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

Good morning, and welcome to The Lottery Corporation's Results Call for the 2023-'24 Financial Year. Your speakers today will be CEO, Sue Van Der Merwe; and Chief Financial Officer, Adam Newman. Following the presentation, we'll open the line for questions. I will now hand you to Sue.

Thank you, and good morning all, and thanks for joining us. I'm exceptionally pleased to present a record result for The Lottery Corporation for FY '24. A very successful year for our game portfolio with revenue up 13.8% to just under $4 billion. Active registered customer numbers up to 4.75 million, that's an uplift of 500,000 and growth across both digital and retail channels delivering we're on our plan. We are actively managing the business, and we are seeing the{ UHresults. The FY '24 result is a great example ofour portfolio strategy delivering. With $771 million additional value in Jackpot offers versus the prior period, we delivered a 26.7% increase in jackpot game turnover with most base games down only 2% to 4% on a like-for-like basis. That shows the strength and resilience of our lottery business. It was certainly a year of big jackpots. The big events, including $200 million for Powerball and $90 million for Oz Lotto on Boxing Day, captivated the nation, driving customer acquisition and reactivation. Good long-term product strategy, active portfolio management together with excellent marketing campaigns helped deliver the success of those events. Game innovation is a proven capability in the team. And this year, we successfully embedded and benefited from the Powerball price increase and the commission rate increase, which we implemented in May '23. Our retailers also benefited from the increases. And overall, we were pleased to return $725 million in commissions to retailers and venue partners. Stakeholder engagement is a strong focus. The low spend, mass participation model of lotteries underpins wide community acceptance, and we are actively engaging with governments and regulators. FY '24 delivered returns of $1.9 billion to state and territory governments. Finally, given the very strong result, the company's strong financial position and our focus on delivering shareholder returns, the Board was pleased to determine to pay a special dividend of $0.025 per share in addition to a full year ordinary dividend of $0.16 per share. Slide 5 provides a reminder of the company's investment attributes, which have contributed to our strong FY '24 performance. We are a business with a significant customer base, powerful brands, significant retail distribution, digital upside, strong cash flow generation and defensive qualities. The resilience and historical growth of the lotteries and Keno market over the past 2 decades is demonstrated in the long-term growth chart on Slide 6. The consistent and growing demand for our products over time has established us as a market leader and one of the top-performing lottery businesses globally. I'll now hand to Adam to take you through the next slides.

