The Lottery Corporation Limited (TLC) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to The Lottery Corporation Full Year Results Briefing. [Operator Instructions] I would now like to hand the conference over to Ms. Sue van der Merwe, Managing Director and Chief Executive Officer. Please go ahead.

Thank you. Good morning, all, and thank you for joining us for The Lottery Corporation's full year results for FY '22. I am Sue van der Merwe, Managing Director and CEO, and I'm here in Melbourne with Adam Newman, our CFO. As you'll be aware, The Lottery Corporation became a listed entity as a result of its demerger from Tabcorp, and that became effective on June 1. And we're very pleased to bring you our first set of financial results as a stand-alone company. Appreciate it's a busy reporting day for you, so we'll move straight to the presentation lodged with the ASX this morning, and then we'll answer any questions you have at the end. Slides 3 to 5 provide an overview of The Lottery Corporation, and I'll just comment on some of the highlights from those slides. Firstly, this business has significant scale and reach. The equivalent of 46% of the adult population bought one of our products in the past 12 months. And that's 8.3 million customers, and just under half of those 4.1 million are registered to our database. Our lotteries retail network is one of Australia's largest retail franchise networks, and as well as providing important customer service, it provides high visibility for our brands. And then added to that is our extensive license venue distribution channel for our Keno network -- our Keno product, should I say. Secondly, we are the leader in lotteries and Keno in Australia. And I'm proud to say we rank amongst the highest-performing lotteries companies in the world. Some of the key attributes that underpin our success are our diverse product portfolio, our very trusted and high-profile brands, our digital capability both in marketing and distribution and our growing digital channel and the focus we have on being customer-led and on curating customer experiences through data-driven insights. And finally, this business makes a positive impact to our winners, to communities with $1.7 billion paid in taxes to government and to thousands of retailers, many of them small businesses. Slides 7 to 8 go through the executive summary, and I'll just talk to an overview of the business results on Slide 7 firstly. We're pleased to be announcing another record result in FY '22, and that follows a very strong FY '21 when we saw a rise in lottery product purchases during the height of the pandemic. At an overall portfolio level, we were able to retain the premium from COVID in FY '22. And once again, the resilience of lotteries in different trading conditions came through. In terms of the key figures, group revenue grew over 9% while group EBITDA was up nearly 12%. Our strategic approach to managing our diversified and balanced product portfolio across our lottery products delivered another successful result. Saturday Lotto and Set for Life were resilient in the face of heightened jackpot activity. In Powerball, which demonstrates the success of the recent changes we made to the Saturday and Set for Life games, and active management of jackpot sequences and our continued focus on brand, on customer and channel are evident in the results as well. Keno was impacted by venue closures due to the COVID lockdowns, but digital growth was strong, and that largely offset the reduced retail activity. Moving to Slide 8 and our key initiatives for FY '22. There were 2 key priorities for us during the year, delivering the demerger and maintaining momentum in the business. The demerger work was extensive and complex, and much of it was carried out while managing the impacts of the pandemic on our teams and the business. It's a significant achievement to have implemented it successfully and on time and, at the same time, to have delivered on a number of initiatives to drive the performance of the business. The change we made to Oz Lotto in May '22 was designed to deliver bigger jackpots and to reinforce Oz Lotto's strategic position in the jackpot segment of the game portfolio. And that change has been well received by our players. Oz is our third biggest contributor to digital sales, and it's one of the main acquisition games into the portfolio. On Keno, we secured a new 20-year Victorian license on a nonexclusive basis. And that runs through to 2042 and now allows for digital sales. The focus on customer experience and omnichannel came through in other initiatives such as digitally enhanced retail, which we launched for Keno. And what that is, is it gives players in pubs and clubs in New South Wales new features such as electronic tickets and real-time win notifications. I'll now hand over to Adam who's going to take us through the next section.

