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

Good morning, and thank you for joining today's call on the Lottery Corporation's 2026 financial results. I'm Wayne Pickup, the company's MD and CEO, and I'm joined by our CFO, Adam Newman. We'll walk through the investor presentation lodged with the ASX this morning, then open the line for questions. Since I joined the Lottery Corporation 9 months ago now, you may have heard me say that it operates from a position of strength with a privileged market position and strong fundamentals. But while that's true, we need to position the business for the next chapter of growth to evolve from being a lottery operator to a digitally led entertainment platform. To achieve that, we have refreshed the strategy and implemented a new operating model. New teams are in place and we're moving at pace to execute. We're preserving what's been successful over many, many years. but modernizing it for how Australians want to play and engage today as customers move online and demand more. That creates a clear opportunity underpinned by a simple vision to be the place where Australia comes to play. Looking back on the first year, 3 things stand out. Firstly, the core is strong. That's the benefit of strong infrastructure like foundations through our long licenses, operational scale and well-known brands. Secondly, FY '26 was a really soft year for big jackpots, a 1 in 45-year outcome. A good one for our customers as more Australians $1 million prize, but it was the first time in 5 years that Powerball didn't jack up to $100 million. As Lotto, our other jackpot game didn't get to $50 million for the first time in 9 years. But as you know, the math tells you jackpot runs even out over time. The momentum in pricing, base game participation and digital share matters more to the long-term trajectory than what happens in any single period. So when we evaluate our business, we see through the variations and think that's the right way to look at it. Thirdly, we're executing the new strategy well. Structural changes to our cost base, giving us room to invest in areas where we can get better returns like digital, AI, product and the customer experience in retail. Slide 4 outlines the investment case. Let's be clear, this is a great business that has trusted partnerships with governments to sell products that Australians love. Our license backed market positions would be the envy of lottery operators around the world. Our scale is significant that enables investment and provides the liquidity to fund the prices that customers want. It's delivered steady turnover growth and reliable returns over many years, but more growth sits inside our existing customer base, in addition to new customers we attract. We'll pull the structural levers to accelerate that growth over the medium to long term beyond the 4% historical turnover growth rate. Slide 5 shows how we will turn strategy into shareholder value. What's common to these initiatives is our intention to modernize the business and be more focused on entertainment, not just jackpots. We want people to come back more often, be engaged more often and not just participate when there's large jackpots. So we need to fill the entertainment portfolio with more reasons to come back and engage and really build on these in between moments. This will grow our base of known customers, playing more often. What we're targeting is to combine accelerated revenue growth, expanded margins and strong cash generation to deliver compounding earnings. We have the ingredients in this business to deliver it. Now it's about execution. Turning to the year in detail on Slide 7 and 8. If you want just 1 example of how resilient and reliable this business is, it's the fact we've held the dividend at $0.165. That also reflects our confidence in the business' health and growth outlook. The Victorian license extension to 2068 supports that growth outlook in 3 ways. It secures our position as the national lottery operator. It's materially reduced the business' risk profile. Our next major renewal is New South Wales in 2050. It keeps us part of the Victorian community as we have been for decades and supports a vibrant news agents and lottery agent network. The Victorian license was always a bit of an outlier historically granted on 10-year terms. But the extension brings it broadly in line with other licenses. New South Wales and South Australia have 40-year terms, and Queensland runs for 65 years. We had a very good year in terms of execution. Slide 8 outlines several initiatives. The biggest pieces were the strategy refresh and new operating model. At an operational level, both lotteries and Keno delivered initiatives to strengthen the customer proposition. Now I'll hand over to Adam for the group results in more detail.

