Tabcorp Holdings Limited (TAH) Earnings Call Transcript & Summary

Good morning, and welcome... Hello, everybody, and thank you for standing by. Welcome to Tabcorp Holdings Limited Full Year Results 2024. [Operator Instructions] Now it's my pleasure to turn the call over to the Managing Director and CEO of Tabcorp, Gille McLaughlin.

Thank you, and good morning, and welcome to Tabcorp's full year results for FY '24. I'm Gillon McLachlan, and I'm joined on the call by our CFO, Mark Howell. As you know, we have both recently joined the business, and we're pleased to be announcing our results and meeting investors over the next week. You'll have seen a change in the way Tabcorp's results are presented. There's more information for you in the ASX release, and we've made some new disclosures in the media business, which reflects the feedback of investors and analysts. I'll take the ASX presentation and release as read. The challenges are clear, but so are the opportunities, and that's why I joined Tabcorp. I was drawn to the challenge of unlocking the value in a unique set of assets that have not yet realized their full potential. We're going to create a complete sports entertainment experience for our customers. The journey has started. The app is better. Our speed to market has improved. Our retail offering is being revitalized and we're achieving structural reforms that will make the company more competitive. I commend Bruce as Executive Chairman, the Board and the executive leadership team for the progress they've made on this journey. It's a very different company today compared to pre-demerger. The foundations to unlock value have been built. But the reality is the company is only partway through a turnaround, and we need to continue to enhance execution to create greater value. My job is to unlock new capability and to execute at pace. You're going to see continued change, a new cadence at Tabcorp, a plan that continues to evolve and the team that evolves as the plan changes. There will be a laser focus on people and on capability. I'm going to take the time to understand business capabilities and meet with stakeholders to listen and make the required changes. I'm a tab customer, and I'm a customer of our competitors, so I know how we compare with others in the market. There's no doubt that the TAB offering looks and feels different. It's much better today than it was at demerger. But our product and our business is not yet where I think it will ultimately be. I know our teams feel the same way. We will compete hard. Our media business is a unique asset is only one of its kind in Australia. Our retail network is the same. It's being upgraded, rationalized and revamped and further value can be generated. Strong foundations have been laid, but there is a lot of work to be done. We know the results are not where shareholders or the company wanted to be 2 years from demerger. The company will not meet the TAB25 targets, and I want to be clear about that today. This is a company with enormous potential, working hard to realize it. It requires change, but our goal remains unchanged to be a world-class diverse wagering and sports entertainment company. We're the only company that can deliver on that vision because we're the only company with such unique assets. Our strengths will inform how we compete. That's what I find appealing, and that's what I'm confident of doing in time, although we don't underestimate the challenges. I'll now hand over to Mark to talk you through the detail of the financial results before taking your questions.

