Greek Organisation of Football Prognostics SA

ATHEX:OPAP

Earnings Call Transcript 2018-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. I am Gilly, your Chorus Call operator. Welcome, and thank you for joining the OPAP conference call to present and discuss the OPAP First Quarter 2018 Interim Management Statements. [Operator Instructions] And the conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Damian Cope, CEO of OPAP S.A. Mr. Cope, please proceed.

[Damian Cope, executive]

Thank you very much, operator. Good morning or good afternoon to everybody, and welcome to OPAP's Q1 2018 Investor Conference Call. As always, our CFO, Michal Houst, will start by commenting on the financial picture for the quarter. I will then provide you with an update. We will then answer any questions you may have. Michal, over to you.

[Michal Houst, executive]

Thank you, Damian, and good afternoon, everybody. Starting with a short reference of the macro. Although we still like GDP data for the quarter, I believe that Q1 economic trends will probably improve in tandem with expectations. Prism continues on a healthy growth path in what could prove another record year if sports stay on the rise; at the same time, rolling the country's current accounts deficit. While the increase in unemployment over the course of the last month is most probably due to the seasonality patterns. On top, leading indicators like economic sentiment and consumer confidence recovered after retracing a bit in January and February. On the negative side, signs from the retail business, which is the metrics we follow, have not been particularly exciting. Private consumptions stood lower in the last quarter of 2017, while retail sales remained stable in February. When compared to those figures, it is clear that OPAP once more managed to perform well. Our revenue for the quarter increased by 5.1%, mostly due to solid performance of our new products. Gross profit from gaming operations followed [ the same time ] and came in at EUR 148 million, rising by roughly 4.9% indicating a sound operating model when it comes to new business revenues.

EBITDA-wise, growing some quarter with stability. We managed to grow by a material 11.1% at EUR 87 million due to both revenue increase, but also efficient cost control across the company's operations.

Finally, net profit reached EUR 39.9 million, high by 20% for the year. Our focus on cost efficiency was evident for the quarter. As a reminder, in the past couple of quarters, we have been upgrading our network infrastructure, completely changing our IT systems, rolling out thousands of VLTs and SSBTs and introducing new games. Despite all of those, our OpEx line consisting of payroll, marketing and other OpEx increased by only EUR 1.5 million for the quarter, almost solely coming from our continued investment in our people and the subsequent payroll increase, which however has already started normalizing when compared to full year 2017.

Marketing-wise, our expense was double-digit down year-on-year when we consider that this is mostly a campaign timing effect, and we will expect that the full year figure will be very close to 2017 figures. As for our cash flow, I would start with a small reference to our operating cash flow, which was lower mostly due to higher taxes payable, the latter mostly relates to the payment of the withholding taxation on the extra dividend of EUR 223 million, which we paid in December and, to a lesser extent, higher GGR tax payments.

Finally, our CapEx this quarter is EUR 11 million, and pretty much included everything that the company focused on like IT, infrastructure, rollouts, et cetera, et cetera. Going forward, our expectations for the full year based on the current needs stands lower than EUR 50 million. While we believe that from 2019, our CapEx will mostly tend towards maintenance.

Turning to our products. Betting shined for yet another quarter by 12.6% due to the material contribution of virtuals, while Stihima declined despite a positive contribution of SSBTs. The latter has now reached more than 3,100 machines across more than 1,500 agencies, and demonstrates a satisfying performance in line with international experience. Going forward, we expect that Q2 will also prove to be a positive quarter also held by the most important event in our industry, the World Cup. We, however, note that the like-for-like comparison will gradually get tougher as virtuals enters the market in Q2 2017.

Lottery-wise, revenues were down on the back of 2 factors. JOKER performance, which was hit by tough year-on-year comparables in conjunction with what we think was one of the most unfavorable jackpot rollover in the last couple of years. Note that in Q1 2017, we had a EUR 16 million jackpot, which brought in a cumulative EUR 13 million of GGR, while the highest jackpot in Q1 '18 stood at EUR 5.6 million leading to just EUR 11 million for GGR.