Good morning. Thanks, Wayne. Good morning, everyone, and thank you for joining us. FY '26 jackpot offers ran 21% down versus the PCP. And despite that, the group delivered a resilient result, confirming the strength of our overall business model. Group revenue reached $3.6 billion, a diversified portfolio cushioned short-term jackpot swings. OpEx fell and EBITDA before significant items were $736 million, down just 1.8%. Net interest expense rose 4% or $5 million and this was driven by higher debt levels. We remain materially insulated from rate movements given around 75% of our debt is fixed or hedged against foreign exchange movements, and we earned significant interest income on our cash balances. Following the Victorian license renewal, interest expense will rise materially in FY '27. Net profit after tax pre significant items declined 6% and as Wayne mentioned, directors held the full year dividend at $0.165 per share. Significant items, $58 million after tax as set out in Appendix 1, and they're mainly comprised the ACT license impairment plus reorganization costs. Moving to Slide #10. And our EBITDA result reflects the underlying strength of our overall portfolio. Jackpot turnover adversely impacted EBITDA by $80 million versus the PCP. Factors we control offset most of that impact. limiting the year-on-year EBITDA decline to $13 million. Strong pricing changes to our 2 biggest games, including excellent price retention from the late FY '25 settle a lot of change and 8 months of the Powerball price increase. Our base games were resilient with continued momentum in instant scratches and lucky lotteries. Keno delivered another record year with retail visitation and in-venue improvements sustaining growth. Lower OpEx, reflecting ongoing discipline and overall focus. So in summary, these elements enabled the business to manage the jackpot volatility with diversification across our game portfolio, channels and customer segments, providing earnings stability. Moving on to Slide #11, and there are a few key points on this slide. OpEx came in at $296 million below last year. That reflects disciplined cost management, including the benefit of optimization activities, which remove structural costs from the business. This was accompanied by actions taken in a low jackpot environment with advertising and promotion and incentives, approximately $10 million lower. We are expecting OpEx in FY '27 to be between $305 million and $315 million, subject to jackpot outcomes. FY '27 will benefit from labor savings tied to the recent operating model changes. We'll reinvest some of these savings to drive long-term top line growth. Secondly, the dividend. As Wayne said, we manage the business for the long term and look through jackpot variability. Holding the full year dividend reflects the Board's confidence in the business. From FY '27, we'll move to a payout ratio that's based upon net profit after tax, pre significant items and adding back license amortization after tax. This is a more cash-based measure that fully reflects our cash-generative nature and supports the consistent, reliable dividends that are a critical element of our capital management framework. Leverage and interest since the merger, we've held the leverage near the bottom of our 3 to 4x target range thereby preserving capacity for the Victorian license extension. Now the Victorian license has been renewed, leverage is likely to increase above the long-term target range. Reported leverage was 3.1x at the 30th of June 2026. Adding in the cost of the Victorian license and normalizing for jackpots, adjusted leverage was 4.2x. However, we expect to delever over time and return to the target range, supported by both earnings growth and free cash generation. The new debt will also materially increase interest expense in FY '27. Our average interest rate is currently 5.8% and new debt is expected to be at higher rates, given where base rates are now and likely margins for tenures of anywhere up to 10 years. Finally, Standard & Poor's reaffirmed our BBB+ credit rating after the license extension, reflecting the structural derisking that it provides. So to summarize, our balance sheet and strong credit rating that is fully debt fund the Victorian license. And in a year of unfavorable jackpots, we held the dividend and showed the cost and capital discipline you would expect for us -- from us as we focus on delivering long-term value for our shareholders. Thank you, and back to Wayne.