Thanks, Sue, and good morning, everyone. I'd like to highlight at the outset that while we've delivered strong top line growth, we've also delivered an increase in our margins. We've been able to increase our registered customer base, and we've also increased our dividend. This has all been despite the challenges of high inflation and rising interest rates. Slide #7 gives us a snapshot of our FY '24 group results. These results benefited by the jackpot outcomes during the year with both revenue and VC, up by approximately 14%. We also saw an increase in EBITDA of 16%, and this was despite above average OpEx growth. Depreciation and amortization rose 10%, and this was primarily the impact of separation spend. Interest expense declined $3 million, and this was a combination of higher average debt and cash levels and increased interest rates during the course of the year. We are materially insulated from rising interest rates given that about 85% of our debt is fixed. So whilst interest expense actually rose, this was more than offset by an increase in our interest income. Net profit after tax pre significant items of $412 million was an increase of 21% on the prior year. There were $2 million of significant items, and this was a combination of the remaining separation costs, which were offset by receipts from the ATO tax settlement, and we have provided further details on these in Appendix 1. If we move now to Slide #8. And as Sue pointed out, turnover drove a record result despite the OpEx pressures. EBITDA rose from $713 million to $827 million. The main drivers of this increase were a combination of favorable H2 jackpot sequences, initiatives that were delivered and active game management. Revenue benefited from above model jackpot outcomes, and we've estimated this impact to be approximately $250 million for the year. This had an EBITDA impact of around $50 million. This is allowing for some transference amongst games in the portfolios and some increase in our advertising costs. In addition to the 9% Powerball increase and the 2% commission rate increase, Lotteries VC was favorably impacted by Set for Life interest revenue, a step-up in our digital share in the second half of the year and a final step up in a jumbo reseller arrangement. Group OpEx increased by $30 million -- $29 million rather, sorry. Approximately $13 million of this increase was estimated as being attributable to separation, which is a combination of primarily technology, labor and nonlabor costs. Outside of the impact of separation, rising employment costs were the largest factor, and this was due to pay increases, a reduction in capitalization rates, some increase in head count and some additional reorganization costs. Advertising and promotion costs also rose during the course of the year, which was spend that was associated with the higher jackpots, the Keno rebrand and the launch of Weekday Windfall. There was also an increase in spend in relation to security and SaaS cloud applications, noting that 50% of our costs roughly are people-related and technology costs now form approximately 30% of our total costs. If we move now to Slide 9, capital allocation framework. This is a resilient business that generates strong and predictable cash flows with low capital intensity and a highly variable cost base. This slide sets out how we think about allocating our capital to drive long-term shareholder value. We are focused on growing the top line and providing exceptional customer experiences and increasing our registered customer base. We also remain focused on ensuring that we're well positioned for any potential license extensions and maintaining value in the exclusive nature of licenses. Dividend payout ratio is targeted between 80% and 100% of full year net profit after tax pre significant items with a long-term leverage range of 3 to 4x EBITDA, and this reflects the underlying quality of the business and of our licenses. If we can move now to Slide #10. Our balance sheet provides flexibility in order for us to maximize returns for shareholders, and this includes dividends. Leverage ended the year at 2.6x. However, this is more like 2.8 on a normalized jackpot basis. If funds aren't required for licenses and are not better returns available to us elsewhere, we will look to return these funds to shareholders in the most tax-efficient way. We had $640 million of available liquidity at year-end and an average debt tenor of 5.5 years. The unprecedented jackpot activity during the year influenced a dividend, with the group declaring a final ordinary dividend of $0.08 per share, and this will be fully franked, bringing the full year ordinary dividend to $0.16 per share, which is a payout ratio of 86% and an increase on the prior year of 14%. As Sue mentioned, we've also determined to pay a special dividend of $0.025 per share, and this will also be fully franked. The special dividend is consistent with our capital allocation framework and our view to maximize long-term shareholder value. Any future capital management will be considered on a case-by-case basis, having regard to a disciplined approach to capital expenditure and deploying excess capital at appropriate risk-adjusted returns. The total dividend for the year of $0.185 per share was a 23% increase on the prior year. It also equates to a payout ratio of 100% of our full year net profit after tax pre significant items. OpEx for the year was in line with the $300 million target that we provided at the half. If we look forward to FY '25, and as we flagged at the half year, there will be a final run rate impact from separation, and we estimate this to be approximately $12 million. No further separation costs or impacts are expected beyond FY '25. We are pleased that separation is now behind us. It's been challenging, and in some ways, has been a perfect storm of events. In addition to the impacts of separation, there will also be normal cost inflation in FY '25, noting, as I said before, that nearly 50% of our costs are people. And there will be -- there is a wage increase of approximately 4% during FY '25. Moving forward, we'll seek to reduce OpEx growth to below normalized revenue growth. And our optimization activities will be focused on releasing funds for reinvestment back into the business in order to help us drive top line growth. Depreciation and amortization and CapEx finished materially in line with expectations. And going forward, the post-separation step-up in D&A is now complete. And as a rule of thumb, we would expect CapEx to equal non-licensed D&A, absent specific initiatives. So in summary, before I hand back to Sue, we are pleased with the year. We've built a great foundation now that separation is behind us. We remain very focused on cost and capital discipline and our strong balance sheet provides flexibility for us to be able to grow and continue to deliver value to our shareholders.

