Greek Organisation of Football Prognostics SA

ATHEX:OPAP

Earnings Call Transcript 2021-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. I am Gaily, your Chorus Call operator. Welcome, and thank you for joining the OPAP S.A. Conference Call and Live Webcast to present and discuss the First Quarter 2021 Financial Results. [Operator Instructions] The conference is being recorded. [Operator Instructions]

At this time, I would like to turn the conference over to Mr. Jan Karas, CEO of OPAP S.A. Mr. Karas, you may now proceed.

[Jan Karas, executive]

Thank you very much, operator. And good afternoon, and good morning to everybody. Welcome to OPAP's Q1 2021 Financial Results Conference Call. Having behind us a year full of turbulence, uncertainty and severe restrictions on most economic activities, we feel both proud and safe by saying that OPAP was beyond any doubt able to face unprecedented challenges in the best possible way.

Profitability was obviously affected by the fact that the bulk of our land-based network was closed for almost all the quarter. But our focus on online as part of our established dual strategy, led to record high numbers and solid profits on that front. Going forward, we are cautiously optimistic as online remains strong, and our back to the game commercial plan, together with the substantial commitment of our partners has led to a successful OPAP stores reopening and encouraging initial footfall and GGR indications.

Our CFO, Pavel Mucha, will now provide you with a more detailed review of our quarterly performance, while I will then inform you on the progress we have demonstrated on the operational front. We will then answer any questions you might have. Pavel, over to you.

[Pavel Mucha, executive]

Thank you, Jan, and good afternoon to everybody. It is true indeed that although the lockdown has led Q1 numbers towards lower levels year-on-year, we believe that Q1 performance comes with a clearly positive tone. Several individual KPIs improved materially, and we trust that those will shape the longer-term trend.

Before getting there though, and starting as always with macro developments, I wouldn't say that much has changed since our last update when it comes to the hard data. That said, the fact that leading indicators such as consumer confidence and economic sentiment have now been growing, is reflecting a positive tone which we hope will be eventually equaled on GDP and private consumption.

Broker estimates still come with a wide range. However, it is fair to say that most of the projections hover around 3% to 4% for the year. All in all, the fact that the economy has gradually reopened together with the vaccination progress and the fiscal support, which is one of the highest in Europe, makes us optimistic for the future.

Jumping to OPAP's figures on Slide 5. Our total GGR came in at EUR 174 million, which is lower by 47% year-on-year, but this number is rather skewed on the back of the retail lockdown. In more detail, the land-based segment recorded revenues that dropped by 84% year-on-year as most of our Greek stores operation was suspended for almost all of the quarter, with only about 40% of the network opening only within February. As such, I don't believe that it would make much sense to refer to our retail performance in the few days that only a small part of our network was open, other than the drop was within our expected range.

On the contrary, when it comes to online, a more detailed reference is definitely needed as GGR reached EUR 122 million versus EUR 5 million 1 year ago, with EUR 103 million coming from Stoiximan as a result of the company's full consolidation as of December last year. Stoiximan continues to be the country's market leader with good growth coming in for both sports betting and casino. At the same time, OPAP's online brand also reached new highs with revenue quadrupling on a year-on-year basis, reaching EUR 19 million, up from EUR 5 million in Q1 2020. This performance is a result of our decision last year to prioritize online launches which effectively enabled us to quickly offer a full spectrum of online games, including betting, casino and lottery.

On the expense line, let me firstly note that our gross profit has again once more been hit by our prudent decision to record Hellenic Lotteries increased GGR contribution according to the annual contractual threshold of EUR 50 million. As you know, we have already filed an arbitration request, but until this is decided, we have chosen to book the full amount in our numbers so as to stake as conservative as possible. Other than that, OpEx figures on a reported basis increased to EUR 76 million, but these are obviously not like-for-like due to Stoiximan full consolidation. When adjusting for Stoiximan impact as well as one-offs items, OpEx dropped by 15% due to cost efficiencies that we pursued immediately after the initial lockdown.