Thanks, Adam. Now let's turn to the segments, starting with lotteries on Slide 13. As the chart shows, the lean jackpot run for Powerball and Oz Lotto was estimated to have had an $80 million impact on VC versus model expectations despite that, what I think is important to take away from the slide is that where we control the levers, we performed well. our pricing strategy and reduced OpEx is clear evidence of that. Slide 14. As you'd expect, fewer larger jackpots reduced overall customer numbers and turnover. I want to touch on the key distinction between retained and new or reactivated customers here. There are 2 cohorts that behave differently. Retain customers are the most valuable group. They typically spend around 5x more than new or reactivated customers. This cohort remains quite resilient and has grown over time, compounding at about 3% a year since FY '22 and moving within a very narrow band throughout. This points to a structurally healthy core even through softer jackpot periods. New and reactivated customers, on the other hand, swing more of the jackpot cycle. Customer is a hero metric, how many we have, how engaged they are and what they're worth to us. And we've set ourselves a very simple target, more customers playing our games more often. More than 4 million Australians play our games each year who aren't registered today. So we're very focused on this opportunity. Some of the recent initiatives the teams implemented have cut friction and make it easier for customers to sign up for us to reach them. In terms of channel, we continue to benefit from the shift to digital, the digital share growing 90 basis points. That's notable given jackpots, which skew stronger to digital, had lower turnover this year. Slide 15. Looking at our base games, a really pleasing performance, up 5.6% on the past year. Saturday Lotto was very strong as were instant scratch hits, which grew almost 8%. That's referenced in Appendix 3, which sets out the turnover performance of each game. We have renewed momentum in instant scratches. It's a great category. It's retail only, and the team have done an excellent job in extending the product's appeal and we see even more opportunity for improvement across the ticket range. We touched on how we intend to do that on Slide 18. Slide 16 now. These charts really speak for themselves when it comes to the softness of the offers in both Jackpot games. Oz Lotto was especially soft against a tough FY '25 comp. More than half its draws at the $3 million, $4 million or $8 million level where the offer is naturally less attractive than higher levels. We're addressing Oz Lotto directly and more on that shortly. Slide 17 is new and shows exactly where the unfavorability occurred. By coverage, we mean how many of it draws possible combinations are covered by tickets sold and allowing for the fact that some players have the same numbers. To illustrate, take the Oz Lotto draws between $15 million and $40 million, where the average coverage was just 27%. This means there should theoretically be a winner only 27% of the time. The actual rate was double that 54% or 13 of 24 draws had winners, a similar story for Powerball. As a result, we didn't reach the very large offers $100 million plus for Powerball or $50 million plus for Oz Lotto where turnover grows the fastest. As we have said, this is variability, and we expected it to -- we expect it rather to even out over time. In fact, since the business listing, the aggregate variation over those 5 years nets out at 0. In other words, outcomes tend to regress to the mean over time. Now if we turn to Slide 18. One of the things this business has done really well over time and as a key strategic differentiator for us is optimization through price. It's a proven and repeatable playbook where we change a game, subscription price and lift prizes at the same time. Our recent changes to Saturday Lotto and Powerball are working as planned, coming up, set for life relaunches next month subject to regulatory approvals. It's already a strong product, and we're going to make it even stronger. We're now going to give winners an extra $200,000 upfront and a further $20,000 in division. It's tested well and a $0.10 price increase will support that next evolution for that game. Oz Lotto will be next. We're targeting a price and matrix change with launch planned for the second half of calendar 2027 subject to all regulatory approvals. Oz Lotto plays an important part in the portfolio as 1 of 2 weekly jackpot games. This duality increases the likely frequency of large jackpots and our ability to stretch the customer proposition. So following the successful Powerball changes, we see a timely and compelling opportunity to optimize Oz. Now if we turn to Keno on Slides 19 and 20, the growth story continues against the prior year that had a really strong Keno classic jackpot run. Pub and Clubs continue to experience good visitation. We've sought to gain share of wallet by making the Keno in-venue experience more visible and more engaging. As for online, as many of you are aware, legislation was introduced in Federal Parliament by the government to ban online Keno products as part of broader gambling reform. Parliament is currently considering the bill the full year impact of discontinuing online Keno for us would be circa $25 million of EBITDA based on FY '26. Our response is to double down on Keno in licensed venues. We have long-standing relationships with venues, and we're well and truly embedded in the Eastern seaboard pub and club ecosystem. Now if we bring it together, let's recap our strategy on Slide 22. Here's the logic and what sits behind the 3 pillars. Pillar 1 is about strengthening what we have that's renewing and growing what we already do well, the core lottery and keno offer. Any adjacent opportunities would be looked at selectively only where our licenses and brands can compete. We're not chasing markets where we lack a clear edge or aren't sustainable. Pillar 2 answers where new growth comes from, that's digital. That's where younger at out Australians where we have the most room to grow and where margins are attractive. We want to create digital experiences that customers want to return to and play, not just transact with. And Pillar 3 is about delivering the first two, by modernizing our operations, maintaining our maintaining our expense and capital discipline and building trust for capabilities support these pillars and make the strategy executable. Slide 23 lists this year's priorities. In lotteries, it's investing in product and marketing to drive participation and know more of our customers. It's also about continuing to invest in retail and that critical connection between the retailer and customer. In digital, we have a strong pipeline of initiatives backed by a new team. One of our biggest opportunities is social play, turning a solo experience into something people want to share, syndicates, digital gifting, et cetera, there's a lot we can build here. There's 2 features about to go live on the lot app and line with being more about entertainment. The first is the reveal. It turns checking the results on the app into a more dynamic event rather than a transactional type of notification that says whether you've won a prize or not. The second is PlayPick, which can make number selection far more engaging rather than tapping numbers on a grid or letting a quick pick decide customers can pick their numbers through quick interactive games. The idea is picking your numbers should feel playful and entertaining, not just functional. And we're investing confidently in Keno, rebuilding it around licensed venues to make it more entertaining and deliver really simple social play. One example is our planned BYOD model a customer-led digital solution that gives customers more choices in how they play Keno within a pub or a club. We also expect to expand our reach into new venues. So lots of upside from that initiative alone. As for what we've seen so far in FY '27, jackpots have been off to a slow start, but the underlying health of the business remains strong. We haven't seen anything in the past 7 weeks that changes our expectations for the business or our approach to managing it. So in conclusion, on Slide 24, the financial performance in FY '26 was resilient. Where we control believers, we performed very well. The Victorian license extension in 2068, strengthens our infrastructure like characteristics further. Our new operating model gives us 3 verticals with clear ownership and accountability and an in-flight road map and clear indicators to track progress. On a final note, I'd like to thank our team for their hard work and contributing to this result, and we'll now open up the line for questions.

