Greek Organisation of Football Prognostics SA

ATHEX:OPAP

Earnings Call Transcript 2018-Q2

[Operator]

Ladies and gentlemen, thank you for standing by. I am Galley, your Chorus Call operator. Welcome, and thank you for joining the OPAP conference call to present and discuss the OPAP S.A.'s first half 2018 financial results conference call. [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 everyone, and welcome to our OPAP's H1 2018 Investor Conference Call. As always, our CFO, Michal Houst, will start by commenting on the financial picture for the quarter. I'll then provide you with an update. And we will afterwards answer any questions you may have.

Michal, over to you.

[Michal Houst, executive]

Thank you, Damian, and good afternoon, everybody. Starting with macro developments. It seems that GDP has entered a growing path fueled by tourism, exports increase and a gradual unemployment reduction. The latter has also helped into an increase in the disposable income, which however, has not been materialized into any private consumption growth. Our base case scenario is that this trend will remain in place for some time, which in practical terms would mean that gaming spending should also grow our base at a modest pace.

Our revenue growth continues to compare favorably with these new retail-oriented economics indicators. We managed to outperform, also accelerating our base on the second quarter. Overall, we generated revenues that came in higher by 7.1% and 9.3% in the first half and second quarter of this year, respectively.

Likewise, gross profit from gaming operations moved in line with revenue, higher by 9.1% in Q2 at EUR 242.3 million, once more demonstrating healthy new business growth.

Profitability wise, reported EBITDA in H1 rose by a strong 70.5% at EUR 288.1 million while growing even further by 34.6% in Q2 2019. On a recurring basis, after adjusting Q2 2017 figures for litigation provisions of approximately EUR 12 million, EBITDA in the second quarter increased by 9.3%, in line where the first quarter stood. Growth came as a result of the revenue expansion at the same time always keeping an eye at all controllable cost lines.

Finally, Q2 net profit reached EUR 26.2 million, higher by 59% year-on-year, while increasing by roughly 5% on a recurring basis. As a reminder, note that the effect on -- of the one-offs will be come to balance in the 9-month period as Q3 2017 was favored by a positive reversal of roughly equal amount for provisions.

On the cost side, trends were also quite similar to the first quarter. Commissions to our agents increased by 6.2% on the back of the agent commission compensation scheme, which was commissioned for our August games to 5% to 7% of NGR. Note that despite the change on the nominal rate, the average agent's remuneration has increased versus last year levels on the back of the new products contributions.

Growing further, we expect further cost savings to materialize coming from the reduction of the base VLT-related commissions in the agencies effective in the second half of this year and the reduction of our legacy games commission rate to 5% to 6% of NGR as of 1st of January, 2019.

Before we get to rest of our cost items. Marketing expense normalized in H1 remaining broadly slight year-on-year. You may remember that this was also our guidance during the previous quarter, and we don't see any reasons to deviate from that for the rest of the year as well. We consider that keeping marketing costs light is substantial achievement.

Moving to payroll, the relevant expense line increased by 20% and 22% in H1 and Q2, respectively, primarily due to the full consolidation of Neurosoft, which added EUR 3 million on the relevant cost line in H1. But aside that, we were also in need of increased personnel related to the concurrent implementations of several new projects, but we believe that we have now come to a point where headcount have now more or less stabilized.

Finally, IT remained flat, and it's expected to head south in the medium term on the back of a renegotiated agreements, becoming effective in the second half of this year. Overall, we are satisfied with how costs have been evolving. We also think that this is of high importance when considering that in the last year, we completely transformed our technology at the same time, rolling our probably the largest number of machines on a European level.

Operating cash flow reached EUR 104 million in the first half of the year, remaining at broadly the same levels versus last year on the back of the calendar effect related to the agent settlement and higher taxes payable. CapEx in H1 amounted to approximately EUR 23 million, spreading across IT, network infrastructure, rollouts, implementations, et cetera.

Our expectation for the full year now stands at almost EUR 40 million CapEx. While based on our current planning starting from 2019, we should turn towards maintenance CapEx significantly lower than that, always excluding any new opportunity.

