The Rank Group Plc (RNKA.F) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to The Rank Group Plc Full Year Results Investor Presentation. [Operator Instructions] Before we begin, we'd like to submit the following poll, and I'm sure the company would be most grateful. I'd now like to hand over to the management team. Richard, Cliff, good morning.

Good morning all. Thank you to everyone joining us today for this presentation, which I'm delighted to host. My name is Richard Harris, and I'm joined by Cliff Baty, Rank's Interim CFO. We're going to look at Rank's full year results for the year ending 30th of June 2026, which we published in mid-August and also give an update on the group's forward-looking strategy. These are my first set of results as Chief Executive, and I'm grateful to the Board and our major shareholder for their support and for this opportunity. Rank genuinely is a great business. And I'm delighted to share with you the story of another year of strong performance to set out in a bit more detail how I see the opportunities for the group, and why I think we are really well positioned for future success. I'm going to start with the key highlights before handing over to Cliff for the financial review. Once again, there was strong revenue and underlying profit growth in the year. It was great to see all businesses contributing to the improved performance despite some external headwinds. During the year, we took decisive action to mitigate the impact of higher RGD on the U.K. digital business. And the performance in digital was therefore encouraging at plus 12% in Q4, particularly given the material reductions in above-the-line marketing. We started the new financial year in a similar fashion, so that's pleasing, too. Going back a little bit to August 2025 when we started to increase the number of gaming machines in Grosvenor. As planned, we increased machine numbers by 65% before Christmas with only modest in-year CapEx. Momentum is building, with the initial step-up in performance continuing to improve through the year and strengthening further since then. The trajectory is positive and provides a strong platform on which to build but requires further optimization before we need to make any further capital investment. So the focus is on maximizing the productivity of the existing machines, and there are lots of actions underway in that regard that we'll come on to later. Over the last 6 months, we've been through an estate segmentation exercise in each of our venues businesses, where we've taken a look at performance on a location-by-location basis. Off the back of that work, we've taken some difficult but necessary actions, including the closure of 9 Mecca sites in the year ending June '26. And at the end of August, we also announced the closure of 3 Grosvenor Casinos. On the other hand, in Grosvenor, we're also trialing a smaller format casino venue that could provide an attractive investment opportunity. It's all about ensuring we have a high-quality, high-return venues estate for the future. We've also continued to evolve the strategy over the last few months. As a result, we are clear about how we create value. And we're also clear on where we can win in casino-led and bingo-led gaming and importantly, also about why we can win. More from me on that later. So now let me pass over to Cliff, who will take you through the financial performance.

Thanks, Richard, and good morning, everyone. I'm going to talk briefly through the financial highlights, operating profit growth and then cash flow, CapEx and capital allocation. This slide illustrates some of the financial highlights from a strong year for the business. Like-for-like net gaming revenue was up 6% at GBP 834 million, with growth across all our businesses. Good cost control meant that resulted in an operating profit of GBP 78.6 million, up 21%, and that includes 1 quarter's impact of remote gaming duty in our U.K.-facing digital business. That strong result flows through to improvements in underlying EPS and ROCE. Given this performance, the group has proposed a final year dividend of 2.5p per share, giving a total full year dividend of 3.5p per share, a 35% increase over prior year. This slide just walks through the key items in the profit bridge, starting from last year's GBP 64.8 million. Revenue growth, that's revenues less direct costs was GBP 24.5 million. As mentioned, we started paying 40% RGD from the 1st of April, which was a GBP 10.1 million impact. However, the U.K. digital business took mitigated cost actions, which resulted in GBP 8.1 million of savings from reduced above-the-line marketing, staff and supplier costs. Depreciation increased by GBP 4.6 million as a result of prior year's CapEx investment. Minimum wage rises and the knock-on impacts across our U.K. estate meant underlying salaries and wages costs increased. However, we