Thanks, Gil, and good morning, everyone. I'm excited to have joined the company in the last few months. Like Gill, I believe the company has an enormous opportunity and look forward to working with Gil and the management team to deliver value for our shareholders going forward. Slide 20 shows the group result for the FY '20 year compared to the prior year. Tabcorp delivered EBITDA of $318 million, down 19% on the prior year, driven by a 3.9% decline in group revenue as a result of a soft wagering market and the divestment of the MPS business and EBIT in the prior year. Group OpEx increased 6.3% to $614 million and is above prior guidance. During the second half, we continue to see persistent inflation across most parts of the business, although our Genesis program, which delivered benefits of $25 million was able to largely offset this inflation. At the same time, the business continued to reinvest in customer-facing areas such as brand, data analytics and product. There were also higher costs associated with regulatory and compliance. The cost headwinds experienced in F '24 are likely to persist into F ‘25. However, we are targeting further savings of $20 million from Genesis this year. As part of this, in July, we completed another round of operating model changes that saw the removal of 85 roles across the business. A key priority of mine will be strong cost management and to ensure we are positively leveraged when the market returns to growth. In F '24, the effective tax rate was impacted by foreign income tax offset that were unable to be utilized. We have included a tax slide in the appendix that includes commentary on the F '24 tax expense as well as our expected F '25 tax expense, cash tax and franking position. F '24 NPAT before significant items was $28 million and the statutory net loss after tax was $1.36 billion, driven by impairments, which I'll now speak to. Lastly, before I leave this page, Tabcorp announced a final F '24 unfranked dividend of $0.03 per share. Slide 21 provides detail on significant items. Transformation costs with the Genesis program, demerger-related costs and one-off Victorian license bids were largely offset by the settlement of various tax matters. We announced in February a non-cash impairment of $732 million after tax. Given ongoing softness in the economic conditions, we have recognized a further impairment of $645 million after tax in the second half, which relates predominantly to New South Wales Wagering. On a pre-tax basis, New South Wales recognized an asset impairment of around $100 million and accounted for the vast majority of the goodwill impairment at the segment level. The impairment recognized in the second half primarily reflects a slower than previously expected recovery in the wagering market and a greater tightening of the regulatory environment as well as the impact of higher than previously expected inflation on OpEx. The impairment announced in February benefited depreciation and amortization in the second half of F '24 by $26 million. Together with the full year impairment, the expected impact on depreciation and amortization is $65 million in F '25. To be clear, that is a total impact of D&A in F '25 for both impairments. I'll skip Slide 22, as I just touched on it, and we'll turn to Slide 23, which shows the segment performance for F '24. I'll describe the Wagering and Media key financial performance first and then move on to Gaming Services. While Wagering and Media revenue declined 3% to $2.16 billion in F '24, reflecting a decline in the overall waging market. The decline was driven by turnover, which was 3.4% down for the year. Digital turnover was down 2.2%, reflecting a 4.9% decline in digital turnover, partly offset by higher yields of around 40 basis points. Generosity was 4.1% of digital turnover for the year, 3.9% in the second half and down from 4.4% in the first half as we benefited from improved generosity efficiency during this period. Cash wagering revenue was up 0.4% for the year, including growth of 5.3% in the second half. This was driven by improved yields of 40 basis points despite cash turnover being down 0.7% for the full year and being in growth of 2.9% for the second half. So overall, a pleasing cash result. Combined turnover in the second half declined by 2.9% and a relative improvement on the decline of 3.8% in the first half. Overall, domestic wagering revenue was down 1% for the year and up 2.3% in the second half. We were pleased with our relative turnover and revenue results when compared to that of other market participants. You will note in the presentation on Slide 11 that we have included an additional view of our relative performance versus competitors. This captures a much bigger proportion of the market in our previous measure and is based on net revenue, including generosities. On that basis, we have performed well versus our major competitors. Following a review of disclosures, international wagering has been included with wagering to better reflect the activities of this revenue stream. International wagering declined by 14.8% in F '24 due to the increased competition in the global pooling market. Media revenue declined by 6.2%, reflecting the impact of lower wagering market turnover to which a meaningful portion of media revenues are linked, as you can see on Slide 16. Wagering and Media VC margins improved 40 basis points for the year to 35.1%, benefiting from the Queensland license reform, which was partly offset by the annualization of higher [indiscernible] in New South Wales and an increase in Sky rebates to pubs and clubs. Wagering and Media EBITDA of $251 million declined by 18.4% with an EBITDA margin of 11.6%. Turning the focus now to Gaming Services. On an underlying basis, adjusting for the sale of MPS and EBIT businesses, F ‘24 Gaming Services revenue was up 10.1% to $163 million. Underlying Gaming Services EBITDA of $59 million has increased by 14.3% when compared to F '23 with an EBITDA margin of 36.1%. The Gaming Services segment is now underpinned by a high-quality integrity services business, which continues to perform strongly. I'll now move to Slide 25, which provides a breakdown of the key drivers of OpEx for F '24. We continue to see persistent inflation across the cost line of the business. In F '24, Genesis benefits of $25 million largely offset inflation prior to the investment we are making in key strategic areas and higher costs associated with regulatory and compliance. Adjusting for the insurance proceeds benefit in the prior year, OpEx increased 4.4% to $614 million. This is above prior guidance. As you can see in the waterfall, we invested in around $15 million in key customer-facing areas, such as the TAB brand refresh. It was pleasing to see this resonate with customers, and we performed well relative to our competitors. We also invested in data analytics, which drove an improvement in generosity efficiency across the year. In addition, we invested in market-leading vision, which is 7 seconds faster than other WSPs. We believe these investments will hold us in good stead going forward. Employee costs, despite being impacted by wage inflation came down by around $13 million as a result of operating model changes and the divestment of MPS. Demerger dis-synergies were driven by increased tech costs as the separation from TL fees grew to a close. We were able to offset some of these incremental costs via the Genesis program. Lastly, as the regulatory environment continues to tighten, the cost of regulatory matters and compliance costs also meaningfully increased year-on-year. We remain focused on improving cost discipline across the business and program execution to ensure we capture positive operating leverage when the market returns to growth. Turning to our CapEx investment on Slide 26. CapEx for the year was $151 million and in line with guidance. We continue to increase the proportion of CapEx invested in growth in transformation in line with our strategy. In F '24, we spent 64% of our CapEx on growth and transformation. This is up from 49% in F '23. Following 3 years of significant investment in digital and transformation, we now expect to reduce our CapEx in F '25 to approximately $140 million. This reduction also reflects changes in the mix of technology spend between OpEx and CapEx as we move to a more modernized cloud-based architecture. In F ‘25, we expect depreciation and amortization expense to be between [indiscernible] receive of the impairments recognized during the year. On Slide 27, you can see that we delivered strong operating cash flow conversion of 94% and generated free cash flow of $134 million. I'll now turn to Slide 28 and our capital position. Tabcorp continues to maintain access to diversified funding sources with no debt maturities until F ‘28 following the extension of our tranche bank facility to 2029. The company's balance sheet places us in a strong position to continue to pursue growth opportunities. As at 30 June ‘24, pro forma leverage was 2x net debt to EBITDA. We have access to significant levels of liquidity with approximately $600 million of undrawn funds and cash available. Our weighted average debt maturity is 4.8 years. Like any investment-grade company, we will manage our balance sheet to ensure it is strong and provides flexibility for growth. Eateries in operating performance and maintaining an appropriate buffer to our covenants. In addition, we will maintain access to multiple funding sources and an efficient cost of capital. In light of our recent license extension in Victoria, the enhanced credit quality of the business and to provide Tabcorp with the necessary flexibility in funding capacity to pursue upcoming growth opportunities, we no longer consider the target leverage of 1x to 1.5x net debt to EBITDA to be appropriate. We consider a revised target of less than 2.5x net debt to EBITDA to be more appropriate through the cycle leverage target. The target leverage measure is consistent with how our banks and note holders calculate covenants, and it includes interest-bearing liabilities, leases and cash reserves. As a new management team, capital allocation is a priority. We will be reviewing the capital allocation framework to ensure we have the right settings in place to navigate the risks and opportunities facing the business going forward. I'll now hand you back to Gil, who will provide some comments on the outlook.