Thanks, Adam. I'll talk now to our business results and begin with lotteries on Slide 12. Lotteries' revenue was up 14.7%, and that was driven by active game and sequence management, highly favorable jackpot outcomes and positive impacts from the Powerball price increase and commission increase, which I mentioned earlier. For Powerball, we deployed 2 sequences during the year to ensure a balanced spread of large jackpots with the accelerated sequences helping to deliver the record $200 million draw as well as the $150 million draw in May. For Oz Lotto, we used a range of sequences, which ultimately delivered a strong jackpot run to end the first half with the $90 million draw on Boxing Day. Base games were down 2.4 -- 2% to 4% on a like-for-like basis in a weak consumer spending environment. The team deployed significant marketing activities to effectively leverage those big draws to retain and acquire customers and also to encourage reinvestment into other games. A key attribute of our successful lotteries business model is its mass participation across Australian adults. Slide 13 illustrates the continued growth in active registered customers with a significant uplift of 12.2% in FY '24, together with an increase in estimated total active customers to circa 10 million. These are important achievements as they provide opportunities to deliver greater personalization and enhanced experiences to our customers. In terms of channel performance, it was pleasing to see retail turnover growth by 6.6%. Retail remains an important part of our offering, providing brand presence, customer convenience and support for a broad range of small businesses. Digital turnover grew by more than 18% in FY '24. Store Syndicates Online continued to be very popular with both customers and retailers, and it accounted for around half of the 2.5% increase in digital share. [ All our ] digital now accounts for 41% of our lotteries turnover. Turning to Slide 14 and the breakdown between our Jackpot and base games. We managed the business for overall growth and to maintain a healthy and balanced portfolio. The difference in mix that we see in FY '24 was driven by the big jackpots. Against that backdrop, the resilience in demand for our portfolio of games was evident with most base games, as we've said, only 2% to 4% down on a like-for-like basis. And that was despite some transference of spend to Oz Lotto and Powerball. On to Slide 15, FY '24 saw an unprecedented level of jackpots with a 40.2% increase in the cumulative jackpot value offered across Powerball and Oz Lotto. This resulted in circa $500 million of additional turnover relative to model outcomes. The highlight was record 200 million Powerball event, which we showcased on Slide 16. A draw of this size gets Australia talking. It captivates customers, it sees queues forming in retail stores. At peak, we sold more than 9,000 tickets a minute with searches for Powerball dominating Google and social media search terms as that draw made headlines across the country. The draw introduced 170,000 new active registered players to the category and 40% of them have made a subsequent purchase. These new players skew younger and are more likely to use digital channels. While there were 2 divisions, 1 winner is taking home $100 million each, a life-changing amount for certain. Overall, we had 6.7 million winning entries across all divisions. We continued our focus on game innovation with the launch of Weekday Windfall, which we've outlined on Slide 17. This refresh of our Monday & Wednesday lotto game with the addition of the Friday draw has been a real success. It's delivered circa $135 million in annualized estimated additional turnover. The Friday draw has resonated well with customers, delivering an estimated $120 million in annualized turnover based on current run rate. The launch also included a new innovation in a Weekday3Play ticket, and that provides an easy way for customers to buy into the game across the 3 nights. And that has also proven very popular accounting for 1 in 8 entries sold. So that's lotteries. Let's move now on to Keno on Slide 18. Keno accounts for 7% of our revenue, and it's an important part of our business. It offers diversity of earnings as a social game that's played mainly in licensed venues where we don't have a lotteries presence. It also taps into different customer motivations, strong in-venue performance, particularly in Queensland, underpinned the Keno result. Local area marketing initiatives helped drive activity for Keno in pubs and clubs, and we ran more than 2,800 of those marketing initiatives in FY '24, an increase of 26%. Earnings were impacted by changes to commercial arrangements with retail partners and the shift of some digital turnover from high-margin ACT license to Victoria as required by our Victorian license. You'll see from Slide 19 that Keno retail performance was strong, delivering a 4.4% increase in turnover. Keno Online, which we offer in jurisdictions where it's permitted, with Victoria being the most significant in terms of scale was down 2.4% in turnover. The impact of online competition in Victoria was evident, especially in the first quarter. However, it stabilized from the second quarter onwards. In May, we launched brand refresh for Keno with the Together We Play campaign, and we've illustrated that on Slide 20. The campaign emphasizes the social side of playing Kino, differentiating our product from other operators and also showcasing how the game can bring people together. On Slide 22, we recap some of the key initiatives we delivered in FY '24. In addition to those, we've already covered throughout this call, I'm pleased to say that we again received the highest level of responsible gambling accreditation from the World Lottery Association. As a company, we're committed to responsible play, and it's pleasing to have received this endorsement. As we know, there's ongoing focus from governments and regulators on online gambling. We acknowledge the federal government's current review into online Keno and foreign matched lotteries. Lotteries have been a part of Australian life for more than 140 years. It's very much in the public interest for the industry to remain sustainable and highly regulated, especially as lotteries provide substantial revenues to said governments, support thousands of small businesses and are loved by millions of Australians. Slide 23 outlines our strategic framework. It sets out how we plan to achieve our vision of being the world's best lottery operator. There are 3 components to it: drive, develop and discover. Firstly, we drive the business through focusing on customer-centered initiatives to Deliver sustainable growth. Secondly, initiatives under the develop pillar help future-proof the business. And thirdly, the Discover pillar is focused on complementary new earnings pathways. We look forward to sharing more on our strategy at our Investor Day in October. Turning now to our FY '25 priorities, which is on Slide 24. We take a customer-centric approach to everything we do, seeking to maximize customer lifetime value in a responsible way. A customer's journey with us can start and continue in retail or online. So it's important that the experience is a seamless one. Among the many initiatives we're planning to execute this year are the digitally enabled retail membership program, which will modernize the sign-up experience for customers and our retail partners, implementation of a new customer data platform to drive enhanced personalization and engagement, bringing charitable games products into the lots digital ecosystem, so customers can buy a Play For Purpose ticket, for example, through the lot app. And subject to all the necessary approvals, our next game change, which is claimed to be to Saturday Lotto, the second most popular game in our portfolio. In parallel, we'll continue to actively manage the portfolio through jackpot sequences and timing draws to optimize the customer offer. While it's early days, we are pleased with the start to the year. We've seen a stabilization and some early signs of improvement in lottery sales for similar offers across the base games. Keno has continued its good momentum. And tomorrow night's $100 million draw has been reached in just 5 weeks on our accelerated sequence and sales to date are encouraging. So as we conclude on Slide 25, FY '24 was a very successful year. Strong headline results and good use of the leaders available to management drove growth. We continue to innovate and deliver against a proven plan while also adapting to changes in the market and customer preferences. We are making positive impacts, and we are operating in a way that delivers results for customers, shareholders, governments, small businesses and community. That's the end of our presentation. Thank you again for joining us this morning, and we're now happy to take questions.