were able to mitigate this through staff costs and other savings, giving an overall cost increase of GBP 2.8 million. Finally, we launched online bingo in Portugal in March, which led to a net P&L cost of GBP 1.3 million due to the initial start-up costs and marketing investment. Overall, this gives an operating profit of GBP 78.6 million with an increase in operating margin from 8.1% to 9.4%. We also did incur some exceptional costs during the year, and we have previously separately disclosed the Spanish fraud and the regulatory settlement items shown here. Other significant costs represent the management actions we've taken to strengthen the business. This includes the closure of 8 Mecca clubs in early June and 1 in the first half of the year. These clubs are either loss-making or not commercially viable, so we took the difficult decision to close. I'm pleased that we've seen a positive transfer of customers from these clubs to other Mecca venues nearby where that is geographically possible. These closures are part of the venue segmentation work we've performed and will help drive future investment decisions across the estate. The restructuring costs relate to the staff reduction actions taken in response to the start of RGD. Whilst these decisions are always difficult, we will continue to look for efficiencies across the business as we tightly manage the cost base. Turning to the cash flow for the year. Net free cash flow was GBP 25.5 million. This reflects CapEx of GBP 50.2 million, which was at the lower end of our FY '26 estimates, together with lease payments of GBP 48.3 million. Lease payments have increased over prior year due mainly to the increase in machine estate following the rollout. Interest and tax costs were GBP 8.6 million, offset by working capital inflow of GBP 4.6 million. The table at the top right of the slide shows the year-end cash position with the cash inflows of GBP 25.5 million, together with dividend payments of GBP 13.8 million. And this has left the group with a net cash balance of GBP 56.8 million at year-end. Adjusting for IFRS 16 leases of GBP 204 million, this gives an accounting net debt figure of GBP 147.2 million. It's worth noting, we also refinanced our debt facilities in June with a new 4-year GBP 120 million RCF facility on improved commercial terms. This puts our balance sheet in a healthy position going forward. As previously mentioned, FY '26 CapEx was GBP 50.2 million, down from GBP 58.5 million in FY '25. Looking at the split across the businesses, Grosvenor included general maintenance and upkeep spend as well as refurbishments at Brighton and Bolton, the introduction of sports betting areas at Reading and Leicester, together with the works required for additional machine rollouts across the estate. In Mecca, spend included our new 1825 Social lounge at Stockton, a significant investment in the modernization of Bingo, which has had a launch event this last weekend and was highlighted in the opening video. Other spend includes upgrades to our gaming machine areas in Thanet, Romford, Acocks Green, Gateshead and Swansey, as well as external signage at 11 venues. Digital CapEx was GBP 10.8 million and comprises mostly capitalized internal headcount of our IT development team. The reduction in spend from FY '25 levels reflects a lowering from the more elevated CapEx of recent years when we were addressing a significant maintenance backlog as well as investing into the venues estate, especially The Vic renovation. Going forward, we will take a disciplined approach to CapEx, spending what is required to maintain a high-quality estate and only investing in high-returning development projects. This approach also feels prudent given the recent change to RGD and the current discussions around the industry. We would estimate FY '27 CapEx will be around GBP 40 million, with the bulk of the reduction being in the Grosvenor business. These reduced spend levels will significantly improve the group's underlying ongoing cash generation. This slide also illustrates the strong growth in return on capital employed over recent years from 4% 3 years ago to over 18% now. And whilst the full year of RGD will have an impact in FY '27, we would expect to continue to see strong returns in the future. Given the expected improvements in cash flow generation described, I thought it would be worth quickly reiterating the group's capital allocation policy. Maintain balance sheet strength with, disciplined capital investment as described, pay a progressive dividend that grows to over 35% payout ratio. Our FY '26 dividend of 3.5p per share represents a 33% ratio. We will consider inorganic growth opportunities, but only where they can help us achieve our strategic aims and meet our strict financial criteria. Otherwise, we will return surplus cash to shareholders. I will now hand back to Richard.