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

J Ust 1 question, Wayne. How would I take on board your comments that how would you describe the consumer environment at present? I appreciate the underlying look quite solid. I ask you with regards to the 4% reduction in retained customers. Just wondering, is there a luck a jackpot aspect to that? Or how much of that would you actually attribute to macro and how you have to work this?

We haven't -- it's a good question, Ryan. We haven't seen anything in the data in our data anyway, that would sort of give us cause for concern. Some of those retained customers, obviously, they're not completely jackpot immune. One of the things that gives us confidence in current trading performance is the smaller games. And when we look at instant scratch in particular, they're still doing very, very well. But -- and as you guys probably know, lotteries are traditionally resilient through our consumer downturns, economic downturns. But I wouldn't -- we haven't seen anything in our data, but we're obviously cognizant of it, where I'm out visiting retailers. It's tough out there in general. But nothing of concern in what we're seeing coming through. But would just like a few more jackups, that's all.

The next question comes from David Fabris with Macquarie.

Just wanted to focus on cost actually. I mean you've done a great job on costs, and I appreciate the guidance. I'm just curious, does the FY '27 guidance have the full run rate of the recent cost initiatives Will some of that flow into FY '28. And then in addition to that, should we expect any net benefits from AI flowing through? I guess I'm trying to figure out whether that call it $300 million to $315 million range is the kind of zone we should be thinking about beyond '27 with some of those moving parts?

David, it's Adam here. Thanks for your question. Yes. So with regards to the op model changes, they've sort of benefited a little bit in this year, we'll have benefits flowing into next year and a bit basically flowing back into FY '28 as well. They're taking into account with the overall range. Effectively, -- we've talked about it before. We talked about the Investor Day that some of those savings get reinvested back into the business. But it's not just the op model. We've obviously had a program of optimization looking at other costs opportunities within the business over a period of time as well. And that's all kind of reflected in that overall range that we've provided there to you. I don't want to get into the -- looking out beyond FY '27 at this point. And you probably just need to take into account that the range also reflects the fact that not only have we remove structural costs out of the business, but we did have some top related actions that we took for this year and that a call out there between advertising and promotion and incentives that in a model where you go back to a reverse and they'll come back into the picture as well.

