La Francaise des Jeux SA

PAR:FDJ

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, thank you for joining us for the FDJ Conference Call. I would like now to hand over to Madam Stephane Pallez, Chairman and CEO. Madam, please go ahead.

[Stephane Pallez, Chairman, President & CEO]

Thank you very much. So this is Stephane Pallez speaking and I'm with Pascal Chaffard who is Executive Vice President, Finance, Performance and Strategy. So we are happy to have this FDJ Q1 Trading Statement and COVID Impact Conference Call with you, positioned late afternoon to broaden audience to U.S. participants. So I suppose that most of you have read the press release that we published early this morning European time. Already on March 20, we published a first communicate to let you know that continuity of FDJ's operations was assured, thanks to the efforts and the technology across the group. And we share at this point, our first estimates on the COVID impact. Today, alongside details on our Q1 stakes and revenues, we will update you on these ones according to the current, even though quite limited visibility that we have on this unprecedented crisis. So let me just go over the main key highlights of this morning's communication before turning to Q&A. So in the first quarter of 2020, FDJ recorded a 5% decline in stakes to EUR 4.1 billion, hence decline of its revenues of 1% at EUR 500 million -- EUR 0.5 billion. The player payout ratio reached 67.5% in Q1 2020 versus 68.3% in the first quarter of 2019, the difference stemming from unexpected sporting results that reduced the PPO. From the start of the year until mid-March, we enjoyed pretty good momentum with activity completely in line with our annual targets, i.e. stakes up 5%. But of course, this momentum was halted quite brutally by the first consequences of the COVID-19 epidemic. So since March 16, which is the start of the lockdown in France, stakes have dropped by nearly 60%, a decline of more than 40% in lottery stakes, excluding Amigo. Why excluding Amigo, because we decided to suspend Amigo game since March 19 since it's a game that -- where players are actually present in the point of sale, and therefore, we thought it was just incompatible with sanitary requirements. And of course, in this 60% stake drop, we have striking drop of nearly 95% in sports bettings following the cancellation of most sports events and competitions all over the world. So this trend which now we have observed during a complete month of lockdown, as today, mechanical impact of close to EUR 100 million on revenues and roughly EUR 50 million on EBITDA. At the end of this -- of the lockdown itself, which we assume today will be on May 11, we assume a gradual recovery of activity, only again gradual recovery before hoping to reach stabilization at a date, which is, I think, still quite unclear. We -- so therefore, we consider that May 11, as announced by the French government, will be the beginning of the lockdown exit. But again, precise conditions of this lockdown are still to be announced in the next 15 days by our authorities. And so therefore, there are a lot of questions that remain open. For instance, the date where we can have bars reopening. Bars and restaurants are, of course, closed today. And it's unclear whether they're going to be able -- at which day they're going to be able to reopen, but it will be definitely after May 11. And it's also quite unclear, as you might know, when we will have resumption of sporting events calendars and at which level and under which conditions. And in this sense, we are again like any sports betting operator in today's world. So as a precaution to and against this, of course, very negative trend, we have decided to start implement an action plan, aiming at saving more than EUR 80 million, that is to say more than 10% of our annual fixed costs over the rest of 2020. As regards our financial situation, we have specified that as on the April 20, FDJ has available cash in excess of EUR 800 million, and we have given some indication to show that on the basis of again a gradual recovery starting mid-May, the group's monthly cash burn in May and June is expected to be limited to approximately EUR 10 million. We have also informed that since we have now drawn the syndicated loan that was put in place to finance the payment of the equalization right payment to the French state, we have actually initiated this payment today. So this is done as of today, and again financed with the loan that we announced a little bit earlier this month. And lastly, our Board, which has been meeting yesterday, has decided to propose to our June 18 General Assembly, which will be a virtual general assembly because no -- the conditions are not established to have a public meeting. Therefore, the Board has decided to maintain the payment of dividends on the results of 2019, but to reduce the payment of this dividend for this year by 30%, which is to say, EUR 0.45 per share instead EUR 0.64. So that's basically, and again, quickly, the main information that we put today in our communication. Of course, now we are ready and happy to answer your questions. Thank you very much.

[Operator]

[Operator Instructions] We have a first question from Sabrina Blanc from Societe Generale.

[Sabrina Blanc, Equity Analyst]

Sabrina Blanc speaking. I have -- firstly, I hope everybody is okay in the team. I have 3 questions, if I may. The first one is regarding the cost-cutting plan that you have mentioned above EUR 80 million. Could we have more color to know how you can reach this level? The second key question is regarding what you have provided in terms of expectation about the EUR 120 million of negative impact from the COVID on the sports betting, what was mentioned in your press release of March. Can you come back on the assumption that you have made for that? And notably, does it take into account the fact that all the suspended events are going to be postponed in 2H, this type of thing? And the latest question is regarding the commitment in terms of payout ratio for next year.