[Operator Instructions] And today's first question comes from Adrian Lemme with Citi.

My first question was just on the OpEx. So the way I understand that there's guidance of an incremental $12 million from the incremental separation costs. Are we then right to then assume some further underlying inflation, I'm guessing 3% to 4% on top of that? Or do you think you can offset it with any cost saves, please?

Adrian, it's Adam here. You're correct. I'd take out $300 million that we had for this year. I'd add the final step up, which is the run rate impact of the finalization of separation and then take some inflation from there. I did point out that 50% of our costs are people and we have a 4% pay increase for FY '25.

Right. That's very clear. Look, my second question was about the Saturday lotto. I'm just -- I understand it might be early days, but are you able to give any further detail on what these game changes will be and when we might see them implemented, please?

Sure. Likely to involve a price increase and potentially some change to Division 1, unlikely to involve a change to the matrix of the game. But as you say, still early days, and we're still exploring the nature of 5hat change and looking at the timing for implementation.

And our next question today comes from Bradley Beckett with UBS.

Just a question on the strategy. On Slide 23, you talked to new revenue segments. Can you give us a bit of a sense of your appetite here? Is that sort of around digital instance or other gaming adjacencies?

Yes. Thanks, Bradley. I'll answer that in the first instance. We will unpack all of that further at Investor Day, as I said, but digital [ instants ] are banned in Australia under the Interactive Gambling Act. So it's definitely not something that we're looking at. It really is more around other opportunities for revenue growth. It could be other types of products, really not speculating on what it is. I think importantly, as we've always said, we are focused on our business and driving the performance of our domestic business in Australia, whilst we look for other potential opportunities for earnings.

Great. Just one more, if I can. On -- maybe one for Adam on the cash conversion, looked a little bit lower versus FY '23. Can you give us a bit of a breakdown as to what's driving that?

Yes. Bradley. This is a very cash-generative business. Effectively, cash conversion ebbs and flows a little bit, and it's driven by the timing and the size of draws as you approach the reporting periods in particular, being December and June and then what happened in the prior reporting period as well. We've got a large jackpot in the last couple of weeks of a month where you got a reporting period. You do get a buildup of payables and government taxes associated with that, and they unwind in the next period. And then, of course, if you roll forward to the next year, and if you haven't got a similar jackpot coming up that affects your cash conversion, we typically work off the fact that in any given year, cash conversion is going to be close to 100%.

And our next question comes from David Fabris with Macquarie.

Look, I wanted to try and tease out a little bit more on game innovation. I can see on Slide 24, you've given us a taste for the changes that are possible in FY '27. Can we maybe understand whether there's going to be anything material to Set for Life or Powerball? I mean, I recall that big Powerball change we saw maybe 4 or 5 years ago. Just trying to understand what kind of innovation we could see over the next 3 years, if possible.

David, yes, we've obviously indicated that we're doing Saturday next. And as we've spoken about before, we're constantly looking at the portfolio of products and addressing a change in a game within the portfolio where we think it's going to have the best results. And responding to whatever is happening in the portfolio at the time. I mean, Powerball, that change has been an incredible success. It's still delivering. It just delivered a 1 in 7-year event with the $200 million. So we're saying Set for Life and Powerball would like -- Set for Life or Powerball would likely be the next game that we would look at after Saturday, but I really can't give you any flavor for what that would be. All of these changes, we do extensive research on them before we decide on what the actual change will be and certainly before we implement it as well. So we've got a long way to go yet before we're able to make any -- able to provide any further detailed information on those changes.