In a nutshell, payroll decreased by 8%, while like-for-like marketing came in lower by 15% after adjusting for Stoiximan's impact. Going forward, it is obvious that marketing will move higher as the gradual restart of our land-based activities will require a marketing boost so as to enhance our customer reach.

With those in mind and turning to Slide 8, EBITDA came in lower by 29% at EUR 61.3 million comparing to Q1 2020 when it was EUR 86.4 million, or this is minus 44% like-for-like after excluding one-off income in Q1 2021. While further down the profitability line, earnings after taxes and minorities in Q1 2021 reached EUR 10.3 million or minus EUR 2 million like-for-like versus EUR 36 million in Q1 2020 as a result of lower operating profitability due to lockdown.

Cash flow wise on Slide 10. Despite our positive operating profitability, operating cash flow was negative for the quarter due to adverse working capital movement. This took place on the back of our network closure, which in turn led to receivables related to our past prepayment of GGR contribution. This effect is obviously not going to continue as our OPAP stores are now open. Overall, our cash position remained at an exceptional EUR 486 million, shaping the comfortable net debt-to-EBITDA ratio of 2.4x. With that in mind and given the shops reopening, we are increasing the proposed dividend per share to EUR 0.55 versus EUR 0.45 announced before. Given the circumstances, we believe that this constitutes a much rewarding return to our shareholders.

Finally, we have also prepared a few slides pertaining to our post reopening performance. Starting with Slide 11, it becomes evident that OPAP's brand online penetration is picking up pace, with Joker now reaching 20% and Pame Stihima standing at 8% versus low single-digit percentages in the pre-COVID period.

In addition, when turning to Slide 12, our retail business has also been recovering at an encouraging pace. In comparison to the same weeks in 2019, performance following the reopening has been steadily picking up pace with the last week generating numbers very close to the numbers generated in 2019. Comparison is also favorable versus post-lockdown reopening in 2020. But so as to be fair, we must stress that the sports betting offering is now full of events versus quite a limited offering last year.

With that, I'm passing you back to Jan.

[Jan Karas, executive]

Thank you, Pavel. Now following up on the financial part, I would like to start right away with something that I hope will no longer be needed as a reference from now on. As per our current operating status, OPAP shops in Greece have reopened since April 12, while VLTs activity is expecting to restart on May 24.

As for the Cyprus network, following 15 days of closure, stores are again open under social distancing measures. On our part, as seen on Slide 14, we have taken in time all the appropriate measures so as to make sure that our network would be ready to restart the operations, and that's exactly what happened. All of our stores opened right from the first week after the lift of restrictions, while 75 new stores opened, all of which were constructed during the lockdown period. At the same time, we have expanded to 1,500, the number of agencies equipped with the enhanced video broadcasting capabilities of the CMS systems controlled by the agents, while our plans for the future call for an even higher degree of digitalization in our agents and customer experience alike.

Product wise on Slide 15. Our actions so as to be ready with exciting and new content at the time of the recovery opening were successful. We added new sports in our live sports channel. We introduced new betting options and features such as bet wishes, which allow players to request tailor-made events and odds from our trading team, thus adding a personalization touch in the players betting experience.

We also introduced new over/under options in our exciting Powerspin game that were well perceived by the players, while we are also enhancing our scratch tickets portfolio with the small retail gaining ground in the mix due to an increased number of distribution points. On top, we started offering a new exciting scratch game that allows the winners to enjoy a fixed annuity of payments for the time span of 30 years.

Finally, we launched a new brand campaign for our Laiko game to strengthen its relevancy across all customer segments, and to support the game, Jackpots. We are happy to see a very positive early reactions, and we plan to further couple the campaign with special summer edition promos.

At the same time, as you will see on Slide 16, our aim to provide new digital customer journeys inside our stores and strengthening the in-store digital entertainment continues at full speed. We've introduced completely new loyalty offering by enhancing a very simple and straightforward way, our long-standing and successful OPAP application with the new rewards feature. We reward our players in several ways, including wheel of fortune, monthly draws and weekly offers.

As customers will participate by scaling their bracelets, we will also benefit from new data sources that will enable us to provide an even better solutions for our customer needs and expectations. We believe that loyalty will be relevant across our customer segments, fully exploiting the mobile experience within the store.