Thanks, Mark. In the near term, we expect the macro-economic environment to remain challenging given expectations around interest rates remaining elevated and the high inflation levels that persist. The regulatory environment will also continue to tighten. Over TAB, which is already regulated in every state and territory we operate in, we're well placed to handle those regulatory changes. Australian wagering is historically a resilient market. I'm confident we'll return to growth and when it does, I'm focused on us being in a position to capitalize faster than our competitors. Within this backdrop, the business has solid foundations and unrivaled assets, but we need to move quicker and enhance our execution. We will be better. The key items on the outlook slides are, the market is expected to remain soft in the near term. Amongst other things, this will impact the uplift from the Victorian license as you've seen in the FY '24 year, and the company will not hit the FY '25 OpEx guidance. There will be a change in Tabcorp. This is a business of enormous opportunity that must be realized. I can see the asset base creating a world-class sports entertainment experience. The turnaround will take time by the rewards we're unlocking the significant value that is hidden within the unique assets of this great legacy brand. Mark and I now have to take your questions.

[Operator Instructions] Our first question comes from the line of Andre Fromyhr with UBS.

Firstly, I just wanted to ask about your outlook commentary about the wagering market. When you say that the softness from second half '24 is expected to continue in the near term. Are you talking about continued declines in the overall market? Or is it really a story of not expecting much growth. I wonder if you could talk through some of the assumptions that you're carrying on those comments.

So we've obviously seen turnover sort of negative through the second half. I suppose the recent trends we've seen in the market we saw in the second half has been broadly consistent with the first period of the F '25 year. So not really seeing any trends there. The one thing we would call out, obviously, is we have gone through a period, and we acknowledge a period of fairly strong yields for some time. I suppose we would disflag whether it's a bit unclear as to whether those yields will remain strong or we see some level of reversion.

