Tabcorp Holdings Limited (TAH) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Tabcorp Holdings Limited Half Year Results, 2024. [Operator Instructions] I would now like to hand the conference call over to Mr. Adam Rytenskild, Managing Director and Chief Executive Officer. Please go ahead.

Morning, all, and welcome to Tabcorp's half year results. I'm CEO, Adam Rytenskild and I'm joined by our interim CFO, Damien Johnston. This morning, we'll take you through the presentation we lodged with the ASX before taking your questions. Today, we'll update you on the performance of the company in the first half, outline progress in delivering our TAB25 strategy and provide you with a breakdown of each business unit's performance. Across the 3 pillars of our strategy, we've made very meaningful progress. When the market level the playing fields and reshape the cost base, we're halfway through our turnaround, and we're not done yet, but we're on track. TABs gained market share while increasing VC margin. We've contained costs and have positioned the business for when the market returns to growth. The improvement in total revenue share, digital turnover share and digital revenue share is a very encouraging trend. This is a big step forward and shows our strategy is on track. Our faster, simpler and more innovative customer offering has traction. Customers are noticing the frequency and the quality of our digital updates. And we're set for further growth after winning the Victorian license. This license is a game changer for our business. It will deliver better margins and improve our ROIC. As of August last this year, Victoria will go from being our lowest margin state to being our best license. We continue to invest in our OpEx and CapEx in a disciplined way, containing underlying OpEx growth to 1% through the successful execution of Genesis and shifting the mix of investment towards growth and transformation. Within Gaming Services, we've pivoted towards our high-quality integrity services business, which grew EBITDA 8% and provided earnings diversification and strong free cash flow. The information on this slide highlights that our turnaround is on track. To our headline results for the first half of this financial year. Our strategy remains unchanged. We're clear and deliberate in our approach to reshape the business and create long-term value. Group revenue is $1.2 billion, down 5% on first half '23, predominantly reflecting wagering market conditions. Group EBITDA is $170 million, down 14% and group EBIT is $50 million, down 32%. Group OpEx is $316 million, up 4% or 1% underlying, reflecting the strategic investment in customers and product to set the company up for growth as the market strengthens. The statutory loss reflects the impairment in the wagering business and predominantly the New South Wales and South Australian wagering business. Damien will talk to this in more detail. The impairment in part reflects the legacy license structures in those states. And this reiterates the importance of Queensland and VIP and why we continue to advocate for level playing fields in all states. Tabcorp remains in a strong financial position with net debt of $193 million and gearing of 0.9x as of 31 December. The Board has announced a dividend equating to a payout ratio of 111%, reflecting confidence in the business and the strength of our balance sheet. And Damien will provide a more in-depth overview of our results shortly. Australian wagering is an attractive market. It has consistently grown ahead of GDP at a 6% CAGR over the past decade and being resilient through economic cycles. This has also been a market delivering innovation and a growing array of products for customers to wager on. And this is continuing with the likes of international sports delivering good growth. What we've seen over the past 12 months is a recalibration following a spike in digital growth through COVID. More recently, the softness in turnover has been by lower activity around the customers cycling a strong prior year that included football World Cup activations and the launch of Betr. Encouragingly, betting frequency improved in the December quarter, posting modest growth. For TAB, we've continued to take turnover share and delivered an improving net revenue trend in the December quarter and into January. In January, we did this with lower and more efficient generosities. Tabcorp is leading the market to reshape it for a sustainable future, and we remain confident in the long-term growth outlook. Rest assured that reshaping the market will create a long-term sustainable industry and vibrant wagering ecosystem. To market share, our strategy is very deliberate and involves investment in technology platforms, data and AI as well as products, brand and marketing. This is a long game, and I expect continuous improvement as we not only improve our offering, but to improve our ability to adapt and innovate. Total revenue share, digital turnover share and digital revenue share, all have an improving trend. That's an incredibly important step for the business and one that I'm personally very pleased about. Importantly, we're experiencing turnover growth across both racing and sports turnover share growth that is, across both racing and sports and continued strong growth across our multi-products. Same gain multi turnover was up 33% for the half. We're confident we're on the right path and that the investments we're making are putting us in a stronger competitive position to capitalize on increasingly higher margins for Tabcorp and for when the market returns to growth. I want to talk about our data and analytics capability because it's a key part of our plan. We're delivering a more personalized customer experience with more meaningful and efficient generosity and we're