KINO cannibalization, which mentioned early, has been growing together with the number of the machines albeit at a modest and definitely not alarming rate. All in all, I think it is fair to say that KINO cannibalization has up to this time been somehow milder versus our original expectations, while the game will be additional aided by the new initiatives similar to KINO BONUS that are scheduled to materialize in the Q4 this year. Hellenic Lotteries performance was very close to the last year's numbers, as Scratch ticket decline was almost fully counterbalanced by the passive lotteries rejuvenation. We expect this term to remain largely unchanged during the remaining course of the year as well.

Finally, when it comes to VLTs, Q1 GGR reached EUR 43.4 million versus just less than EUR 2 million in the same period last year, demonstrating that VLT already constitutes our largest contributor -- one of the largest contributors to our financials. GGR for the full year operating machine for the quarter reached EUR 46 per VLT per day, which we consider satisfying, given the fact that half of those commenced operations within Q4 2017. As for our progress, we ended the quarter with 11,500 machines in the field, where we are now standing at almost 13,000, and remain firm on our 20,000 machines target by the end of the year.

With that, I am passing you over today Damian, who will comment on our business progress for the quarter and our plans going forward.

[Damian Cope, executive]

Thank you, Michal. I'll now take you through our business progress in Q1, and also provide you with an update on our key initiatives and strategic priorities.

Turning first to our retail network. While OPAP above managed on the one hand to realize some commission-related savings, our investments have also helped to deliver a positive impact on the agents' profitability as well. Based on preliminary data, the average commission per agent across the network in absolute terms is actually higher year-on-year, while for shops with VLTs, average total commission is almost 10% higher. We believe these initial results vindicate our long-term view, and provide a good example of how reaching a common understanding can lead to results that are positive for both OPAP and our agents. As you will remember, a number of our agents did not sign the new contract last year. And once their 12-month termination period ended, they closed their shops during Q1 2018. As a result, the number of OPAP shops in the Greek retail network went from 4,367 agencies at the end of 2017 to 3,836 today. The latter number includes around 150 new shops that we have opened so far during 2018. Some of these relate to the normal course of business, such as relocations to commercially better spots, while some others pertain to the replacement of some of the locations that terminated their operations. All in all, our target is to replenish roughly more than half of the closed shops' locations, resulting in an overall network of somewhere above 4,000 agencies by the end of 2018. The recruitment process for new agents is proceeding well, and we are confident that we will, in this way, further modernize and optimize our overall retail estate.

Our busy technology road map continues with good progress made. We've now rolled out all of the new retail point-of-sale terminals, so around 10,000 units, together with the new digital signage plans. We expect the migration of the remaining retail products and services to these new terminals and the move to the new Playtech sports betting platform to be completed as planned over the summer.

Finally, when it comes to online, the relaunch of our offering has been pushed back slightly to coincide with the new football season. It's no secret that we were targeting the World Cup. But in the end, we decided to delay our launch and remove the complexity of an additional technology migration during this busy period.

On VLTs, the rollout is proceeding well, and we now have just over 12,800 machines across our estate. And today, we also celebrate the opening of our 300th gaming hall. As we pass the midway point of our rollout of 25,000 machines, we've been further assessing the relative benefits of putting more machines into existing gaming halls and OPAP agencies, as we are allowed to do under the new law, compared to rolling out new locations. The fact that many of our existing points of sale have a relatively short operating history also has to be factored into our thinking.

As a result, during Q2, and along with more new openings, we gradually started to increase the number of VLTs in certain locations that we think make commercial sense, and we expect that this trend will continue over the next few months. Overall, we're still aiming for our end of 2018 target of around 20,000 machines, which we believe is feasible, given the current rollout progress, and the fact that we managed to deliver 10,000 machines during the course of 2017.