I was just wondering Gill, you commented on the scale of the opportunity and the quality of the assets and you're sort of doing the rounds, meeting stakeholders learning more about the business. But could you put a bit of a time frame on when we would expect you to come back to the market with your strategy under the next year?

Yes. Thanks, Andre. Yes, I was the only time I mentioned this on day 18. So I think people would expect me to get around and speak to the right people and take the time before I come back to the market. I'm aware of the pressure on that. But I'll be coming back when the plan is set. Then I believe it's the right plan for shareholders going forward. That's going to be how long it takes. I want to make sure that it is considered and sharp and then we've got to execute.

Maybe just one final one for me, specifically on costs. As much as there has been a, let's say, a departure from the existing Tab25 OpEx targets. Should we still assume that the Genesis program remains in flight, both in terms of how much you spend is going to be spending on transformation, but the scale of those benefits. I'm curious if that's still kind of part of the strategy, at least for now?

Yes. So what I'd say is we've called out in the outlook, Andre, that we're targeting Genesis benefits of $20 million in F '25. I think from a transformation perspective, you should assume given if you look at the significant items and what we spent on transformation in F '24, a decent chunk of that related to the new ERP. So you should expect that the amount that we've been spending on transformation in F '25 to be significantly reduced from that level.

Our next question comes from the line of Justin Barratt with CLSA.

Gill, I just wanted to ask you directly, look, the labor government is pondering some relatively significant advance for wagering across the market. I was just keen to get your thoughts directly on the prospect of those ad bands. Any indications that you could provide on how we should think about the impact on your business going forward?

Yes. Thanks, Justin. I've made comments in a formal life publicly, and I think they're consistent with Tabcorp's position, which is I think there's too much advertising, and we expect it to come down. Then I don't want to front run where the government will land. But when we look into this business with the unique assets that we have, I think we're best placed in the market to absorb whatever the change looks like. We are not modifying our outlook based on any potential changes. We think that actually our unique assets see us well placed to absorb that, and it's consistent with the broad philosophy that Tabcorp has come out with that a reduction is appropriate.

I just wanted to a quick one on the proforma impact from the Victorian Wagering and Betting license. I think previously, the proforma uplift was to be about $115 million, or sorry, you previously said the proforma uplift would be about $140 million in FY '23, but now you're saying it's about $115 million to EBITDA in FY '24. I just want to understand, is that reflective of more of the operating environment? Or is there something else at play there in terms of that preforma uplift?

No. It's just as you called out, it's just on the operating conditions in the marketplace. Obviously, the earnings that would materialize from that was always going to be dependent on market conditions. The $140 million that we previously gave was based on market conditions of F '23. Obviously, since then, in F '24 market conditions have continued to soften. Obviously, as you think about the look forward, you need to form a view on what you think as far as F '25 will look like and which will determine, I suppose, how you think about the earnings benefit from the vehicles going forward.

Our next question comes from the line of Rohan Sundram with MST Financial.

Just a couple for me. Firstly, Gill, maybe to hear your thoughts on, from a customer's perspective on the Tabcorp product and how competitive you think it is in this environment? Just any thoughts you have on the competitive landscape?

Thanks, Rohan. I think that I want to commend the team on the huge improvement in the TAB app, it's dramatically different from where it was 2 years ago, and it's a very good wagering app. I do think there's opportunities or for product improvement. The team know that and both in terms of functionality and product. So I think it's a really strongly competitive app in the market, but I do believe there's opportunities for improvement. I know the team feel the same way. I think the competitive landscape is exactly that. It's competitive. Our job in here is to compete strongly. I think leading has competed strongly using our competitive advantages. I think we are now competing strongly digitally. I think there's opportunity to play to our other strengths as we meet the market.

Our next question comes from the line of Matt Ryan with Barrenjoey.

The cash number within your retail business was pretty strong. I think it grew about 5% in the second half. I note that a lot of the pubs and clubs data across the country is also quite strong, but historically, that retail business hasn't sort of managed to keep up with the pace of growth probably for structural reasons. Can you just give any color on why you thought that number was so strong in the period?