On the online front on Slide 17 and 18, Pavel already indicated that this was yet another record quarter. Through our new strategy, we hope an 84.5% stake at the domestic market leader business Stoiximan, while at the same our full autonomous OPAP brand has managed to get a key place in the market as per official 2020 data. Who would say not long ago that OPAP, a 99% retail-oriented group at the time, would manage to generate a considerable EBITDA profitability when its retail network being closed for the last part of the quarter. A lot has changed since then, and this is exactly what we are trying to depict here.

70% of our overall GGR came from online in Q1, indicating that OPAP group is now well braced to face any online retail or omnichannel challenges. Overall, our online product mix follows international trends, with betting accounting for the most part of the revenues, casino flowing with 38.7% and lottery being a small but still substantial part. Going forward, retail reopenings should naturally affect quarter-on-quarter trends and as such, online penetration figures will be naturally lower. But nonetheless, we believe that online numbers as a whole will remain solid within the second quarter as well.

On our part, having rolled out quite a few new products within the last couple of months, we are constantly enhancing our OPAP brand online offering. We continue our efforts to fully utilize our sales force platform, enabling a 360 customer account view, upon which all of our CRM activities now rely. Our latest and focused actions are coming on campaigns automation by targeting specific segments and players, so as to offer personalized rewards using both our sales force as well as our robotic process automations. We also launched a brand-new live chatbot service for our online players, thus enhancing our customer support.

Going to Kaizen Gaming, it's clear that facts speak for themselves. Taking advantage of the COVID-related developments, both number of active customers and GGR have reached quite impressive figures, driven by a complete and exciting offering as well as constant focus on technology. We have every reason to believe that the company will continue to be a national leader in both Greek and Cypriot markets, although someone should take into account both territory opening, which is probably here to stay as well as the new online law, which will soon lead to increased competition.

Finally, just before passing the ball back to operator, let me walk you over the CSR-related directions. On the children hospitals front, renovating is progressing well with an aim to deliver those by May end. Our OPAP Forward initiative also progressed well with weekly webinars, online workshops and advisory meetings with international speakers and high-profile companies.

Our sports academies online platform reported increased visibility rates through the ask your favorite athlete videos and frequent content updates. Last but obviously not least, in collaboration with our local retail network, we supported hundreds of families in Central Greece, affected by the earthquake with food and the diligence packages.

With that, I'm concluding my opening statement. I also share our cautious optimism and further believe that OPAP will soon be in the position to reap the merits of our people's considerable efforts. Thank you for your patience and attention. And I'm opening the floor for any questions you might have.

[Operator]

[Operator Instructions] The first question comes from the line of Draziotis Stamatios with Eurobank Equities.

[Stamatios Draziotis, analyst]

May I start with one on shareholder return policy? You've -- in the past, you've indicated that you would be comfortable with a net debt-to-EBITDA ratio in the region sort of 1, 1.5 to 2x. Just wondering, given there's been a rebasement of your EBITDA since last October due to the prepayment of the gaming duty through to 2030. Could you tell us how this affects this sort of ratio or comfortable zone, let's say, in terms of leverage? So that's the first question.

And 2 questions on the business, if I may. Firstly, on the OpEx side, given that the government is yet to fully unwind the support measures taken in the after month -- in the aftermath, sorry, of the lockdown, for example, rent subsidies, employee subsides, et cetera. Could you tell us the extent which you expect to benefit from this in the second quarter?

And lastly, on the top line. Could you just tell us what you've been seeing since the reopening for KINO, which is a frequent draw game? Just wondering how customers have adopted with the -- to the restrictions regarding indoor seating or the lack of it?

[Pavel Mucha, executive]

Thank you for the questions. In terms of our leverage, yes, indeed, the new tax regime on legacy games will certainly significantly enhance our profitability going forward. At the moment, we really don't have any plans to significantly change our debt level, and we have yet to see really how this develops going forward.