In terms of customers, we've now reached a total of 210,000, and there are no notable changes that we've witnessed in the demographic trends, with the male-female split now slightly different at 74%-26%. Product-wise, we believe we now have a deeper understanding of what sorts of content our customers like, and we have a busy program of new games launches for the rest of 2018. We're also still working hard to introduce our linked jackpot product either in Q4 2018 or early 2019.

As for the rest of our products, and starting with betting, Michal has already referred to the performance. I would just like to reiterate that we are satisfied with virtuals, and plan to bring in new content by the end of the year. On SSBTs, our installation pace has picked up, growing from a base of 1,400 machines at the end of 2017 to more than double that at 3,100 machines across 1,500 agencies as of today. This figure is going to further increase within this year, as the evidence from our operations in Cyprus in particular strongly suggests an argument for increased density. We already offer betting on virtuals via these devices, but we are also looking to add other products and we hope to have an additional new product being piloted by the end of this year.

Lottery-wise, we remain rather unlucky so far with jackpot rollovers, and notably when compared to Q1 2017, as you've heard from Michal. Considering though that this is within the normal course of business, we expect that the trend will sooner or later revert to the mean. And as for KINO, our flagship game has been performing relatively well, and both the gradual opening of new agencies as well as our new product initiatives in Q4 should help the game further.

On passive lotteries, we launched the new Laiko product with a new more attractive price structure, and first impressions have been positive from both our network and our customers.

Despite our significant efforts to revive horseracing in Greece and deal with the problems that we inherited, such as the steadily dropping number of horses and a market-lead lower level of batting activity, our horseracing business remains loss-making. In the past 2.5 years, we've undertaken many initiatives and incurred significant costs to develop a competitive offer, including designing a simplified betting product, upgrading the racetrack and conducting 2 horse auctions with beneficial financial terms for Greek owners. We also continue to give extra incentives to horse owners by doubling prize money compared to the provisions within the concession agreement. Yet despite these efforts, there is still no significant improvement in the results, which makes it clear that the horseracing business requires a full strategic review and further optimization of the operating costs. To this end, we are engaged in trying to make this activity sustainable. And we are in discussions with the relevant authorities, exploring various options, so as to reach common ground and find a viable long-term solution, while at the same time protecting shareholder interests. Whatever the outcome, it is certain that the status quo cannot continue.

Taking into account the payment services now also fall within our product range, I'll also provide an update on Tora Wallet. Following the award of the e-money license from the Bank of Greece, the company proceeded with a pilot project to certify a small number of OPAP stores as agents of the e-money institution. The pilot was concluded successfully in early May, and the next step is to invite all OPAP stores to participate in the certification process. In all certified locations, the bill payment service will be immediately available, allowing consumers to make payments to more than 100 organizations, including all major utility providers. Following that, we expect that within the second half of this year, we will gradually extend Tora's offer to various additional services, including remittances, where consumers will be able to send cash from one certified location to another, both in Greece and overseas.

Moving now to the rest of our strategic priorities, and starting with our brand, the strong momentum of our campaigns continue -- continues. Our new tagline, Live the Game, awareness stands at 60% in just a few months. And our Credibility campaign for customers was launched on March 30, with our new site, www.opap.gr, used by the wider public to learn more about OPAP and its operations, and has already had more than 145,000 unique visitors. We also continued our efforts to strengthen our customer relationships by implementing a new campaign management tool, which allows us to optimize one-to-one communications with our players. And we also reached a total of 12,000 customers through 17 research studies just in Q1 alone. The OPAP team reached 1,428 people in the quarter, and that is evident from the comparison with the full year's figure, the growth trend has decelerated. And that is very much in line with our thinking following the completion of some of our key projects. It's also worth noting that the company's headcount expansion came in tandem with an overall improvement in the company's working environment. We were particularly proud for OPAP to be recognized earlier this year being 1 of the 10 top large Greek companies to work for by the internationally recognized Best Workplaces program. Within CSR, following the successful conclusion of the first "OPAP Forward" program, which led to the support of 20 small and medium enterprises and the creation of over 2,000 direct or indirect job positions, we recently launched the second "OPAP Forward" program, which means we are now supporting 40 companies across Greece. We also still continue our support of the sports academies as well as the children's hospitals renovation. Both of these projects are widely recognized, as proven by the numerous awards we received at the recent Hellenic Responsible Business Awards event. As for our relationship with the Hellenic Gaming Commission and other key state bodies, we continue our fruitful and efficient day-to-day cooperation focusing on the mutual interest of Greek society, the Greek state and OPAP. We've been working particularly closely in relation to the topic of illegal gaming, which deprives the state of significant tax revenues and poses a threat for society. Tackling illegal market requires time and major effort, but the steps made by the authorities in the past few months are very much in the right direction. At OPAP, we're fully committed to support the Greek state and the Hellenic Gaming Commission in this area.