understanding our customers better. This improves the value we're getting from our marketing and customer offices. A great example has been a 15% improvement in generosity efficiency over the past 12 months, and this improvement accelerated through the half. Our deeper understanding of customer segments is delivering improved relevance of offers and promotions and more customers are receiving offers that reflect their preferences. Our AI capability is also expanding, and we're beginning to implement AI and customer care, personalization and for internal processes as well. We'll continue to invest in this capability to improve customer experience and to create growth. In addition to our data and marketing effectiveness, we're also transforming our technology capability. We're moving faster and have closed the product gap, and we're now looking at ways to become a market leader in product and customer experience. We're simplifying and modernizing our technology stack. An exciting example of this will be our new fixed odds platform due to be live in the second half of this '25. This will consolidate over 10 applications into one modelized platform, it will have capability for unlimited markets and capacity for 65% more bets per minute than our current platform. We're also migrating the cloud platforms, which deliver simplicity and speed to market. Over 70% of our wagering applications will be migrated to cloud by the end of this financial year. And importantly, all of this has been delivered in a really disciplined way and in the first half of the year, we've begun to transform our retail and invent experience. Our upgraded venues are innovative, fresh and interactive. And as you can see on the screen, we're looking differently. We're looking different, and we're thinking differently. It's early days, but I'm pleased to report an immediate uplift in turnover at those venues. Turnover is up 13% and cash turnover is up 11% relative to the trend prior to the refurbishment. On the Gold Coast, we've launched our next-gen venue at a racetrack. On Magic Millions Day, TABs turnover share was the highest of any operator. That's only one day that it shows what we can achieve when the entire TAB ecosystem connects together. I'm really looking forward to sharing our retail growth journey with you at the full year results. Now, winning the Victorian license was a very exciting and terrific way to win the half. I can't emphasize enough how this license will transform our business. It has strong retail protections and significantly higher margins for Tabcorp. Had the license been in place last financial year, our EBITDA would have been $140 million higher. From mid-August, we'll be on a level playing field in Victoria, meaning our season taxes reduced to the same level as our competitors. It better reflects the modern wagering ecosystem and allows all operators to compete on the same terms. And for Tabcorp, this allows us to make targeted investments that deliver growth. We can't wait for the new 20-year license to commence, and I look forward to sharing with you the stark difference in our Victorian earnings in FY '25. Queensland performance has improved since becoming a level playing field state. Our Queensland VC margin was up 21% and active customers and turnover outperformed the broader wagering business. Level playing fields create better financial performance and provide a platform for TAB to be more competitive as more level playing field to introduce, Tabcorp becomes a more valuable business to our high-quality integrity services business. Pivoting from gaming to integrity services have improved the quality of this business, Integrity Services EBITDA increased 8%, driven by the new Tasmanian licenses, fee increases in New South Wales and more monitored machines. This is a high-quality business with attractive characteristics, and it is providing us earnings diversification. During the half, we sold Max Performance Solutions as part of the Integrity Services pivot. Now, throughout the first half, we continued to implement our Genesis efficiency program, making Tabcorp a leaner, faster and simpler digital-first business. The program is creating capacity to invest in a customer offering that sets us up for growth when the wagering market strengthens. Our progress in Genesis is providing us with the opportunity to make deliberate strategic investments. There's a lot going on in Genesis. And since we began the program, our net headcount has reduced 15% and contractors have reduced by 45%. Senior management roles have also reduced by 30%, and we have closed around 50 unprofitable agencies, TAB agencies. We're further reducing around 200 roles in the second half, led by IT and business process outsourcing with Accenture. Our underlying OpEx growth of 1% is a strong result and includes a reshaping into an ongoing investment in our competitiveness. And given the high inflation environment, we've reduced our cost base significantly in real terms over the last 18 months. I'm also pleased today to update on the strong progress of our Dabble Investment. The company recently entered the U.S. market and the initial performance has exceeded expectations. Since the U.S. launch in October, Dabble has had 630,000 registrations and 440,000 active users. It was #2 in the U.S. App store for sports in January. And it's also performing well in Australia and continues to scale. During the half, active users increased 6%, turnover increased 74%, and net win increased 46%. This is a fast [indiscernible] they 've invested in. Dabble gives us insight into a different customer segment and a different way of thinking, and we look forward to continuing to grow our relationship with Dabble in the future. I'll now hand over to Damien for a deeper look at the financial results.