Thank you, Cliff. Moving across to my new role as Group CEO has been an appropriate time to review the lessons learned over the last few years. The great thing from my perspective is we believe that there are lots of things that we're doing right, and that's coming through in the customer response, the colleague engagement scores and in our financial results. It's therefore about fine-tuning how we execute our growth plan from a position of strength. I would describe it as a positive evolution of strategy and how we create value. The group's purpose to excite and to entertain our customers remains unchanged. And I'll talk in a moment about how that purpose is implemented across all of our businesses. We believe we have a clear right to win in casino-led and bingo-led gaming. We have deep expertise in our casino and bingo businesses. We do it better than the competition. There are areas of core competence, and we will create strategic value by doubling down in those areas. There are clear growth drivers in casino venues in digital and in our bingo venues, and we are well placed to capitalize on the existing and growing customer preference for gaming machines and in a broader sense, electronic play, such as tablet-based play and Mecca Bingo venues. Finally, the group center adds value in a number of ways through the development of talent and strategic capabilities in data and analytics, supporting plans to provide more personalized experiences where the potential is vast and increasingly in the application of technology to help serve customer needs. I'll talk you through some of the key parts of that value creation plan today. Starting with our purpose. We apply the group's purpose to excite and to entertain through a common customer experience vision for all of our businesses. Importantly, the aim is to offer more localized, more segmented and more personalized experiences. But in order to do that, we need every customer to be known, valued, safe and most importantly, entertained. That's regardless of whether the customer plays in venue or online, in casino or in bingo, in the U.K., Spain or Portugal. So the vision for the experience is consistent, and we implement that well in some areas of the business today, but we've got a great opportunity to do it much better across the group in the future. Moving into casino-led and bingo-led gaming. To reiterate, we believe we have a genuine competitive strength, expertise and significant further potential in casino-led and bingo-led gaming. In Grosvenor Casinos, we're the market leader in U.K. land-based with around 40% market share, a position that's grown in recent years. The venue segmentation work gives us a clear framework for commercial strategy and investment across the estate, including the trial of a new small format, high-productivity, electronic-led casino. Revenues in Grosvenor are resilient, improving, and there are clear further growth drivers. There are also high barriers to entry through the licensing model. And our casino heritage, that genuine casino authenticity is a key point of difference online. People come to us for our live casino offering. It's a real differentiator, which is particularly important with RGD at the higher rate. On bingo, put simply, bingo is in the DNA of the bank group. We love bingo. We're proud of it, and we're passionate about it. It's great value, community-based entertainment. We have a strong estate of 9 well-located venues in Spain and have remodeled the shape of the Mecca estate in the U.K. to focus on the higher quality, higher return venues that generate strong liquidity, which is critical to the bingo game. Liquidity is king. It drives the price boards that customers play for and the price they pay. And that applies online, too. It's exceptionally hard to replicate the liquidity gain in the unlicensed gambling market. We're well positioned online, particularly given the changing nature of the industry with a highly loyal customer base. So we're clear where we can win, but also why we can win, which is on the bottom half of this slide. We've got well-loved brands in attractive markets, a compelling customer proposition that's delivered by highly skilled and highly engaged colleagues. We've got clear growth drivers, which are well understood by everyone across the group and a significant opportunity to grow through investment in the cross-channel proposition. We're viewing the implementation of the strategy through 2 parallel components. On the one hand, we're focused on delivering the GBP 100 million plus operating profit ambition that you're all familiar with. That's the deliver part of this chart. We're also thinking about how we build a business for long-term value creation. That's the deployed part of the strategy. As I say, one doesn't lead to the other; they run in parallel, but we need them both to fully realize our ambitions. In deliver, it's about maximizing the value of our existing assets, a laser focus on performance, using data and insights to drive growth and utilizing technology to improve the customer proposition. That will result in revenue growth, but also higher margins, higher returns and improved cash generation. In deploy, it's about selectively deploying capital to build scale in the areas where we know we can win and where we're very confident of securing strong financial returns. The smaller format electronic-led casinos are a good example of that as are our investments in social gaming lounges in both Mecca and Enracha. We'll also look to grow our international revenue streams to provide greater diversification. Both Yo and Enracha, 2 bingo-led businesses, have high operating margins above 25%. The 2 very productive businesses, but they account for less than 10% of group revenues. We want international to be a bigger proportion of the total group in the future, and Portugal is where we're starting to focus our attention. It was great to launch our bingo product there towards the end of the financial year, and we're slowly building momentum as we attract new players to this product. To reiterate, deliver and deploy our parallel, rather than sequential, parts of strategy. We need both to fully realize our ambitions. Right. Getting into the drivers of growth in each