That's understood. And then the next question, just thinking about leverage and cap management. Obviously, you're sitting below the target range currently. I mean, I guess, we can expect the [ odd ] special dividend dependent on jackpot activity. But is there any consideration to move the dividend policy to adjust the cash earnings? So you've got that $35 million of noncash license amortization each year. Is there a consideration to move to, call it, NPAT payout ratio?

David, Adam here. Everything's sort of we're constantly evolving and looking at a framework that I talked about before. And nothing is off the table, but at the moment, that's not a consideration. I think the first port of call that we'll get through is Victorian license and when that renewal may arise and that will kind of shake out whether there'll be any further changes with regards to the dividend framework that we've currently got at the moment.

Yes. Okay. But to be clear, that big license, I think, expires in 2028, right? So unless you can do it earlier, that will be something that would happen in 2027?

Yes, that's correct. But I would also make the observation that there may be opportunities. I don't want to talk about specific licenses in general. But we're -- as you can imagine, we're always working with government stakeholders with regards to all of our licenses to see where there are opportunities to evolve them.

Thank you. And our next question comes from Rohan Sundram with MST Financial.

Sue and Adam, so just one for you to begin with. I take on board your comments earlier around the federal government's review into the offshore lottery providers and online Keno. But how would you describe the response that you've seen thus far? Is it pleasing? Is it in line with what you were hoping to see from the government initially?

We welcome that review by the federal government, including the review into online keno. We acknowledge that online keno in particular, has a higher risk profile, certainly than lotteries, which has a very low harm profile. And I think if the government is going to review the industry and the impact on Australians from the gambling industry, then it makes sense that [indiscernible] lottery products is included in that. So we welcome the review. We will obviously be making a submission and cooperate with government in discussions.

And one for Adam. Adam, I take on board your comments around the 4% increase in labor cost. But on the other portion of your cost, the other 50%, how would you describe the inflation pressures at present?

Yes, look -- but I'll describe the other [indiscernible]. There's probably a little bit more than your typical run-of-the-mill inflation in technology costs. Other than that, I think wage inflation and inflation from the other parts of the cost base are probably running in a similar line.

And our next question today comes from Rohan Gallagher with Jarden Group.

My earlier question has been answered. But just to clarify, Adam, in your prepared remarks, you said that there was a $250 million benefit from the above [ trend ] jackpot but in the written materials, it's saying $500. I just -- want to just clarify the sort of additional turnover in FY '24 assumed.

Yes. No, I was calling out the revenue impact. So the $500 million is the turnover impact and the $250 million is the revenue impact.

And our next question today is a follow-up from Adrian Lemme with Citi.

I was just interested with the extraordinary activity around the $200 million Powerball jackpot. I was just interesting -- interested in how the network handled that. And if you were to get even larger jackpots potentially posted game changes, should we expect any significant investment might be required to handle it.

Adrian, you're talking about the technology network, obviously.

Yes, exactly.

Yes, just clarifying because we talk about the retail network as well, which in the retail network, obviously handled it very well. And we're very excited by the event and benefited from it as well as from additional commission that was paid as a result of the commission increase and the payable price increase. So that network was very happy. The technology network also performed very well. Our team did a lot of testing leading into both the $150 million and the $200 million to make sure that we were going to be able to manage the capacity and the technologies system absolutely performed well. So we are confident that we've got a system that can cope with the next one if we get one.

That's good to hear. And one last one, if I may. Just with the acceleration we've seen so far in the Powerball sequence since 1 July, are you able to confirm that you still got plenty of excess headroom within that Powerball reserve fund to continue doing this acceleration throughout '25, please?

We will use the accelerated sequence tactically through the year. So it's not intended that we run that accelerated sequence for the full financial year. We are on that accelerated sequence now. Really pleased that it got us to $100 million in 5 weeks and this -- earlier in the year. After this, we would likely go back to a less accelerated sequence, but we absolutely have the ability to bring that accelerated sequence back as we see it appropriate throughout the year.

And our next question comes from Sam Bradshaw with Evans & Partners.

I'm just wondering if you can provide a breakdown for us as how much in the 40.9% digital share came from Store Syndicates?

How much of the 40.9% came from the Store Syndicates? I can tell you that of the increase in the year of the 2.2% or about half of the digital increase was relative to Store Syndicates. I think the turnover specifically [indiscernible] in total was over $100 million for the year.

Thank you. There are no further questions at this time. I'll now hand the call back to Ms. Van Der Merwe for closing remarks.

Well, thank you, and thank you, everyone, for your time today and for the questions. Very much enjoyed the opportunity to talk to you about the company and wish you all a really good day. Goodbye.