Turning to our products. VLT were the main reason behind year-on-year growth. Q2 GGR reached EUR 46 million versus EUR 7.5 million during the same period last year on the back of the substantial increase of the machines, which stood at almost 14,000 at the end of H1 and now standing at roughly 50,500 machines.

Our KPI related to the GGR for the fully operating machines for the quarter reached EUR 42.40 per VLT per day, also due to the dilution coming from the new machine rollouts. On our part, we have a set of plans to increase the machine's performance, and Damian will tell you more about that later.

Betting slowed with regards to the revenue increase. The segment's revenues increased by 7.3% and 2% in H1 and Q2, respectively. The slowdown of the increase rate between the first and second quarter is exclusively due to the fact that we've chose to commence operation in Q2 2017. And as such, we only have comparisons now for like-for-like.

Stihima also experienced material growth in June aided by the World Cup, where the averaged turnover per match being almost 6% higher versus the Euro event in 2016. As for lottery, underlying trends were roughly the same with one of the first quarter. KINO dropped year-on-year on the back of the anticipated VLT cannibalization. On the positive side, we continue to see that the substance -- the substitution is smaller versus original assumptions.

Taking into account our plans to launch a new KINO initiative later this year, we remain confident about the game prospects, both in the short and in the long term. At the same time, JOKER jackpot revolvers remain unfavorable for the full cost over the quarter, resulting in flattish quarterly revenues.

As told several times, jackpot frequencies come in practice for these kind of games. And as such, we believe that the trend will sooner or later normalize. This was already partially approved by longer jackpot series in July, August.

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

[Damian Cope, executive]

Thank you, Mikal. As you've heard, OPAP delivered another strong quarter in terms of our financial results. And I'll now share with you details of our operational performance in Q2, including an update on our key initiatives.

Overall, I would say that we have again made good progress across all of our strategic priorities. Starting with the core of our business. Our retail network of dedicated OPAP stores in Greece, we continue to move ahead in the overall modernization and optimization of our state.

As you can see from the presentation, Slide 16, the number and profile of our stores has changed over the past few years. In summary, we are building a higher quality estate of shops that are on average 17% larger in terms of floor space than just a few years ago.

Today, we operate just over 3,900 OPAP shops in Greece, and around 800 of them have been renovated within the last 3 years. The decline in total shop numbers in the last 12 months was due to the departure from the network of those agents that chose not to sign the new contract last year. Inevitably, this drop in location number has had a slight drag on our overall network performance during 2018.

This ongoing process to improve the quality of our estate will naturally continue for the next few years. So far, during 2018, we've opened more than 300 new shops and expect to have closer to 4,000 shops operating at the end of the year. All of the new shops we opened are benefiting from our latest design guidelines plus the many technology improvements which I will update you on shortly.

While we optimize the shops themselves, we also continue to support our agents. And in Q2, the first quarter since the new contract became effective, we saw that the average commission per agent grew by 6%. As stated previously, we continue to identify further means through central procurement and other initiatives by which we can assist our agents to grow their profitability.

Turning now to our other network, Play Gaming Halls, where we have now reached a total of 316 operating locations. We expect to have around 350 in operation by the end of 2018. As our rollout of VLTs has progressed, we've moved our focus towards developing fewer larger Gaming Hall locations with between 25 to 50 machines rather than more of the smaller venues with up to 25 machines. We're also looking to further improve the overall customer experience.

At the start of the summer, we opened a new concept of Gaming Hall in Volos called Mega, which we hope to establish as the genuine entertainment destination for local players.

In terms of the overall rollout of VLTs across both Play Gaming Halls and OPAP shops, we continue on our long-term path towards completing the placement of 25,000 machines by the end of 2019. As of today, we have 15,554 in the field and are targeting between 19,000 and 20,000 by the end of 2018. I would say that our focus has already changed from one of pure rollout to the standard process of establishing operational excellence, a process that involves the optimization of VLT allocation in terms of venue, product mix and many other factors. From Q4 2018, we'll also be initiating the contractor performance management process across all of our VLT vendors.

And for your information, we've included on the Slide 18 a summary of the current split of ordered machines across our full VLT vendor partners. In particular, there we're spending more time using the benefits that come from the mandatory Player Card to engage directly with those customers who've opted in to receive communication from us and to provide a number of different offers.