of our business units. We talked about the playbook for success in Grosvenor in the Capital Markets event that we held in October 2025. The key components of that are shown here. We have a high-quality segmented estate. In each of the segments, we have a clear commercial plan, a clear investment plan and a model of the returns we expect. We've improved the quality of our club environments over the last few years. There's still some work to do, but the estate is increasingly in better shape. We'll continue to invest in the estate going forward, a targeted approach that utilizes the venue segmentation. But it also recognizes that we've delivered high returns where we've focused on more targeted schemes that have the most direct impact on the customer. In hospitality businesses, people are key. And in Grosvenor, we have over 4,000 highly skilled colleagues. The From Like to Love cultural change program introduced a few years ago has had a material impact. We've got some of the best engagement scores in the hospitality sector, which, given the 24/7 nature of our operations, is fantastic. We also offer unrivaled products and service, first-class table gaming, the best, most innovative electronic gaming in the U.K., a much improved slots proposition with breadth of choice for the customer. And we can now offer sports betting and already have sports betting terminals in 24 casinos. We're learning plenty there as sports broadens the proposition of our venues. We have a tailored F&B offer, and we're also the leader in poker in the U.K. On which note, we held our annual Goliath poker event in our Coventry Casino in July. Cliff and I both went along for some of it, to watch rather than play, unfortunately. It was a fantastic success with 15,000 customers competing for a main price pool of GBP 2.2 million. It's the biggest poker event of its kind outside of Vegas, and we're very proud of it. Most importantly, customers love it, too. Finally, we continue to make progress with the cross-channel proposition, which is a point of difference in the market, and can be a catalyst for further growth through retention and deeper relationships with our customers. There's a big opportunity in that regard. Moving on to Grosvenor performance, where we've made continued progress in the year. Revenues were up 5%, with gaming machines the fastest-growing product vertical. Table gaming performance was flat, a tale of 2 halves. Revenue was up 2% in H1, but down in the second half due to the Middle East conflict and reduced travel from the region. As I mentioned earlier, we plan to trial out smaller format casino this year using some of our dormant licenses. Gaming machines were an important driver of growth in FY '26. As you can see from the chart, slots performance improved as the year progressed, and that improvement has continued into the new financial year. We've grown machine numbers by 850 or 65%. And after the initial step-up in revenues, we're very focused on optimizing the performance of the machine estate before making further capital investments. Our experience from adding machines into venues in the past tells us that it takes 2 to 3 years to get to maturity. We've learned that customers like the increased breadth of choice in the machine estate, but there are probably 4 of the 5 machine suppliers that we'll work most closely with in the next few years in order to maximize performance. Service definitely matters to our slots customers, knowing their favorite games, helping them with the offers and so on are an important part of the slots experience. We're investing in service training and a mystery customer program with a specific focus on slots areas. And we're also investing in a new loyalty and rewards program directed the machines in the first half of the new year. It's clear that data and insights have to drive decision-making and performance improvements. We'll increase machine allocations to the venues when utilization rates demand it and returns are strong. Growth will come from increasing the customer base and increasing share of wallet from existing customers that also play elsewhere. We offer a really attractive slots proposition in our venues now, and we expect to move from GBP 2 million slots revenue per week prior to the land-based reforms to over GBP 3 million per week in the next 2 to 3 years. On to building scale in digital. I think it's fair to say the U.K. digital landscape is experiencing a seismic shift, with the increasing RGD to 40% of revenue. With that in mind, ensuring we have a clear framework for acquiring, entertaining and retaining customers is key. For us, that's join, play, stay. Join is about acquiring customers as efficiently as possible. If we do that well, marketing expenses as a percentage of revenue will decline as our acquisition programs become more effective. Play is about giving customers the best possible proposition, the most fun in order to deepen engagement. To that end, we've protected free bets and incentives and continue to focus on improving customer journeys in the digital channels. If we do this well, customer player days should increase. And stay is about retention, building loyalty and improving customer lifetime value. That's the commercial model that we've implemented, and it gives us the best chance of success in a higher tax world. In that context, digital performance is pleasing. Revenues grew by 12% in the final quarter, the first quarter with higher RGD and by 8% for the full year. We took decisive action to mitigate the impact of the higher taxes, reducing above-the-line marketing significantly, more than most operators because we've got the advantage of well-known brands. We dialed up performance marketing modestly, and that supported performance and is delivering good returns. We also renegotiated supplier contracts and reduced headcount in the U.K. digital business. They were the necessary actions to ensure we had a viable business going forward. As I mentioned, we've continued to invest in the customer proposition. That's key to also having a vibrant digital business in the U.K. going forward. Moving to performance in Spain, where we grew by 7% in the year, much improved from where we finished FY '25 and the start of FY '26 when we're