Yes. Got it. Okay. And whilst I've got you, Adam, just on the license payment, I mean, are you able to give us any indicative range to consider for the debt cost. I mean, obviously, you've suggested it's going to be above that average of 5.8% currently. But any range might be helpful because obviously, that's going to have an impact on our net interest costs in our forecasting.

Yes. Thanks, Dave. Yes, another good question. At the moment, it's a bit dependent upon markets and timing of takeout of the existing facilities within that. So we're not really giving a range other than saying given where base rates have moved for tenures for periods over and above up to that 10 years, it's -- it will be north of $5.8 million. So I can't be any more specific at this point.

Understood. And just my final question, just on Keno. I appreciate you've reiterated the $25 million EBITDA impact from exiting the online business. But obviously, you've got the refresh of the retail products and offering going on like the new terminals and BYOD. In the coming years, do you think that these initiatives can cover that impact? Or should we be thinking about Keno being kind of below the adjusted run rate once you take out online Keno?

I think it's too early to say, David, we're going through the -- we're going to be launching or trialing rather BYOD in Victoria in November and will provide sort of updates as we go. But as I've said in the past, Keno, we've now got a focused team on Keno, right? And just improving the visibility and the product presence in venue, we think we'll do a lot. We work -- we've got great relationships with clubs and pubs around the country. But we'll provide more data as we can in terms of how those initiatives are rolling out. But I wouldn't want to go beyond that at this stage.

The next question comes from Justin Barratt with CLSA.

Wayne, in your FY '21 key priorities for lottery, you talk about the review or extension of draw times for Powerball, Oz Lotto Oslo and so I was just wondering if you could expand on that point a little bit for us, please?

Well, they currently $70 million -- and we're looking to push them out by about 1.5 hours, it's 9:00. So Okay. So Yes. So there's it's not much more complicated than giving people another 90 minutes to get their ticket. And so we've heard from customers that they didn't get into the draw because they're taking the -- I know from my picking the kids up from water polo or something or rushing around or trying to get dinner ready. And so it's really just listening to customers and giving them another 90 minutes to buy a Powerball, Oz Lotto ticket and it seems to be something that customers want and a bit of a no-brainer.

Yes, fantastic. And then -- really appreciate Slide 17 of your pack today around these mid-level draws. I guess my question in relation to that it is that my understanding is that at those mid-level draws, it does have an impact on your price reserve fund. So I just wanted to ask, I guess, in relation to Powerball and Oz Lotto, has that impacted -- or has this track in impacted your price reserve funds across FY '26 and therefore, again, I appreciate on the edges, but I guess a chaos next year.

Yes, we've been prudent with the Price reserve fund. We haven't got aggressive with sequencing. So the PRF balances are robust and sort of average over a long -- over the sort of a long period. So we have taken a very sort of prudent approach. So we've got no concerns around the price reserve funds. And in fact, we'll look at -- over the coming months, we may look at deploying some of those PRF balances, maybe not -- may be different to how we've done it in the past as well. So there's a few levers that we have, but we've just taken a very -- the business has handled what has been a statistically awful period very, very well, and we've taken a very measured approach. We're focused on execution and we're really controlled the things that we can control. But the direct response to your question is that we've got no issues with the PRFs. And that's partly because we haven't been overly aggressive in terms of the way we look at sequencing.

The next question comes from Adrian Lemme with Citi.

Adam. I was just hoping you could talk to the progression of like-for-like for Powerball since the price increase. And what we can tell, the retention was extremely high. in the first few months, but then it's faded, say, in the last 6 months? Are you able to sort of talk to that progression and where you might see the exit rate, please?