Thanks, Bateman. My observation and as I look at the earnings results of relevant companies, as you've called out, is that pubs are back big time. My data sample of 1, as I live in Parana all the 3 problems in my precinct have booked out every night, and they're busy. That's the prevailing view in here is that the pub post curve become the hardware of the community. People are spending family individuals, all demographics entries but finding time and their incentive to become a center of the community. I think we're seeing that beyond our numbers into other verticals.

Just looking at Slide 9, you've sort of walked through, I guess, where the product is at. it seems like the app is taking a lot of those boxes love to preempt your strategy that you're going to go away and work on, but one thing that doesn't appear to be so much on that page is, I guess, the concept of data analytics and sort of more personalization than below-the-line promotions. Is it fair to say that's probably a decent area of opportunity for Tabcorp still?

Yes. It's a big project, the personalization project. Jenny and Al and the team are working on that. It's a priority for us. When we're able to unlock that, I think, again, that talks to the suite of assets we have, and it will be a very powerful weapon for Tabcorp, and it's a huge priority for the business.

Just one last one on the gearing, the target change. So I guess, the words that you're using is that you'd like to see gearing below 2.5x through the cycle. Just sort of curious on that comment of through the cycle, whether you'd be willing to, I guess, allow for the gearing metric to go above that 2.5x perhaps the right reasons?

I'll look modestly, I would say. But obviously, we would want within a reasonable time frame to be well below the 2.5x. So we're sort of just giving ourselves a tiny bit of flex at the edges, obviously, just not knowing sort of the machinations of the market. But clearly, we want to be prudent in terms of the way we manage the balance sheet, the less than 2.5 provides significant headroom to our covenants. As I said, is consistent with how our lenders actually calculate covenants. So we feel very comfortable, inclusive of the fact that, obviously, with the new Victorian license the credit quality and the certainty of the cash flow of the business is materially enhanced.

Our next question comes from the line of Rohan Gallagher with Jarden Group.

Mark, significant items it has currently exceeds your market cap. Can you walk us through the assumptions that you've taken in regards to the incremental $700 million write-down at period input?

Well, what I would say, Rohan, I'm not going to go through the specific assumptions. Obviously, we've made some assumptions around the market. Then obviously if you look in our disclosures in the annual report, you'll see more detail around some of the assumptions that are outlined obviously there around tax and other things. I think what we'd say is sort of in my voice over, is that obviously, the vast majority of the impairment was a result of where we are in New South Wales. As I said, on a pretax basis, the impairment was around $100 million in assets and accounted for most of the goodwill impairment. The 2 key factors were a slower than previously anticipated recovery in the Australian wagering market. That was driven by the fact that there's been persistent inflation and elevated rates relative to what we thought back in February. That has obviously impacted the consumer spending on wagering activity. Obviously, they've been also at the same time a tightening of the regulatory environment. So a slower recovery is how it's relative to what prior expectations were. Then on the other side is obviously just more impact on the cost base as a result of persistent inflation. So I'm not going to go into it any further than that, but they are the 2 kind of key drivers of the outcome.

I was more focused on forward earnings, but I'll take that. Just a follow-up, if I may. Sky Racing, unique media assets, as Gill touched on fantastic. A lot of rebates have been made across the new base. Are we pretty well through that now? Or will that have an adverse impact on FY '25?

So now there is more to come in F '25. It's sort of low double digit in terms of the impact of Sky rebates. But what I'd say, Rohan, is that there are other initiatives that we're working on that we think will offset that drag from increased sky rebates going forward, which is why you didn't specifically call it out in the outlook statement.

Our next question comes from the line of David Fabris with Macquarie.

Look, I'm curious about the operating costs. I mean, is there any ability to make wholesale changes to the cost base in the near term? Or are you happy with the size of that cost base relative to where your volumes are?

Well, I'll jump in there. Clearly, the OpEx targets are not going to be hit, and we've called that out [indiscernible]. I think some comments to make is that I think that some of the underlying assumptions are not correct have proven not to be correct. I think we're seeing persistent inflation, and we're seeing the increased costs of regulation playing a persistent role in stickiness in that cost base. It doesn't mean that clearly, it's going to be a focus, but the cost base has been impacted by those in a pretty sticky way.