in a slight decline. YoBingo performance was pleasing and YoSports growth was particularly strong. We've taken some of the community capabilities we have in bingo and are applying them to the sports site, which gives us a point of differentiation against the much bigger operators. Broadly maintaining margins in digital given the tax impact in Q4 was pleasing, but digital profitability will inevitably be reset in the year ahead. Moving to Bingo. The plan remains to maximize medium-term cash generation in our bingo venues. The slides illustrate our model. We have strong brands in both Mecca and Enracha, and a vibrant bingo game is key. That's how you attract customers. It's their primary reason for visit. Those customers, generally speaking, are very loyal and the community aspect is very important. There is a deep loyalty to our brands and a strong association to colleagues and to other customers. From a financial perspective, gaming machines and electronic tablets are the productive assets that help drive overall profitability. And good quality data, which continues to improve through the loyalty card in Enracha and through the Mecca app is important to driving growth. In the year, both Mecca and Enracha delivered solid performance. NGR growth in both was driven by a combination of strong bingo proposition. Remember, that's the primary reason for a visit to why they come, plus the strong gaming machine growth. We've made targeted investments in each business, particularly in the gaming machine areas, but also in social bingo lounges. The first of those, Bingo Boom, opened in Seville in April, and the investment in the 1825 Lounge in Mecca Stockton that you saw in our opening video completed in July. We'll report back how they're doing in due course. Off the back of the venue segmentation work, we did close 9 Mecca venues in the year, and that leaves us with a higher quality Mecca estate that we're very happy to invest in. The Enracha estate remains well invested and in very strong shape. Colleague engagement and customer NPS is also strong across both businesses. I've mentioned already that slots and electronic gaming are the economic growth engine for all of our venues businesses. Slots account for around 44% of group revenues and electronic terminals account for around 16% of Grosvenor revenues. Tablet-based play and Mecca now accounts for around 80% of bingo revenues. The important point is that customers like playing electronically, even when they're in physical venues. It's part of the broader trends that we see across hospitality businesses. Customers increasingly interacting with physical locations through digital devices. It's convenient, it's interactive and it's what customers demand. We continue to improve the proposition in these areas to capitalize on this growth trend and the shifts in how customers behave in hospitality venues like ours. Slots and electronic gaming are also our most productive assets. They utilize space efficiently and generate strong returns. As part of our increased focus, we're deepening relationships with suppliers to ensure we continue to develop the proposition and to lead the way in our casino and bingo sectors. It will be remiss of me not to mention Machine Games Duty, and I'm very aware that there's been media speculation that has impacted the share price in the last couple of weeks in particular. So let me address that today. MGD is currently charged at 20% of revenue generated on gaming machines in both casinos and bingo halls. And as you've heard me discuss today, gaming machines are an important component of venue profitability. Any increase in MGD puts pressure on the viability of our venues. You can see on the slide the impact of wage inflation and higher taxation on the number of Mecca venues and Mecca colleagues over time. Unfortunately, any increase in MGD would lead to fewer venues across the sectors, lower employment and reduced tax receipts within 12 months. From my perspective, it makes no economic sense for the government to consider increasing MGD. Over the summer, we started to make the arguments publicly, and you may have seen some media coverage setting this out. As we approach the Chancellor's budget, I'm determined to do all we can to amplify our arguments with treasury through the media and with politicians. We have meetings with treasury officials. We're working closely with industry peers, and we're engaging locally to set out the facts and the risk of unintended consequences of tax increases to both casinos and bingo halls. As we do so, we continue to showcase our clubs that support jobs, provide customers with enjoyable experiences such they come back in week in, week out and generate significant tax and duty receipts, a long way that continues. We're very proud of what we offer in towns and cities across the country. These are genuine community assets. Moving to current trading. We said at the time of the results that strong momentum has continued into the first 6 weeks of the new financial year. Revenues were up 8% with gaming machines in Grosvenor having grown 15% and digital revenues having grown 10%. But as you've heard, digital profitability will inevitably reset in '26, '27, and that's despite the decisive mitigating actions that we've already taken. We're providing a trading update on the first quarter of the financial year on the 15th of October. Finally, I also expect that trading momentum to translate into further strategic progress. The group's strategy is focused on those areas where we can win, casino-led and bingo-led gaming. And the underlying performance momentum is good across the group. There are clear growth drivers in each of our businesses and plenty of runway ahead of us. We've got a strong balance sheet, and that allows us to continue to invest in order to capitalize on these growth opportunities. We believe we're on track to deliver the GBP 100 million of operating profit in the medium term. And across the group, there is a clear focus on creating long-term sustainable shareholder value. All right. Thank you for listening. There is now an opportunity for questions. We'll see if any have arrived while we've been talking, and please feel free to submit any online as we continue the discussion.