We believe that with the gradual introduction of responsible promotional activities both direct-to-customer and in and around the Gaming Hall, we would develop a solid base of regular customers who will be able to safely enjoy loyalty benefits, whether they play in a Play Gaming Hall or in an OPAP shop. These new marketing efforts only began in earnest recently, and we expect to increase these activities during the seasonally busy Q4 period.

In terms of total customer numbers, we now have over 240,000 registered VLT player accounts, with the level of actual monthly activity driven by seasonal factors. The gender split is now 73% men, 27% women. And in terms of age groups, about half of our customers are in the 25- to 45-year bracket, with the remainder split, older, younger.

When it comes to our VLT performance, we've seen that the daily yield per machine has slowed a little as the density of our machines has increased. I believe that the various actions I've described should help to gradually raise this number over time. And as each individual VLT location reaches maturity, which we still believe is between 12 and 18 months from initial deployment.

One final point on VLTs. I would just like to remind everyone that we still experience significant and in some cases, a very aggressive competitive pressure from the many illegal gaming locations. This persistent problem exists across the whole of the country of Greece and even in central Athens, with even new illegal locations being opened during 2018. We continue to work with the government to identify solutions to address this problem which directly impacts the performance of our VLT business. It also remains a serious risk for Greek consumers and a substantial lost revenue opportunity for the Greek state.

Turning now to other products. And first, our largest product category, lotteries, of each JOKER and KINO are the major contributors. As you've heard from Michal, our performance in this category is affected by the volatile performance of JOKER, which like lotteries in many markets, reacts directly to the level of rollovers that occur. KINO performance remains robust despite the competition from the growing portfolio of products in our shops. And during Q4, we also intend, subject to regulatory clearance, to introduce an extension of the KINO game where customers would be able to bet on a number of new alternative bet times.

Turning to betting. Unlike most other operators, the World Cup in Russia was a busy and successful event for OPAP. Thanks to our new sports betting platform, we were able to significantly increase the number of markets on offer, especially for live betting and SSBTs, and this translated into positive growth and turnover per match, especially Live betting, when compared to levels seen at the Euro 2 years ago.

On SSBTs, we now have over 4,000 machines live across more than 2,000 shops. The majority of them being tablets rather than the full-sized cabinets. They are popular both with our customers and our agents, and we expect to increase the number to over 5,000 SSBTs installed by the end of 2018. In shops where SSBTs are installed, we see that they already account for between 15% to 20% of sports betting turnover. And we expect that this would grow further in the future.

Finally, and as mentioned in the past, we plan to develop these self-service devices to offer a number of additional retail products. It's already possible to place bets on virtual products via these devices, and we intend to also add the popular KINO product with the aim to have this piloted by the start of 2019.

It's also worth mentioning that in Cyprus, we now have over 750 SSBTs across our shops there. And throughout 2018, we've seen strong year-on-year growth in both turnover and GGR as a result. During Q4, we also intend to launch in Greece the next version of our virtual product called Matchday from Inspired Entertainment, which provides the opportunity for customers to bet on multiple simultaneous virtual events.

Turning now to technology. And as you all remember me saying on previous calls, our company has, for the last 2 years, been working on a significant transformation and modernization of our technology infrastructure and platforms. While the modernization process will continue as a part of normal business, I can confirm that during the summer, we successfully concluded all of our major technology migrations. During the whole program, we introduced over 50,000 new technical devices, everything from tills to set up boxes, routers to printers, and in particular, this means that every agent now has a benefit of a new modern point-of-sale terminal, which replaces the previous ones which had been in place for at least 10 years, and these new terminals house all of the major products being sold.

Customers also enjoy the many benefits of the new plays at sports betting platform that is fully integrated across both over-the-counter and SSBT transactions for both live and pregame bets and offering a number of new features, including cash-out.

Within the technology program, we also worked with our partner, [ NLS ], to replace the entire network infrastructure together with a new digital sign-in setup introducing an improved platform, which will provide significant flexibility in our broadcasting capability in the future.