Thanks, Sue. Hi, everyone. Thanks for joining us today. It is a very busy time of the year. There is some noise in our numbers as a result of the demerger. And on Slide 9, what we've provided is the reported results, and these are the numbers that you'll see in our financial statements as well as our comparable results, and it's these comparable numbers which are more reflective of the ongoing business. In order to effect the demerger, an internal restructure was undertaken. And this resulted in Keno being part of The Lottery Corporation for just 1 month in FY '22, with the debt also transferring at the time of demerger. Consequently, our reported results reflect 12 months of the lotteries in both periods, however, only 1 month of Keno and 1 month of interest on the transferred USPP notes and our bank debt. The comparable results adjust the reported numbers to include the contribution of Keno fully in both periods as well as the impact of the fair value uplift on the Keno acquisition. Should be noted that the comparable results don't include the full year impact of demerger synergies, and they stop at the EBIT line as there's no meaningful basis to be able to allocate interest given the central funding model that was previously utilized by Tabcorp. Significant items in the current year relate to the demerger and the sale of our Jumbo shares in the prior year. Slide 10 bridges between the 2 financial years on a comparable basis for the group. Earnings over this period increased by close to 20% -- 20%, rather, 12% off the back of a strong performance by Powerball. This was assisted by favorable jackpot outcomes and margin expansion following the ongoing increase in the digital share of turnover. Keno performed well given the retail closures in the first half and rebounded strongly as COVID restrictions ease. Nearly half of the OpEx increase in FY '22 was one-off costs in the second half, and this largely related to separation. If we exclude those, the second half represents a reasonable reference point for the future as this period was relatively free of COVID impacts. FY '23 OpEx will also reflect the initial dis-synergies and cost inflation. I'll now hand you back to Sue to talk to the results of our 2 segments, Lotteries and Keno.

Thanks, Adam. So on Slide 13, we set out the sources of revenue growth in lotteries. The first green bar includes the benefits of the accelerated jackpots sequence, which we put into play with Powerball, which enjoyed a favorable jackpot run during FY '22. We had strong growth in digital sales, increasing about 26% in FY '22. And that drove margin improvement. And the result also highlighted the resilience of our retail network, which grew sales and still remains our largest selling channel. In terms of OpEx, Adam has already called out the one-off impacts in the second half. Apart from that, we saw an increase in promotional spend to support the stronger jackpot sequences along with some increased investment in technology. On Slide 14, we then look at performance within the portfolio of games. Aggregate sales for our jackpot games Powerball and Oz Lotto grew strongly largely due to Powerball and the active management that we deployed in accelerating jackpot offers. Powerball also benefited from 53 draws versus 52 in the PCP. Sales for our base games were slightly down on the PCP, but as you can see in the table of 2-year growth figures, they were up 5% to 10% on pre-COVID levels for most games, even excluding the price increases that we've put through. We manage our overall portfolio for growth by having games that appeal to different customer motivations. And what that does is reduce the variability of our overall results as the product mix changes from year-to-year based on jackpot activity. Slide 15 shows that Powerball jackpot outcomes were at the 65th percentile and Oz were at the 35th percentile in FY '22. So the percentage impact on each of the jackpot games was similar but clearly in opposite directions. As Powerball is the highest-selling game, the net impact from that was that overall turnover for the year from those favorable jackpot outcomes on Powerball was around $100 million. Slide 16, which looks at our channel mix as well as our customer growth. So as I mentioned in the opening comments, we now have around 4.1 million active registered customers. That's an extra 330,000 on last year. Those registered customers are very important to us as we can directly market to them in a more personalized way, and it also makes our marketing more efficient. On this slide, you can also see the continued shift in the channel mix, with digital now accounting for nearly 38% of sales. But we're pleased that retail also grew in FY '22 and remains resilient. It's an important part of our omnichannel approach that allows customers to buy when and where they choose to. On Slide 17, we drill down into how we're managing Powerball to maximize its appeal to customers and optimize returns. It's been 4 years since we implemented the Powerball game change, and it has delivered the bigger jackpots more often that we designed it to do. It's been very successful. And it's allowed us to appeal to a younger adult demographic and expand the customer base. To maximize results, in February, we accelerated the jackpot sequence, skipping straight from $80 million to $120 million rather than going to the $100 million level that we had done previously. And that draw actually outsold the $150 million draw of 2019, and it accomplished that in a shorter period of time as we got to that level in 7 weeks as opposed to 9. On Slide 18, we look at Keno. Keno is an important part of the group. It offers diversity of earnings and exposure to the licensed venue channel along with digital distribution in some states. As mentioned previously, Keno was substantially impacted by venue closures in New South Wales, and that naturally had an effect on both revenue and margins. New South Wales is our largest market for Keno, and it's one where there's no digital alternative. But Keno was able to compensate elsewhere with the impact of the closures, largely offset by digital coming from other jurisdictions. On Slide 19, we take a closer look at the channel mix during FY '22, with retail turnover down 9% and digital up almost 15% to now account for almost 19% of sales. Now for the next 2 slides, commencing with Slide 21, we'll go on to capital management. And I'll take -- I'll pass over to Adam to take you through those. Thanks, Adam.