[Operator Instructions] Perhaps if I start off with this one from Peter, I've kind of summarized it here. Your criticism of potential gambling tax increases is strongly and clearly made, and Richard has been a prominent in the media on this already. Are Rank able to quantify the impact of potential tax increases in terms of jobs and venue closures? And what other evidence can be given to government to ensure they understand the implications?

Great. Thank you, Peter, for that detailed question. So it's the theoretical impact, I suppose, of higher machine gaming duty. If you take what has been proposed by some of the think tanks that have been vocal on this, could be as high as GBP 35 million. Now that is a pretax number, and that will be before any mitigating actions that the business would take. From my perspective, that is, as I said previously, that is nonsensical from an economic perspective because it would make a number of our venues unviable. And that would inevitably -- we're economically rational people, it would inevitably therefore, lead to job closures -- sorry, venue closures, both in our business and across the casino and bingo sectors. If we close venues, that also leads to job losses. It also leads to lost investment and in my view, it would lead to reduced tax receipts from the gambling sector within the next 12 months. So the economic case on this is not particularly strong. Actually, it doesn't make any economic sense whatsoever. In addition to the kind of economic argument, though, so this has been considered in the past and the economic argument won the day. So we'll need to continue to win that economic argument, and we'll do that publicly, as we've said. But in addition to that, I think it's probably right that we have to also win the political and social argument here as well. Our venues, so we've got 41 Mecca Bingo venues. We've got 47 Grosvenor Casinos up and down the country. But actually, there's a bias towards the northern part of the country, and that's where the venues would inevitably become unviable and potentially lead to closure. And we're really proud of those businesses. So we've got very much very long-serving colleagues, we've got very loyal customers, and we think they are genuine casino assets. So we'll also be making the case around the role that our venues play. They are very highly supervised, highly regulated environments, and we're very proud of them. So we'll be looking to make the financial case but also the political and social case.

I think on the evidence point, actually, it's worth saying that they've been working with other operators and commissioned the sort of EY report and to see what the impact of 40% would be on the industry. And there's 108 casinos in the U.K., and that report says 34 of them would close at 40%. So that has been presented to government and treasury. So hopefully, that will land.

That's great. Well, look, I might keep you guys on this theme, if I may. The second question we had is, given your dialogue with government, what is the percentage probability of Rank fully file for sustained slot machines and more specifically, raising Machine Gaming Duty from 20% to 40% in the next budget?

Very hard to put a percentage likelihood on it. There's been some speculation around for a while, as I mentioned, it probably kind of kicked off back end of July. But it's not kind of new speculation. We've had it in previous years as well. And as I said, the economic argument that we've kind of laid out already in the previous question won the day last time around. So it's very hard to put a kind of percentage likelihood on it. In terms of the impact for rank, I mentioned unmitigated could be as high as GBP 35 million, but that's a genuine theoretical impact. What we have to do is kind of monitor how this plays out and understand the kind of competitive dynamics if it were to go ahead, understand those competitive dynamics and what it would mean for each of our venues in their local markets. So there's a long way to go. Budget not until the end of October. We're putting our case forward very strongly, both through ourselves and through industry body. So we'll fight hard to kind of make our case.

That's great. Just turning to the next question, how do the economics of the smaller format casino models compare with the traditional Grosvenor Casino in terms of upfront capital investment, revenue potential and operating margins?