As regards the online market, our position hasn't changed. The government has repeatedly expressed its intention to promote a new legislation, and a public consultation process was run by the Hellenic Gaming Commission. We participated in this process, and shared our positions. We've consistently said we would welcome the introduction of a fair and balanced legislation, which will clarify the overall environment and also respect OPAP's rights. We are hopeful that there will be progress in the coming period, but it will be premature to make any further comment at this stage.

Overall, and to sum up, I believe that Q1 set the tone for what we believe will be a meaningful year of growth for OPAP. The transformational activities leading to this growth continue, and are well supported by the hard-working OPAP team. I remain confident that the end of this year will bring us even closer to the delivery of our 2020 Vision.

With that, I'm concluding my opening statements, and Michal and I are now ready to answer any questions you may have. Thank you for your patience and your attention.

[Operator]

[Operator Instructions] The first question comes from Mr. Draziotis Stamatios with Eurobank Equities.

[Stamatios Draziotis, analyst]

Three questions, if I may, please. Firstly, on VLTs, you mentioned the -- what the performance of the 10,000 machines was in the first quarter, the machines operating since the start of Q1. Could you please tell us how the 5,000 machines operating since the start of Q4, i.e., for more than 3 months, how these machines performed in the first quarter? And related to that is, whether you have seen any changes in the pattern of the ramping up of the machines lately, i.e., the time period it takes for the machines to reach the performance you have in mind compared to what we saw in 2017. That's the first question. Secondly, on sports betting, Michal suggested that you basically expect this to -- expect Q2, sorry, to be a positive quarter. Just wondering, what does this mean exactly? Were you referring to Stihima specifically? So just wondering whether you meant that Stihima will turn positive, thanks to the -- on a stand-alone basis, thanks to the World Cup activity. And thirdly, just on horseracing, just wondering, to what extent has this business diluted operating profit in the last 2 years, please?

[Michal Houst, executive]

Stam, I'll answer the 2 questions, and Damian will answer 1 of the 3 questions here. So on the first question, on the VLT, basically, as we -- as you can see, even from the profiling of the ramp-up, basically from 5,000 to 10,000 machines within the quarter. And a majority of those things happened in late November and December. So basically to catch up on the -- to the opening on the main season, let's say. And that's why the performance in the Q1 was basically EUR 46, was driven by half of the machines, which were operating definitely. In average, basically, [ it's seriously ] below 3 months. So it was quite new machines. And in that respect, we are saying that this EUR 46 is a good metric for the quarter, and we believe it's a good performance. And regards to your question, do we see any difference in the ramping up of the machines compared to the machines which we have announced before the Q4, not particularly. So in the gaming halls, the performance is still having quite healthy trends, and we don't see a big difference in the performance. There is some weakening in the shops because, let's say, the shops are a little bit ancillary product in the shops for all the other betting opportunities we have in the shop. And there are some weakening when we are basically deploying to the shops, which are a bit weaker from the business point of view in general. So there's definitely some particular weakening in the shops. But in the gaming halls, which is the majority, let's say, of the revenues and of the machines, the trends are gradually improving. And there's no difference in the performance of the machines deployed in the first 3 quarters and last quarter. Then on the last questions about horseracing, basically, it is roughly EUR 9 million to EUR 10 million on an operating EBITDA level, let's say, a year in the last 2 years, negative, let's say, impact from horses. And this should be better this year, let's say, slightly. If we would not, let's say, review more seriously the business, which Damian mentioned on the call. So this is something we are looking into that. This is what we are mentioning in it, a more restructuring and with more effort from, let's say, all the parties, all the stakeholders around the horseracing. And the second question about the Stihima, I will give it to Damian.