Thanks, Sue. If you'll use the comparable numbers, our gearing at 30 June was 3.1x net debt-to-EBITDA and 3.6x on a reported basis. Gearing levels are the result of the demerger debt allocation exercise with strong good performance pre-demerger favorable to debt levels. We expect significant expenditure beyond BAU CapEx in the year ahead, with around $150 million in one-off implementation costs as we look to complete the technology separation from Tabcorp and will be -- and this expenditure will be a mixture of both OpEx and CapEx. We have a strong investment-grade credit rating, and our cash flows are largely shielded from rising interest rates with over 80% of our debt at fixed rates. We expect BAU depreciation and amortization next year to be in the range of $100 million to $110 million. And if we exclude license amortization, our BAU CapEx and D&A should broadly align over time. On to Slide 22, read capital management. And Tabcorp today announced the final FY '22 dividend with reference to 5 months of The Lottery Corporation earnings prior to demerger in addition to their second half 2022 earnings. Consequently and as we foreshadowed in the demerger booklet, the TLC Board has determined not to pay a final dividend for this financial year. We anticipate that we're likely to pay our first dividend in March 2023, and this will have reference to 7 months of earnings post-demerger. As always, the payment of dividend is subject to law, our business performance and all necessary Board approvals. In terms of our overall facilities, the bulk of our debt is the $1.8 billion in U.S. private placement notes, which is fully hedged for both interest rates and currency. We also have in place $950 million of bank debt facilities, of which $570 million was undrawn at year-end. So in summary, the key message I'd like to leave you with is we've got significant liquidity and a strong balance sheet with limited exposure to interest rate movements. And this is a good financial position for us to be in as we start our journey as a separate public company. I'll now hand back to Sue to take us through the final slides. Thank you.

Thanks, Adam. So on Slide 24 and 25, we talk to our strategy and our key initiatives for FY '23. And I'll start with Slide 24 and the overarching strategy. Driving sustainable and profitable revenue growth has been at the core of our strategy for many years. And we've had and continue to have a very clear focus on being customer-led, on offering innovative products via an optimized channel mix and then managing our portfolio of games for sustainable growth. And while it's not an immediate priority, we remain alive to opportunities to enhance our existing licenses and also explore new licenses or new opportunities that align with our criteria. Finally, we're always conscious of the important role in the community that our business plays, and we're strongly committed to enhancing our responsible play initiatives and also our really strong regulatory and industry engagement. The Lottery Corporation, of course, is a relatively new company, having been listed as a stand-alone entity less than 3 months ago. So the management team and Board are continuing to refine the company growth strategy. Focusing on our key priorities for FY '23, while the demerger has been implemented, there's still substantial work to do to completely separate vendors' systems and some of our functions. So that will be a key focus for us in FY '23. And along with that, we'll be focusing on continuing to drive the momentum in the business. And on that front, as we continue to evolve the lottery game portfolio, our next game change intends to focus on Monday and Wednesday Lotto. It's our fourth largest game, and it's often played in conjunction with the leading games Powerball and Saturday Lotto. And it appeals to existing players, and it forms part of our base game offer. As usual, any change we make will be very well considered, it will be informed by customer research, and we will look at all the elements of possible game changes as we usually do. One of the key initiatives for us in FY '23 is taking retailer Store Syndicates online. It's a really exciting initiative, and it's going to deliver another element to our omnichannel strategy to align that retail and digital experience. Store Syndicates are important to our retailers, and this is going to make it easier for customers to discover and join syndicates wherever they are playing. With Keno, we'll seek to leverage the digital element to the new Victorian license, and we'll offer enhanced features and offers on the app for customers playing in venues. In terms of what we've seen so far this year, jackpot offers have gotten off to quite a slow start, but it's very early days. And that aside, we've been very pleased with trading to date. As an example, the basic games in the portfolio have been holding up well and in line with the volumes of late FY '22. And we're also pleased at how Keno has rebounded strongly. So finally, on to the Slide 27 and our conclusion. And I'll conclude by saying The Lottery Corporation has begun life as a stand-alone company with momentum. We've delivered a record result in FY '22 following a very strong FY '21. The successful demerger has enabled The Lottery Corporation to list as a stand-alone company on the ASX and showcase what is one of the world's best-performing lottery businesses. We offer the games that Australians love to play. Our game portfolio is strong, it's healthy, and we're focused on maximizing the value and upside from existing licenses. The Lottery Corporation has infrastructure-like and defensive asset qualities, low capital intensity, strong cash flows and upside potential from digital growth. These are the key attributes that underpin our investment proposition. Thank you, and I will now open the line for questions.

