wagering & Media is that integration is substantially complete. The programs of work that, that team put in place in the year around data, the brand work in the long way we play and the work done in really making sure we are digitally competitive has all really come together and given us a very good platform going into FY '21.

Okay, your next question comes from the line of David Fabris from Macquarie.

David, look, my first question is on wagering, and there were comments that, that wagering strategy is well progressed over the past 2 years. But what particular customer KPIs have you seen that give you that comfort? And then as a follow-up to that question, I mean, what do you consider to be success from an execution perspective of this strategy when you're thinking about revenues? I mean do you think you can get back and hold market share? Is there a chance you can win back market share? And when do we actually get to that run rate?

Adam Rytenskild?

So the KPIs we look at in the business is around digital. It's a digitally competitive market, so digital KPIs around customer growth, turnover and revenue are all very important. Our competition are effectively digitally and fixed odds only, so we -- looking at it through that lens is -- gives us a good feel for how we're traveling. And COVID, whilst it's been difficult and challenging, has given us the opportunity to look at the business in a digital-only market and see how we'd compete through that period. And as I said, on some of those measures, that was our best performance competitively that we've had, and it's continued strongly post that. In terms of revenue market share, I think that is a good long-term measure. It's been difficult to use that as a measure during the post -- as pricing has increased across the market. We already had the higher yields. So as others bring their yields up, of course we're going to have a relative reduced revenue market share. So through that period, I've been very keenly looking at active customer performance, retention and acquisition and also turnovers while doing -- making sure we maintain our revenues. So over time, we'd look at that as -- revenue market share as an important measure.

Sure. But just to round out that question, do you think that your strategy will allow you to hold market share or win back market share? I mean how should we think about it? And when do we get to that run rate?

Our strategy is absolutely aimed at growing digitally. This will ultimately -- including in retail. And I think, as I said, we've got some confidence because of what we've been implementing that we've got enough in our capability now to be competitive. We're not done yet in executing our strategy. There's more to come in FY '21. There's more to come ahead of the Spring Racing Carnival. But we've got enough now. We're able to compete well through this period. So we expect that looking forward, yes, we'll be much more effective competitively, and we are now. So I guess I'm saying that there's a line in the sand now. Customer migration's done. We're a national digital business, we've got enough in our armory to compete well, and we'll keep building on it.

Okay. And your last question comes from Sacha Krien from Evans & Partners.

A couple of questions, one for Adam Rytenskild and one Sue. Adam, just wondering if you can give us a feel for how much do you think the stimulus is impacting the results you're seeing at the moment. Perhaps you can give us an indication of how much of the digital growth is being driven by new customers as opposed to existing customers spending more. And then maybe are you getting any feedback from venues on the amount of footfall coming through and that is generating that return to pre-virus levels?

Yes. Look, it's definitely a buoyant market. It's hard to say how much is coming from the stimulus, how much is coming from casinos being closed in Victoria, for example, for a period of time. But I guess my perspective is digitally, you've still got to get that business. And whatever the market is, we've got to win our share, and we've got to be able to compete to win our share. And that's what I've been looking at. Feedback on retail, venue footfall. Again, New South Wales is a good proxy because it's been open the longest, and footfall has been pretty good. There was definitely an immediate -- people wanting to get out of their homes and eat in restaurants and pubs and things like that. But it's been open for a little while now. And we've seen that retail performance still holding in New South Wales, and we've seen digital still be strong. To give you a feel for it, the digital growth that we're seeing, about 2/3 of it's coming from newly acquired customers, and about 1/3's coming from increased average spend.

That's really helpful. And my question for Sue, it looks like the online penetration for lotteries was relatively flat on the first half in the second half. I guess 2-part question. Is that due to the lower jackpot levels that we saw in the period? And secondly, can you give us maybe an indication of whether you're seeing higher online penetration at those lower jackpot levels so that when the segment normalizes, then we might actually get a bit of an uplift that comes through in FY '21, Sue?

Sure. Look, in terms of digital penetration, it's -- and it's definitely been accelerated through COVID. So in terms of how it goes through the jackpot rolls, those big jackpots will always attract a large segment of irregular players who come in. And that's why we got that more significant uplift in first half versus second half in number of customers. And Powerball was the first game that they came to play, as I said earlier, followed by Saturday and other games. But yes, I do believe that the digital penetration is higher overall as people have shifted that way, particularly through COVID. Obviously, omnichannel launched in perfect timing as well for what's happened with COVID. Having said that, retail has held up as well. So we're really just seeing positive results overall. Sorry, Sacha, can you just give the second part of your question?

I think you've largely answered it. I guess I was just asking whether or not at the lower jackpot levels you're seeing sort of increased online sales. Because I guess in the overall mix, it hasn't really come through as strongly as you might have expected given the environment that we've had for that period.

Yes. We've put some of the results in -- around what's been happening more recently as well with COVID where digital penetration is up to 30% in some cases. It's also happened across all of the games -- all of the major games, so -- in terms of the uplift in digital takeup.

Thanks very much. I need to call the call to a close. I just want to say look, we are focused on getting the best performance from all of our businesses and having the right balance sheet for the current environment. So on that point, I'd like to thank you all for joining the call and look forward to meeting many of you in one-on-ones over the coming days. Thank you.

Ladies and gentlemen, that does conclude today's conference call. Again, thank you all for participating. You may now all disconnect.