Overall, it was a huge achievement for the OPAP team and one of the largest such retail transformation programs in Europe. Online remains a significant opportunity for OPAP, and now that we've completed the other major technology initiatives, we're now ready to launch our own online sportsbook. Within the next couple of weeks, we'll be relaunching our sports betting site, pamestoixima.gr, which will offer much improved and more competitive odds.

In addition, the new site would provide the opportunity for our agents to earn the same level NGR commissions as they currently have in the shops today. We believe that these 2 factors together with the strength of our brand will combine to significantly grow the contribution from our online business. It's also our intention during 2019 to offer online more of the exclusive products that we currently offer in our shops, notably KINO and JOKER.

Looking at nongaming products now, and you remember that Tora is our e-money business licensed by the Bank of Greece. So far in 2018, we've kicked off the process during which every agent will be certified by the Bank of Greece. This is not a simple process, but it's our intention to have every agent certified by the middle of 2019. And similarly, we hope to be able to offer services online, over our dedicated Tora app during the first half of 2019. We remain excited about the opportunity for OPAP to offer a broad range of nongaming services to our existing customers and to attract new customers into the OPAP world.

As for the OPAP team, our total headcount reached 1,459 people at the end of Q2. The bulk of the year-on-year growth came as a result of the inclusion of Neurosoft's employees. And as mentioned during the previous quarter, we feel that the overall headcount is now very close to what we think it should be considered as the base for the group's current activities. When it comes to our employee engagement, our annual survey demonstrates a remarkable 87% participation with the set of clear and encouraging results. And having been formally recognized as one of the best workplaces in Greece, we will of course be continuing our ongoing investment in the development of all of our people.

Finally, I'd just like to touch on 2 other important areas, responsible gaming and CSR. OPAP takes responsible gaming very seriously, and we've taken a number of steps over the last few years to further ensure that we protect those that may be at risk from our product. And therefore, particularly pleased to announce that we've recently been awarded by the World Lotteries Association with a Level 4 Certificate in Responsible Gaming, the highest level. We've also been awarded by the European Lotteries organization with a statement of alignment with a European responsible gaming standard. Both awards reflect our commitments to ensure that we set the highest standards in this area and the hard work by many in the company to train and educate our employees, agents and players.

Turning now to CSR. In this summer, through the well-documented wildfires in Attica, Greece experienced one of the most tragic events in the country's history, one that resulted in a significant loss of human life. As a company with a physical representation in practically every village, town and city in Greece, we have a close connection with every community. Immediately after the incident, OPAP committed resources and funds to meet the needs of the local communities affected. We offered first-aid and supplies to the locals with a number of our employees serving as volunteers. We cooperated with the local municipalities to accommodate the affected ones, while we later took on the restoration of 2 schools that were hit in the area.

On Tuesday this week, the first day of the new school year, our Chairman, Kamil Ziegler, myself and other members of the OPAP management team along with the President of the Hellenic Republic attended a ceremony at one of the schools to mark the start of the new school year and to acknowledge the renovation of the 2 schools. As the CEO of the company, I remain incredibly proud of these kinds of efforts that OPAP maintains and the ongoing commitment to support the communities in which we operate.

Finally, our relationship with the Greek Government and in particular, the Hellenic Gaming Commission continues to evolve well. You will also be aware that the draft online gaming law has finally been released, with a public consultation period up until October 5. We've stated many times in the past that clearing up the current unclear situation is long overdue, and this is certainly a step in the right direction. As you will understand, we will not be commenting on any specific elements of the draft today but will of course be delivering our comments as part of the consultation process. Overall, we hope that a law that establishes a clear regulatory environment and that also respects OPAP's many rights will be implemented as soon as possible.

With that, I'd like to thank you for your attention. And Michal and I are now ready to answer any questions you may have.

[Operator]

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

[Stamatios Draziotis, analyst]

Well, I have 3 questions. I'll start with the first one relating to VLTs. Basically starting from the machines that we're operating since the start of the quarter. The blended number that you provide shows a small deceleration in terms of daily drop. And I was thinking this is the case even on like-for-like basis, namely the 10,000 machines operating since the beginning of the year. Just wondering, based on the work that you have done so far and the feedback that you've received from your franchisees, what is the main reason for this? Does it relate predominantly to store location and the size of the black market around the area? Does it relate to the machine supplier, which might also explain the different mix of vendors you've selected for the next VLT wave? And related to that is also the question of whether there is actually still a gap in terms of performance between a VLT shop and a betting outlet? So that was the first question. I would let you probably respond to that.