[Damian Cope, executive]

Yes. So just on sports betting for Q2. Look, we're -- as Michal said, World Cup is the biggest, if you like, betting bonanza that ever takes place. The Olympics is not a big betting event, but certainly the World Cup of football is. We're lucky now that it's in the right time zone for Greece. Last time, it was in Brazil. So we expect there to be a lot of interest even though Greece, unfortunately, is not participating. We now have, as you've heard, a significant number of self-service betting terminals out there, which we think will appeal to customers. This week, we launched our coupon for the World Cup, which has got more markets than we've ever had before. So we think we have a very attractive offering. So we are optimistic that our customers will respond. As you know, with any big tournament, you can't necessarily guarantee the margin. But certainly, we expect to see good levels of interest and good levels of activity, and we are optimistic for the quarter.

[Stamatios Draziotis, analyst]

Okay. And just to confirm, so this means excluding the contribution from virtual games, unless the results, obviously, are unfavorable. But do you expect this to flow through to a positive gross gaming revenue number for Stihima?

[Damian Cope, executive]

To be honest, we look at the betting category as one now because, since we launched virtuals, we are well aware that a lot of our sports-betting customers enjoy playing virtual products. So although we look at the individual parts of our betting category, I would be very happy if customers won good money on World Cup matches, and then reinvested that money into virtuals, which is a pretty common experience. So let's see how we go during the World Cup in terms of the relative spend, but we think we've got a very attractive offer for the quarter.

[Stamatios Draziotis, analyst]

That's very clear. And just a follow-up on the question about the VLTs. So I'm not sure that I've understood. So the 5,000 machines, which have -- were already [ around top ] to some extent in the -- from the beginning of the first quarter, did these machines generate gross gaming revenue figure per day in the mid-50s? Or was it...

[Michal Houst, executive]

I mean, you can do the math there. If you would basically use the same logic of the ramp-up that you see, let's say, from the curve in Q1, Q2, Q3, and you know for the last year's revenue, you can do the math there. But basically, this is it, as you said.

[Operator]

The next question comes from Mr. Kourtesis Iakovos with Piraeus Securities.

[Iakovos Kourtesis, analyst]

Could you reiterate for us your CapEx guidance for the full year 2018 period? And second question, taking into account that, at the moment, you're halfway in the deployment of VLTs with more than 13,000 machines already been deployed. I was wondering, do you have any target for your net drop per VLT per day or a threshold for this figure for the full year 2018 period, in which you will be satisfied?

[Michal Houst, executive]

Yes. So for the CapEx, I said it on the speech, it was basically mentioned that for the full year, the expectation is up to EUR 50 million, which is in line with, let's say, our 2 years transformation program, which was over EUR 100 million CapEx. So this is the expectation on the year. And then going forward in '19, '20, blah, blah, blah, it should be seriously lower because we expect only the maintenance CapEx here. So that's the guidance on the CapEx. On the VLTs, yes, for sure, we have targets with which we would be satisfied, but we are not indicating or not giving some forward-looking expectations and forecast. We cannot give you this target, which is, let's say, internal. So unfortunately, I cannot answer. And just for clarification, the machines is 12,800, not over 13,000 there. So -- and I think maybe you a little bit misheard me because I said up to 13,000. Damian said exactly 12,800. So it reached 12,800 there. So it's not over 13,000.

[Operator]

[Operator Instructions] Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Mr. Cope for any closing comments. Thank you.

[Damian Cope, executive]

Thank you very much for joining us today, everybody, and we look forward to speaking with you again very soon. Have a good day. Thank you.

[Operator]

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephones. Thank you for calling, and have a pleasant day.