Thanks, Adam, and good morning, everyone. Slide 17 shows you the group results for the first half of '24 compared to first half of '23 from continuing operations [indiscernible] to 5.1%, reflecting wagering market conditions and the sale of 2 businesses in gaming services. The impact of trading conditions were reflected in lower EBITDA and EBIT, down 14% and 32%, respectively. We announced today a noncash impairment of $731.9 million relating to the Wagering business, predominantly the New South Wales and South Australian assets. The impairment reflects enmeshment based on underlying assumptions, taking into account the softness in the Australian wagering market observed through the 6 months to December '23, which was driven by higher inflation and interest rates, and this has impacted consumer spending on wagering activity. The impact of higher interest rates on discount rates and higher taxes in New South Wales following the end of transitional payments which have been in place following the previously announced increase in the New South Wales pop rate in June of 2022. As noted, the impairment does not include any potential upside from license reform, which we continue to advocate for in both states. The waterfall chart on Slide 19 shows the components that drove the change in EBITDA for the half. While VC declined, our Wagering and Media VC margin improved, driven by Queensland reforms. OpEx increased 4%. However, adjusting for the one-off insurance benefit in the prior period, underlying OpEx growth was contained to 1%. Adam noted earlier that our Genesis program continues to help offset cost inflation and investment in our turnaround. There are 2 adjustments to note in relation to our costs. Firstly, we have reclassified broadcast rights previously within OpEx to variable costs to better reflect the nature of these costs. Previously, we had broadcast rights costs in both VC and OpEx. As a result of this change, all broadcast rights are now within VC. In this slide, we have restated the FY '24 OpEx guidance to account for this change. Secondly, as disclosed in our Victorian license announcement, $83 million of costs previously allocated to the joint venture will now return to our OpEx from FY '25 and our TAB25 OpEx targets have been adjusted accordingly. Finally, on OpEx, we have made a strategic decision to continue investing in the business in a disciplined manner through the current market conditions for the long term. As such, we expect OpEx growth of around 1% in the second half and to be at the top end of the guidance range for FY '24. Turning to our CapEx investment. CapEx for the half was $76 million, up from $70 million in the prior period. Our FY '24 CapEx guidance of up to $150 million remains unchanged. We continue to increase the proportion of CapEx invested in growth and transformation in line with our strategy. I note our FY '24 D&A guidance has been adjusted to $220 million to $230 million to reflect the impact of the impairment announced today. Turning to the balance sheet. Our net debt closed at $193 million. Cash conversion was impacted by the one-off payment to TLC of their portion of an ATO settlement, along with some working capital timing impacts that are expected to reverse in the second half. We're in a strong funding position to pursue our TAB '25 transformation. We have diverse sources of funding and an average debt maturity of 4.2 years. Leverage is 0.9x, providing debt capacity to fund the upcoming $600 million payment for the Victorian license at the end of June. Turning now to the divisional performance on Slide 25. The divisional result was impacted by overall trading conditions on both wagering and media revenues linked to wagering turnover. VC benefited from improved Queensland margins post reform, while OpEx was well contained given overall cost inflation. On Slide 26, you can see digital and cash wagering revenues down around 4%, while VC margin increased 110 bps, reflecting the benefits of Queensland license reform. Adjusting for the impact of insurance proceeds in the prior period, underlying OpEx for Wagering and Media increased 2% and included around $7 million for the TAB brand relaunch in the half. Sport turnover growth was 6.7%, and partially offsetting softer rating turnover. Yields in the second quarter rebounded after abnormally low yields in Q1. Increased generosity efficiency delivered improved market share with only a modest increase in spend at 4.4% of digital turnover. Moving to Gaming Services. In line with our strategy, we have sold EBIT and NPS as we reposition toward the high-quality integrity services business. The removal of the NPS and EBIT earnings post sale impacted the overall result for the half. Importantly, Integrity Services earnings increased 8%. As you can see, Integrity Services revenue grew 10% following the commencement of the new Tasmanian monitoring license, monitoring fee increases and higher monitored EGMs. This translated to 8% EBITDA growth at a 45% EBITDA margin. Integrity Services free cash flow was also strong with EBITDA of $29 million and $7 million of CapEx in the half. Gaming Services segment EBITDA included $4.5 million of earnings from the NPS business prior to completing its sale in October. I will now hand back to Adam.