[Damian Cope, executive]

Yes, we are waiting for questions two and three. But if you want to talk about one first, we'll do that.

[Stamatios Draziotis, analyst]

I think it's better, if you don't mind. Yes.

[Damian Cope, executive]

Okay. I think -- look, I think it's safe to say there's no simple answer. Again, you've got to remember that we've now rolled out 15,000 machines in the space of about 18 months or just over 18 months. And we are learning day by day from our franchisees, from the locations, from our vendors, what works, what doesn't work. As I touched on before, we're trying to get beyond just physically putting machines out there and trying to optimize performance. Some of the issues you've touched on are obvious ones. So looking at the vendors, yes. We don't have 1 machine in our shops for example, like the model in the U.K., and in some cases, we only have 3 machines in the shop, so you're always trying to optimize what the right combination of those machines is. And even in Gaming Halls where we have up to 50 machines, there's obviously an almost infinite combination of machines that we can use and have in our mix. And that's constantly evolving all the time. So that's, sort of, I'd say work in progress. On locations overall, I would say that we are happy with locations. Like any network, some locations work better than others. We have some regions that are incredibly strong, generating GGR per VLT per day well above the average that we disclosed. And similarly, we have others that are at the other end, and in some cases, that is not necessarily down to the location, it may even be down to the quality of the agent toward the franchisee. Again, for a lot of them, it's the first time that they are operating a gaming hall. So there are a number of different factors. We continue to work and -- particularly in the areas I highlighted around customer engagement. So again, unlike a lot of other markets with the Player Card, we are able to contact customers directly. And it's almost like a sort of an online gaming world where you have an e-mail and you can send promotional offers to individuals. But to sort of conclude, I would say that a very, very, very large barrier for us is the illegal market. It is incredibly frustrating for us as a regulated business to go through all of the necessary processes, all of the necessary certifications, open a brand-new Gaming Hall and then within a few weeks, we see an illegal location opening literally sometimes a few meters away and nothing being done about it. And without any restrictions in terms of registration or withholding tax or anything else, it's often quite tempting, even for a registered player to reduce the amount of play they've been doing with us and then go into an illegal gaming location. So as I indicated in my comments earlier, we are working very hard with the government to try and find some kind of resolution to this situation, but it is incredibly frustration for everyone involved in this business that it continues to exist.

[Stamatios Draziotis, analyst]

That's very clear. And secondly, just again on VLTs, if I'm not mistaken, most of the new machines introduced in Q2 were rolled out in Gaming Halls, and in fact it seems in large venues, as you mentioned in the presentation. Could you tell us whether these machines have showcased material difference in terms of performance relative to previous new entrants?

[Damian Cope, executive]

So you're talking about the ones that are rolled out in Q2 this year or last year?

[Stamatios Draziotis, analyst]

The ones that were rolled out this quarter, which seem to have been rolled out -- most of them seemed to have been rolled out in Gaming Halls, and in fact in large venues. And I was just wondering whether you have seen a strong start or not really or you cannot really make any conclusion. I don't know. I just...

[Damian Cope, executive]

To be honest, I mean, Q2 is still very early. Don't forget. As you know, we've had the summer period, and there's always a little bit of a softness during that time. What I would say, though, is the larger gaming locations, and particularly the format that I touched on, the Mega in Volos. We're seeing some very encouraging performance there. So it's early days for the recent rollouts, but as I touched on, and -- it is very much part of our strategy. We're going to be focusing on bigger locations with more of a, if you like, entertainment feel, rather than the smaller destination, which literally has machines and nothing else.

[Stamatios Draziotis, analyst]

That's clear. And just a final question on -- moving on to Stihima. I've seen that the gross win margins of Stihima has been actually expanding in the last couple of years. So just wondering whether this was the case also in H1? And if this has been the case, does this reflect a mix effect, i.e., a shift towards multiples or is this a reflection of pricing, in general?