On the second question, government support really, it's not so much relevant for OPAP directly. We are always helping our agents to get all the support. Like in Q2, they were still opened at the beginning of April. But in the Q2, we don't expect any government support directly for OPAP, if that was the question. That was happening more in Q1, but not in Q2.

For the third question, I will pass you to Jan.

[Jan Karas, executive]

Thank you. So regarding the question about KINO customers' behavior. We have seen our customers accommodating to the situation. Just for the sake of clarity, when we opened, it was not allowed to sit anywhere. But now with the recent release of the measures, customers can sit outside of the stores, where obviously, such a seating is available. So what we see is customers playing much more of the repetitive bets of higher values. And generally, we see the regular customers coming and adopting to the situation, where the segments where we are lacking, and we are looking forward to welcome the customers back in the future is the more the occasional customer segments. thank you for the question.

[Operator]

The next question comes from the line of Chauhan Virendra with AlphaValue.

[Virendra Chauhan, analyst]

Yes, 3 questions from me. So the first question is on the overlap between the OPAP and the human customer base. Could you give us an indication of how much of an overlap lies between that? And which, of course, also indicates some amount of -- like what's the cross-selling opportunity between those 2 customer cohorts, if I can put them that way? So that would be the first one.

The next question is about the cost structure of your online operations now versus the offline ones. So I assume that there will be no revenue-related costs with the online revenue, which -- and these typically range about 28% to 29% of the offline costs. So given that we have ranged at that level historically for your retail revenue, would the 22% to 23% be an appropriate -- 22% to 23% of sales be an appropriate level from a long-term perspective for your gaming revenue-related expense as a proportion of sales?

And in continuation of this, if -- why does like the cost -- that gaming revenue-related cost in Q1, it just seems to be significantly high at about EUR 30 million-odd for retail revenues of EUR 32 million. So any particular reason why that's come higher than what we would have seen in a normal quarter for the retail operations?

And just one more, if I can squeeze it in. Could you clarify on the operating income add back due to the addendum? Is that expected to be recurring at a similar level? I mean, through -- all through the next decade because say, 10-year -- it applies for the next 10 years? So this will be from my side. In case you need me to repeat any of them, I'll be happy to do that.

[Jan Karas, executive]

I will try to answer the first question regarding the OPAP and Stoiximan customer bases overlap. As I'm sure you're aware, our retail customer base is anonymous. We know that quite a few of our sports betting customers do play not only in retail but also in online. That's why we are also so optimistic about our dual strategy, supporting an offering to our players' experiences in both worlds. But that overlap, because of the anonymity on the retail side, we obviously cannot calculate but can at best estimate.

In terms of the online basis -- online data basis, we are not exchanging any data about the customer bases. So such an indication is not possible either. Thank you. Pavel will follow-up on the financial questions.

[Pavel Mucha, executive]

Yes. So in terms of the question on the cost structure online/off-line and really what is the OpEx allocated to online. We have been building the online operations and online team really over several last years. And I think we are always trying to enhance our infrastructure. And there is always also CapEx involved in that as well as OpEx and operating and running costs. Obviously big part of the cost is the bonusing, where we have to remain as OPAP, competitive with the competition. But basically, I wouldn't say that we expect somehow significant increase of the OpEx on -- related to online just because we are growing very successfully in terms of the top line. Obviously, there are a number of costs which are variable and related to the growth of the GGR. But as a fixed cost base, we do not expect any significant increase.

Your third question was about -- can you remind me your another question, please?

[Virendra Chauhan, analyst]

Yes. So the last one was on the levels of the operating income add back that's related to the addendum. Is that expected to be recurring at a similar level that we saw in this quarter? All through the next decade? Or is that variable depending on some other factors as well?

[Pavel Mucha, executive]

No, that is a fair assumption that, that level should continue really month by month, quarter-by-quarter, yes.

[Virendra Chauhan, analyst]

Okay. And just if I could follow-up on the cost question. My question was actually very specifically related not to the overall OpEx, but to the gaming revenue-related expense that consists of the agents, commission and other NGR-related commission. So I was trying to understand, since online will not have this cost item associated with it and historically, this has generated about 28% to 29% of sales. So considering that probably about 25% of that should be a good ballpark for online revenue as a portion of your overall revenue. Will this expense line item be about 22%, 23% in the future? Is that a good way to think about it from a longer-term perspective?