Thank you, DJ. Australian wagering is a strong market, and it's recalibrating. We expect the market to return to growth and a focus on ensuring Tabcorp is very well placed when it does. We're delivering in the areas we can control. We've delivered higher market share at a higher VC margin and a reshaping costs while continuing to invest in our transformation. Tabcorp is a leaner, faster digital business that is using leading technology to create the ultimate personalized experience for customers. TAB25 is about creating a substantially more valuable business at the end of FY '25 than it was when the company demerged. We expect regulation to increasingly be applied consistently across the market. That's a positive for Tabcorp. We also expect level playing fields to ultimately be introduced across the country. That's also a positive for Tabcorp and will increase our VC margin over time. This will be very apparent when the new Victorian license commences on the 16th of August this year. 18 months into our transformation, we're a very different business with a different way of thinking, and you can see our customer engagement is trending in the right direction. I want to thank the Tabcorp Board, management team and our people for driving this transformation. We're energized, extremely persistent and unwavering in our focus to deliver our TAB25 strategy and to making this company more valuable for our shareholders. That plan remains on track for adding value, and we expect the market to continue to grow long term. Thank you for being with us on this journey, and we're now happy to take your questions.

[Operator Instructions] Our first question today comes from Simon Thackray from Jefferies.

Adam, just a quick one. It's fair to say in this result, there's a considerable amount of operating leverage today in Tabcorp and that's a reflection of the wagering environment. I just want to understand what your expectations are for when the market does return to growth, the operating leverage and the change in the cost behaviors fixed versus variable. What are we to expect from Tabcorp when the market does turn? Given you are taking share or continuing to take share, what does it look like for us when we think about that when the market improves?

Thank you. It's a great question because I think what you see in terms of leverage when the market is doing what it's currently doing is a reverse as the market returns to growth. And it's especially our P&L will be very positively leveraged with level playing fields, we had Victorian into that in FY '25 with the market returning to growth and improving competitiveness in the business. You can expect the P&L to be positively leveraged.

And presumably, that translates to EBITDA margins far better than they had been previously? That's the read-through I'm getting from the self-help?

DJ has got his hand up there.

Yes. Thanks, Adam. Thanks, Simon. Yes, I just wanted to, I guess, reiterate firstly, the point that I had made. Now, this market will turn. It's been a long-term growth market. It's a very resilient market. Yes, it's come off the highs of post COVID. But when you look through and there's a helpful chart in there, I think we'd all be confident that the fundamentals of the wagering and the gambling market remains strong, and we'll see a return to growth. I think importantly, for Tabcorp, the trends we're seeing in market share gains, particularly around turnover, mean that we are well positioned to participate in the upside when the market turns. The VC margins improving is a really positive and important point. This is a different world compared to, call it, pre-COVID. The Queensland license reform is incredibly important in terms of getting improved margins, level playing fields. Victoria is going to give us a kick next year as we go to level playing field, and we've called out the impacts of that, and hopefully, there's more reform to come. So, the VC margin story on the back of improved market share and return to growth in the market is only questionably positive. And, Simon, to your point around leverage, this company and I would say, not, I guess, firsthand has an incredibly strong focus on managing its costs. The word transformation is not used lightly, and I think the company is transforming its operations. I'm probably anticipating other questions, but announcements around ITO and BPO. I think illustrative of the changes in the business model that we're making. So, at EBITDA, if we continue to have that level of cost focus and keeping it at very low single digits, we are well placed to see some pretty serious and meaningful EBITDA growth and EBITDA improvement. So, I think we'd be feeling very positive. And the final point I'll make on that, I think the big license outcome effectively removes an uncertainty around license that's hung over us for many years. We've now got certainty on licenses. We need the market to turn. And then you throw in the Integrity Services business, the B2B business of media and there's a really good sort of mix there and they're high-margin businesses. So, I think we are well placed.