Yes. Well, we've got -- we look at it over -- as you probably heard me say before, we don't sort of want to sort of book end -- so you can sort of book in this business in sort of a different period. So we look at it -- first and foremost, we look at it over the sort of the medium to long term. We need -- quite frankly, we need some runs on Powerball to really see how the changes have played out. We are assuming that the statistical guides will shine in our favor at some point, and we'll get some $100 million runs. Over the past few months, there have been weeks where we -- Oz Lotto or even Saturday Lotto at some point have outweighed the Powerball jackpot. So you see that trade down slightly. We have -- as you would expect, we have a cohort of customers that just choose the biggest jackpot prize on offer during the week. But over the 9 months, the data that we're giving you is over the 9 months, roughly 9-month period, any sort of softness that we've seen in the past few months has typically been on the week-by-week basis has typically been because Oz or Saturday super draw have outweighed Powerball.

And can I just ask a quick follow-up on the auto side because it does seem it was maybe down double digit in the second half on the like-for-likes. And I do understand it's a tough comp. But like obviously, there'll be a lot of registered players that would be playing both Powerball and Oz Lotto. So I was wondering if you've done any analysis to see whether maybe those players are pulling back a bit on Oslo since the Powerball pricing -- are they kind of managing to a budget given that price increase, please?

Haven't seen that in the data.

The next question comes from Andre Fromyhr with UBS. .

Maybe a question for Wayne. On Slide 23, FY 2017 key priorities. There's a reference to reviewing the retailer commission structure -- so I'm curious to understand if there's any particular pain points that you're seeking to address there at the moment? And is the scope as broad as just changing percentages? Or is it something different to that?

Thanks, Andre. It's broader than that. We're in dialogue with retailers and their respective associations at the moment on it. It's really just the way -- and so I don't want to go into too much detail, but just think of it as reflective of strategy. So we want to ensure that we're all rolling in the same direction. And we've got -- for instance, Andre, we've got a stated objective of getting more registered players. We want people to register if they win, we want to be able to find them. We want to be able to pay the prices. We want to be able to notify someone of that their favorite retailer has just on -- sorry, it's just sold a hopefully, a $100 million payable price. So we -- a lot of our strategy, as you know, is around having direct relationships with our customers. And in the broadest possible sense, we just want to make sure our commercial arrangements with our retail partners commensurate with that.

Okay. And then if I could just stay on that slide. Wondering if you could provide a status update on the greenfield app over the launch for first half '28, that's conceivably a year away -- so just curious to understand where you're up to and sort of what the risks are around especially at the time?

Well, yes, we're working on it. We're sort of -- with the digital program, we're sort of attempting to sort of chew gum and walk at the same time. So you're going to see a number of drops under the current infra that we have -- infrastructure that we have in place. Next month, in fact, you'll see -- and we showed you some of these at the Investor Day, the Play Pick and Draw Reveal. That will be launched next month. second half of the year under the current digital app. There will be social play digital gifting and auto play. We -- what we don't want to do Andre is just go out and build the same thing that we have today. So a lot of the work at the moment with the team is around looking at what the app ought to be A lot of people are getting excited because they think they can build an app in 2 weeks with AI. We want to build something that people want to use and come back and engage with. The other thing is when we build it, it needs to be AI-ready and have all of those necessary tools sort of embedded in it. So we will -- on the app, we will do it. We will do it well. We will do it efficiently. And I think probably around this time next year, we'll be close to launching it. And in the meantime, we're not just not going to -- we're not stopping doing everything else, right? So in the meantime, we've got a, I think, a very sensible and commercially aggressive list of improvements with the current infrastructure that we have in place today. You may have already -- and I know you're a big Lotto player, Andre, but you may have already seen some improvements in the app UX already. And this is the benefit of the op model change. We have a very excited, pumped up energetic digital team, and we want to create yes, certainly, the best app for this product in Australia.

The next question comes from Kai Erman with Jefferies.

Adam. Just one for me regarding product. You've obviously flagged the upcoming Oz Lotto changes you're working through and done some work on instant scratches to date, which are seeing success with -- do you see any other opportunities in the portfolio to refresh or improved products or potentially any new product ideas that could fit within your existing portfolio going forward?