[Pavel Mucha, executive]

Yes. So you're interested really in the variable -- really GGR-related OpEx, not like fixed base? Yes.

[Virendra Chauhan, analyst]

Yes.

[Pavel Mucha, executive]

Yes. I think it's even a bit more, I would say. There is certainly no agent commission, that's true. But there are -- as I said, bonuses, play quite a big impact. And then as well, obviously, the technological vendors and other vendors. So I would say it's a bit more than 30%, okay?

[Operator]

The next question comes from the line of Pointon Russell with Edison Group.

[Russell Pointon, analyst]

Further to the costs on the online business, specifically marketing, I think you said that your like-for-like marketing expense was down about 15%, which would mean new marketing expense for the digital business coming in is about EUR 5 million or EUR 6 million? And relative to the GGR of EUR 105 million, EUR 106 million, that's about 5% or 6% of GGR. And that compares with similar numbers that you used to report for the offline businesses a few years ago. But as competition increases in online, can that percentage go much higher?

[Jan Karas, executive]

That is a very good question, but that remains to be seen. We obviously expect with several new entrants to the market that the competition will toughen up, and we will need to react accordingly, both impact that will imply to our cost structure that remains to be seen.

[Operator]

[Operator Instructions] The next question comes from the line of Kourtesis Iakovos with Piraeus Securities.

[Iakovos Kourtesis, analyst]

First question has to do with the CapEx for the year. Do you still standing there up to EUR 20 million or something? Or do you plan additional investments related to online, taking into account the success you've enjoyed in first quarter? And second question, it has to do with your GGR during April and May. Obviously, you've started to operate normally in OPAP stores from 12th of April. So for April and May till now, where do you stand in terms of GGR increase versus last year and versus 2019? That will be from my side.

[Pavel Mucha, executive]

Okay. In terms of the CapEx, yes, our overall CapEx investment, despite the success of online and further enhancement will finish below EUR 20 million. We will have a sort of one-off investment on top of that. And these are the 2 online licenses for the sports book and for casino, which is some extra EUR 5 million. But the normal operating CapEx will be well below EUR 20 million.

[Jan Karas, executive]

May I kindly ask you to repeat the second question, please?

[Iakovos Kourtesis, analyst]

Yes, if you could comment, taking into account that your stores opened on 12th of April -- for April and May till now, if you have any update for us for a GGR increase these 2 months till now, total GGR for the group?

[Jan Karas, executive]

Apologies, I was on mute and speaking, sorry. We see from the reopening, certainly, an encouraging early results, obviously, with the VLT still being off. And as I mentioned earlier, some of the occasional customer segments being out, it's too early to make any conclusive judgments, but certainly, the early indications are rather positive, and we believe that this way, we will be certainly -- we continue to be on a journey towards full recovery in the future.

Now as to specific GGR numbers, I would like to abstain from commenting on that for now.

[Pavel Mucha, executive]

Yes. But in the presentation, and I commented on one of the slides where we are showing really performance versus 2019. So as I mentioned earlier, there is some encouraging results. It's really not comparable your question to compare to 2020, that's not comparable because we were now fully closed in 2020. We were in January February up until mid-March operational. And so that's not really comparable. But compared to 2019, we've seen really quick pickup. It's also helped by the sports calendar because unlike when we reopened on 11th May last year, there was really no sports calendar. Now there is a full sports calendar. So that's also helping. So the numbers when comparing to 2019 excluding VLTs, obviously, if we do it for a like-for-like basis, they are quite good and close to pre-COVID 2019 level, and we are really satisfied with the performance.

[Operator]

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

[Jan Karas, executive]

Thank you very much. Thank you very much for your time and patience to be with us. I hope you are all sound and safe, and it remains that way. And I hope the next day is very much optimistic for all of us across the globe. Thank you. Thank you for your question, and have a great day. Bye.

[Operator]

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