And just while I've got you there or Adam, in your notes to the accounts, you talked about a restructuring program that includes the use of third-party service providers and the cost will be incurred in the second half of financial 2024. Can you just step us through that program? What's the impact and the costs and probably more importantly, what are the benefits of that program?

Yes. So, I'll start and Adam will help. So that is actually a reference to the ITO and BPO outsourcing program that we've announced in the last couple of months. Effectively, it's a change in the business model where some of the technology operations and the finance operations are being outsourced to our Tier 1 partner. That will actually give us access to a really deep capability in those areas. It will give us access to efficiencies and cost benefits going forward. And I think it will be a better business for it. In terms of the costs, the cost to implement will be incurred in H2. You'll see in our materials, there's a breakdown of the significant items, and there's a bucket there for transformation costs. That run rate will kick up in H2 as that program is implemented. So, you should think that H2 will be a bit more than H1. And then the benefits we'll see from FY '25 and importantly, as an important driver of managing the cost through FY '25.

No, I was just going to say, I think that nails it. I think my point is that, our cost efforts are not adjust about being disciplined in managing our cost base. It is true transformation. ITO and BPO is substantial, but it's just one example of what we're doing. And we're committed to this program, all pillars of our strategy in this program is part of it.

Our next question comes from Rohan Sundram from MST Financial.

I'll just start with the one question relating to the VIC license and the renewal. Do you still expect to bank much of those savings or the gross savings? Or do you see opportunities to lift investment to stay competitive?

I'll jump in there. I think we've already got the Victorian business, is already invested in. So, we've been investing capital there through the current license. We've got a level of generosity spend in the market that's competitive. So, no, we're not planning to lift our CapEx or OpEx profile off the back of the VIC license. But what it does allow us to do is to be very targeted in the way that we do spend our cost to that CapEx and shift it towards growth opportunities because we're getting a much better return. In fact, the best return in the country will come through Victoria. So, it'd be more of a reshaping of the spend, Rohan, to focus on where we get the best bang for buck in terms of growth and what it delivers.

And just one more. With regards to the broadcast deal, how are you thinking about returns? Or how do you typically think about returns with these deals? And what gives you confidence you can get the returns on it?

That deal is a combination of sponsorship and a media rights deal. So, it's a very deep and extensive deal with the VIC. The way we think about it is we're strategic with who we partner with, and these things are more expensive than they used to be, and you're seeing that with our competitors doing various sponsorship deals with different clubs and codes around the country. Our approach is to be strategic about -- we can't do all of them. We want to do the ones where we can think we can use this platform for growth. And in Victoria, the combination of the big license and being partnered with the biggest and strongest club and what we can do with that from a customer experience a growth perspective with TAB, but also what we can do with that from a media rights perspective, both domestically and internationally is the way we evaluated it. And we're very happy with that deal. We think the combination of VIC and TAB retail license, the new license in VIC is really strong and going to set us up for strong performance in Vicor the next year.

[Operator Instructions] Our next question comes from Matt Ryan from Barrenjoey.

My first question was just on the cost base. I think when you set the operating cost targets, the outlook for revenue across the market was more buoyant than what's transpired. So, I was just wanting some help on how much of the cost base is flexible to be able to react, I guess, one way or another? And maybe if you could highlight some of the things that you might have reduced over the past 12-odd months in light of the softer revenue environment?

Yes. I think our strategy hasn't changed despite the fact the market is soft. It was difficult to anticipate when we set the strategy as to what the market would do through this period. But what we're doing is setting up this business to be more valuable over time. And we already had a program around restructuring our cost base, reshaping it, focusing it towards growth. That hasn't changed. What we decided to do in the first half is continue to invest in the repositioning of that brand, and we did that deliberately. I could have said, no, we're not going to do that. We'll wait until the market returns to growth, but we're positioning this to be in a really strong and growing high-performing position in the coming year plus ahead, and we didn't want to wait for that. So, I guess we're being very conscious in how we spend our OpEx than our CapEx to focus more of it on customer and growth initiatives to set us up for long-term success and just double down on our strategy. In terms of what have we done over the last 18 months since we demerged to restructure our cost base, I think without a Genesis program for everything we're doing, our OpEx for this year would probably be more like $700 million if we've done nothing. So, you can see the impact that our Genesis program is having. We've reduced our headcount that I talked about. Our management team has not been exempt for that with a 30% reduction in management layers. We've been outsourcing we've got procurement exercises that are underway. So, there's multiple, I guess, streams to this program, and it is making a very real difference on 2 fronts, reducing our cost base in real terms one; and 2, reshaping our OpEx and CapEx. So, it's more effective and focused on growth.