[Operator Instructions] Your first question is from Rohan Sundram from MST Financial.

Just a couple from me. I'd like to start with the outlook for variable contribution growth in lotteries. I just thought given digital penetration continues to increase or if you continue to do that, would you expect to grow lotteries' variable contribution at greater than revenue growth on an ongoing basis? Or maybe if you can talk through the other variables like commissions, et cetera, please?

It's Adam here. I'll take the first. We've talked about in the past the biggest movements from a VC perspective have been the contribution of digital. So we've talked about it in terms of 1% movement in digital sort of gives us roughly about a $5 million uplift. And on top of that, we've seen some expansion in recent times from changes that we've made to some of our reseller agreements. And they're probably the 2 areas that have driven the VC margin contribution that you're seeing there. So to the extent that we continue to see growth in digital, there's no reason that you won't continue to see that margin expansion occur.

Okay. Should we expect any changes to commission frameworks going forward?

At this stage, we don't have anything in the pipeline, but we're alive to do -- I guess the importance of our retail network and having that strong and having a strong digital channel. So I guess as we go forward, we'll continue to make sure that our retailers are well supported and can remain viable.

One last one, just a quick one for Adam. Are you able to provide any rough split between CapEx and OpEx in the implementation spend?

Yes. So that's the million-dollar question. There's a combination of factors that we're going to work through. So it's not just the split between OpEx and CapEx. It's also useful life. I don't want to get too granular at the moment because it's still a work in progress. But I would say while we're trying to have as much as we can be classified as OpEx, there will be naturally some that will have to fall into the CapEx bucket, I think we've been working broadly with a range of maybe 40% to 60% in there as a CapEx split. And then you'd have to apply useful life upon some of those assets. And it's a bit unique but useful life -- a lot of the expenditure does -- not all, but a lot of expenditure does relate to technology. So you're probably talking 3 years useful life for a big chunk of the expenditure, 3 to 5 maybe.

Your next question is from Justin Barratt from CLSA.

Just one. First one, just on the -- when you announced the demerger, you suggested that your dividend policy was to pay 70% to 90% of normalized NPAT. I understand from your presentation that you are, I guess, continuing to refine your financial framework. But is there any potential for that to change? Or is that the current -- or does that remain the current policy for the moment?

I suppose the answer is yes to both of your questions, this is the current policy, and it does have potential to change. We're very early on in our journey as a separate public company. We've got 3 new Board members who are at this stage observers. We will look to refine all our capital metrics and settings. And I think when we come back to the market at the half year, we will be able to point to our first dividend. We can update you at that point then.

Fantastic. And then just in relation to the Oz Lotto update that occurred in May, I was just wondering if you could give us an indication of the impact that that's having, whether it's in line with your expectations or not.

Yes, sure. I'll talk to that. It is in line with our expectations. As I mentioned in the presentation, that game was designed to deliver bigger jackpots, and that will -- we expect that, that will come through. These things sometimes take a little bit of time to play out. It's only early days since we made the change. So the jackpots have gotten off to somewhat of a slow start, but the matrix is there to support the bigger jackpots. And importantly, we've definitely been quite pleased with the way trading is going on that's going to date at an individual draw level.

The next question is from Bradley Beckett from Crédit Suisse.

Just now that Keno venues are reopening in Victoria, can you quantify the impact on the ACT digital turnover? And also maybe if you can share any expectation for Keno digital penetration for FY '23 going forward.

I'll talk first to the -- any sort of targets. There's no specific target, but there's no ceiling either. We definitely see potential upside beyond the current levels. Target forward, probably some of that digital growth. We think there's a great opportunity in Victoria. We've got the customers in that jurisdiction, and we can market to them directly, 30,000 Victorian-based customers that are playing through the ACT license. We're also very focused on bringing the omnichannel thinking and the customer experience thinking that we've been applying very successfully through our Lotteries part of the business into the Keno part of the business. And the first example of that is what we're calling digitally enhanced retail in New South Wales. And that's about really bringing to life a ticket that is bought in retail on your digital device while you're in venue, and there's other initiatives in the plan to continue to integrate those experiences. The other part of the question, sorry, can you just repeat the first part? Because I've spoken about the second part, and I've lost track on the first.