Just to jump in and build on that. I think it's been previously called out. But the cost base obviously does have a large amount of fixed costs associated with it. Gill and I are very focused on costs going forward. It is going to take us some time to get our arms around it and put in place the right programs of work and ensure that we've got the right execution going forward. So by no means that we're sort of sitting there going, we're happy with the outcome. We're trying to be realistic as to what we see and be clear with investors on that upfront. But it's certainly going to be a sort of big focus of ours going forward.

I guess I want to try to understand if we can foreshadow a cost-out program in the next 12 or 24 months to right size it to where volumes are?

Yes. Look, as I sort of mentioned earlier, we're targeting Genesis savings next year of $20 million. We will be looking at other opportunities we've got to right size the cost base in addition to that. We're obviously not committing to that today. But certainly, a lot of these things, what I'd call is sort of the low-hanging fruit has been sort of worked through. But we'll look at further opportunities going forward, but that's going to take a little bit of time just to get that program humming like we'd like it.

One more question. Just on wagering, we've had the BetStop program in place since late August last year. Can you make a comment on how much of the volume impact that may have had to the industry or maybe yourselves and whether cycling that in August is going to be a positive tailwind to the December quarter?

I'll jump in and maybe Gill can build. Look, whether it's BetStop, there's certainly been just new measures brought in by regulators that have impacted the market. I suppose the other one we'd point to more recently is credit card ban. So whilst BetStop we would have cycled that in August, there's probably been other things that have been sort of introduced more recently. Obviously, has been touched on this call, there's potential advertising restrictions coming in as well. Switches also played into our forward thinking of the market. So it's certainly been a drag. It's really difficult to quantify the exact nature of that drag. But yes, obviously, I would like to sort of see that dissipate over time.

One last question. Do you think BetStop possibly had a benefit to your retail business seeing the growth we saw in that second half in particular?

That's not something we've considered our view is the volumes of the pubs which are represented across the board is clearly what the view of the market in the year is. I think to add to the first part of your question to Mark, is we're totally committed to regulatory reform and safe environment. Any impact on the business is accepted and as part of our outlook going forward.

Our last question comes from the line of Kai Erman with Jefferies.

Just one for me on the OpEx guidance. Just when you spoke about inflation and regulatory costs increasing. Would you be able to provide any quantitative flavor on that, just in terms of the inflation assumptions, if that's going to be in line with CPI and maybe the quantum of the regulatory cost step-up you're expecting in FY '25?

Yes, we're not going to provide specific guidance on the regulatory cost that you should assume it's more modest than what we've seen as far as we can see right here right now. We wanted to call it out because there has obviously been a meaningful impose on the business, some of which will flow through into F '25. But obviously, from a general inflation perspective, I think you can probably form a view based on what you're sort of seeing and hearing from other companies and what you're just sort of seeing from a CPI print perspective is a fairly good sort of indicator of the sort of inflation that we're seeing on the cost base as well.

Just following on from Matt's question in regard to the leverage target. Just curious whether that's implying a change from you guys and sustainable earnings through the cycle? what are the potential uses for the additional capital that you guys could tap into as part of that leverage target?

Well, I mean, obviously, just I mean, Gill can talk to some of the potential growth. I mean, obviously, just any sort of future growth opportunities the business sees going forward. I just want to be clear that the idea here is not to leverage up to 2.5x that the target is less than 2.5x through the cycle. It's just in providing, as I sort of said, future flexibility for growth. We don't have anything right here right now. I suppose the obvious thing is reform in New South Wales.

All I'd add to that is that, I mean, clearly, there's many opportunities across the business that would require investment if the Board thought that was the right way to go.

Would you guys think about the use of capital in terms of taking on more leverage? Or is there any view that you would look at integrity services or future source of funding? Or would you go to look to keep that part of the portfolio if the right opportunity came up?

Without committing anything, the balance sheet is obviously always being looked at. The Gaming Services business is performing strongly in opportunities for growth in that. There are licenses up for review and our focus at the moment on that business is to make ensure it continues to grow and perform strongly.

As I see no further questions in the queue. I will turn the call back to Gillon McLachlan for his closing comments.

Thank you. I want to thank all of you for joining today. I want to thank you for your focus on our business. Hopefully, take away that today from Mark and I that we are clear of the challenges, but clearly also see the opportunity, and our job is to unlock that, and we'll work with you on relevant updates and discussions as the strategy evolves and thanks for your time.

With that, ladies and gentlemen, we thank you for participating in today's conference, and you may now disconnect.