Can I summarize that the cost base is set to the end of the TAB25 targets irrespective of market conditions?

Matt, I think the short answer is, it's largely a fixed cost structure, which we are working hard to reduce. But there's also a component that is discretionary and can be flexed on market conditions, and that's obviously in the area of marketing, advertising and promotions. So, in the context of looking at 18 months, there's some flex there. You can flex up, you can flex down. Sometimes you went into longer-term sponsorship agreement. Sometimes there's an element of, as I said, money that can be spent or not spent. So, there is discretion to react and move with market conditions. I think, as I understand, Adam's sort of strategy and explanation is, we've chosen not to pull back. And I know that others have. We're very confident, I think, with our product, our offer. And I think that's borne through by the market share performance, by the way. So, as part of that, we've sort of held the line and tried to make progress where perhaps others haven't. And our Q2 market share gains have been really important.

Probably one thing I should add, Matt, is it's not in our OpEx line, but generosities is a large cost. And I think I mentioned that, that has been becoming much more efficient. And in fact, in January, our generosity spend was lower than last year, but delivering a better revenue performance, revenue better than turnover and good market share performance. So, it's not in our OpEx, but that's another area we're very focused on in terms of efficiency.

And with the impairment, what's the D&A benefit for 2025 or like a full year benefit? And can you share what the carrying value of those businesses after the impairment?

So the first question we estimate $40 million to $50 million per annum benefit in FY '25 of the reduced D&A and a half year benefit in the second half of this year. And the carrying value is the answer is, not much. Essentially, the majority of it, the 80% plus of the carrying value of those businesses has been written down by virtue of the impairment, so not much.

And just, I guess, last one just on the impairment. I'm not sure how much of the specifics that you can talk to, but what was the issue that drove the impairment now? I know you've talked about soft market conditions, but that seems to be I guess, something that will repair itself. Is there anything that you think that has changed on that front to cause such a large impairment?

Yes. I think there's 3 things, Matt. And we've, I think, pointed to those, and I'll just quickly recap on those. So, there is the macro factors driving the wagering performance. And I think 6 to 12 months ago, everybody was enjoying the highs of post COVID and the growth rates that we're seeing. And I think nobody was really able to predict whether the growth rates would sort of sort of stabilize and then grow from a new base or whether they would turn down. Effectively, we've seen a bit of a correction in this half that was perhaps not as evident 6 to 12 months ago. So, whilst we're all confident that there's a long-term growth story in a resilient category, I think the reality is, the macro factors have lowered the expectations for today, and that's essentially lower as the starting point going forward. But our assumptions are that we'll continue to see a 2% to 3% long-term growth in the category, and I think that's borne out by history. So, we will revert, but we're coming off a slightly lower base than what would have been expected previously. I think the second factor, which is, again, a market factor is interest rates have put up the cost of WAC. Our cost of capital was a bit below 9% at June. It's now 9.3%, and that's something that pretty much all companies will be dealing with. That's a factor. And the third one is a specific New South Wales factor, which is that New South Wales tax is effectively going up by virtue of the rebate that was in place for 18 months having now expired. So, those 3 things are all headwinds essentially going the wrong way, but they, in aggregate, meant that we had to really have a look at the carrying value and to make the necessary adjustments, which we've done.

And ladies and gentlemen, there are no further questions at this time. I'd like to turn the floor back to Mr. Adam Rytenskild for closing remarks.

Thank you, everyone. Appreciate your interest. We're very passionate about what we're doing. We believe in what we're doing, very focused on it. Again, I want to thank our fantastic team and put a lot of hard work into the first 18 months of our transformation and are committed to completing that through to the end of F '25. So, we're on track. We're happy that we're on track and look forward to talking to you over the journey. Thank you.

And with that, we'll conclude today's conference call. Thank you for participating. You may now disconnect.