[Damian Cope, executive]

If you're talking about the margin across the whole of our betting category, it's obviously a combination of virtuals and sports betting. And in fact, virtuals, if anything, pulls it lower. We haven't been doing anything in terms of our pricing to significantly increase our over-rounds, if anything. In fact for this season, we are being more aggressive on some of our over-rounds. Like any operator, we will promote multiples, because there's a higher margin for us, and certainly with the introduction of SSBTs and as is common in other markets, the number of bets per slip, the average number of bets per slip is higher. So I'm not sure if that answers your question, but certainly there's no specific pricing decision on our part to increase the theoretical over-round of our sports betting products.

[Stamatios Draziotis, analyst]

Yes, it does answer my question.

[Damian Cope, executive]

And sorry, is that the third or is that the second?

[Operator]

Mr. Draziotis, can you hear me?

[Stamatios Draziotis, analyst]

Sorry, can you hear me?

[Operator]

Yes, we can hear you.

[Stamatios Draziotis, analyst]

Yes. So I said I'm -- that was my third question, so I'm done. Sorry.

[Operator]

The next question is from the line of Kourtesis, Iakovos with Piraeus Securities.

[Iakovos Kourtesis, analyst]

My first question has to do with VLTs. And if you could let us know how or what is the performance in terms of net draw probability per day? Is it improved in the third quarter? And how confident do you feel that you are going to improve the performance in terms of this key performance indicator by the end of the year? The second has to do with the online gaming platform. Taking into account that in sports betting you are doing very well on virtuals, I believe. Do you think that the absence or the nonlaunch of the online gaming platform ahead of the World Cup led to have -- say to more -- to weaker performance in terms of GGR from the World Cup than the one recorded in the sports betting? And when you're going to launch it? Are you launch it, as far as I understand, before the end of the year? And finally, in terms of your dividend policy. I suppose you stick on your previous guidance about the -- this additional, the bulk of free cash flow to the shareholders?

[Damian Cope, executive]

Thanks very much. I'll let Michal answer the last one. And then I'll come back to the others.

[Michal Houst, executive]

Yes, we will stick to our dividend policy. So nothing is changing. And it's basically we distribute the maximum allowed by law. There was an interim dividend, which was half of our net income and we are sticking to our policy to distribute bulk of the free cash flow.

[Damian Cope, executive]

And then continuing backwards, if you like, to your original questions. So the launch day, as I said, is in the next couple of weeks. We're literally just in the very final phase of testing. So you can expect to see that soon. It was a conscious decision by us not to launch before the World Cup. I've tried to indicate to you just how much was going on in relation to technology within this organization over the last few months, and it really was very significant. And honestly, we could have launched before the World Cup, but we -- looking at the overall level of risk, it seemed unnecessary. And in fact, our performance in the shops, we were very happy with for the World Cup. We still think it's a great opportunity. We know that there are a lot of customers already playing online with competitors and still coming to our shops. We know the cost saves are significant, and so we think with our brand, with some competitive odds rather than the same odds we offer in our shops and the support of our agents, who as I said are going to be commissioned on exactly the same basis for revenues generated from their registered customers online as in the shop. I'm cautiously very optimistic about our online future. On VLTs, I'm not sure what else there's to say actually. On Q3, like I said, it's been the summer period. No significant change in the trend. If anything I would say is, as you remember from last year, Q4 seasonally is very strong. And so we would expect to see a tick-up in Q4, as we get towards the end of the year and the holiday season.

[Iakovos Kourtesis, analyst]

But last -- one last thing, if I may. Could you quantify for us the benefit from the completion of the migration of your IT systems in the second half of the year in the -- your IT cost line?

[Michal Houst, executive]

Yes, we're all the time saying that, let's say, the annualized savings should be around EUR 15 million, yes? So it's not half of it, because basically, we transferred in July, so it's not half of it, so but it's, let's say, EUR 15 million annualized.

[Operator]

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

[Damian Cope, executive]

Thank you very much to everyone for joining us today, and we look forward to speaking to you again soon. Thanks very much. Bye-bye.

[Operator]

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