[Stephane Pallez, Chairman, President & CEO]

Okay. So on the first question, I will start answering and then over to Pascal maybe for more precisions, and he will also take the second question, and I will come back for the third one. So on the cost-cutting plan, our intention, and not only intention, our plan is to go for a major reduction of our fixed costs. As you know, the company has a large proportion of variable costs to adjust mechanically when our activity is going down, in the matter of fact, or up in other periods. So we are, of course, aiming at cutting our fixed cost. And in those fixed costs, I think it's fair to say that the spending related to, of course, publicity, promotion advertisement is a significant part of this, which is, of course, quite consistent with the fact there is no reason to push in this period with that type of spending to reach our customers. No, there is no cost reduction on -- as regards the employees. There's only a freeze of recruitment in the company, but we have not included any custodian salaries or employees that are currently employees within the company. Pascal, maybe you can -- if you want to add something on this one and go for the second one.

[Pascal Chaffard]

Okay. I will just add that we have touched every cost -- every fixed cost of the company. As you have understood, our definition of variable costs are those who are directly linked and automatically linked to the space. It means that advertisement and promotion of which spoke previously Stephane is for us a fixed cost. We touch also G&A and every fixed cost. What is important also to mention is that we are preserved with this important plan, the ability to resume all of our activities as soon as possible. It means that we will be able with that to recover in the second half of the year if it is possible in France at this time. So I think I've said enough on this topic. We can move on the second topic, which was regarding our expectation of EUR 120 million cut on revenue of sports betting that we mentioned on our first communication in March. And what was the assumption about that? And what is the situation now? So what we can say on sports betting is that we have, since March, faced maybe a deeper fall of our activity as about now every sport events have shut down since the end of mid-March and until the end of March. And since then, the only championship available in the French -- available by the French authority or by the ARJEL is mainly football in Belarus and some small other events, but mainly we have football in Belarus.And we believe that the recovery of sports events will be very progressive and will occur later on this year, but it's very difficult really to forecast when. So we have forecasted -- made a first assumption of forecast mid-March, on the 20th of March. But then -- since then, we think that the impact will be deeper on sports betting, as deeper than the ones we assessed in March as the hypothesis of recovery are more degraded than in March, and we really don't know when football championship will start again, when tennis tournaments will start again. It's very difficult to have a correct assumption on the future on that. That is why we have preferred to not to say again what is our yearly assumption, but to only say what is our monthly situation regarding the shutdown situation. And today, we face 85% cut of sports betting stakes and that's what we take into account when we said that we have EUR 100 million and EUR 50 million EBITDA impact monthly with the shutdown. Maybe one more thing about sports betting. We have also taken into account in our global valuation of this monthly EBITDA impact, our sports betting international activity, mainly sporting solution, which is also deeply touched, as we have some B2C sport betting and B2B sport betting with a revenue share business model, which means that when the revenue is close to 0, the revenue share is also close to 0.

[Stephane Pallez, Chairman, President & CEO]

Okay. Thank you, Pascal. So on the third question, which was on, I think, our guidance, our midterm guidance, on dividend distribution. So we -- when we listed the company, we stated that our intention is to distribute a minimum of 80% of our net consolidated results in terms of dividends. We have, at this stage, no intention to come back on this guidance. But as you have understood, and as most of companies are doing today, we think that the level of uncertainty does not put us in a position to issue a new guidance for revenues and EBITDA 2020. So we'll have to come back when the situation is getting a little bit more predictable, if I may say, on the figures. And therefore, of course, we'll come back also in terms of -- what consequence in terms of net result assumption, which, of course, will give more color to this distribution guidance.

[Operator]

We have a next question from James Ainley from Citi.

[James Robert Garforth Ainley, Director & European Hotels and Leisure Analyst]

Two questions, please, somewhat related. The first one is, is there data that the point-of-sale base is structurally damaged by the crisis? I'm thinking about bars and stacks being closed for periods of time and may never reopen. And so I'm interested to hear about how you might be supporting your POS base. And do you have a view about what percentage of point-of-sale base might be at risk through this process? And then secondly, how are you innovating online? Because it seems to me, it's an opportunity to structurally increase your online business.

[Stephane Pallez, Chairman, President & CEO]

Okay. So on the first question, which is risk on our number of point of sales and on their situation. As you understand, we are monitoring this very closely. Again, we have a very different situation, whether we talk about tobacconists and newsagents or whether we talk about bars, so bars are just again closed. So bars are, I would say, big question mark. However, we have decided not to have any -- not to draw any cash on a regular basis as we used to do on the point of sales that are closed at this point. So we will see when they reopen, how we can assess their situation and how we can maybe accompany them during the recovery. For the tobacconists and the newsagents, as you have understood also, they are authorized, they can be open. Most of them are actually opened. It seems that the ones that are selling tobacco are actually doing not too bad, I would say, because tobacco sales are quite high today for them because since the borders are closed, the traffic or people going abroad to buy tobacco is just impossible today. The newsagents are probably more vulnerable. So all this to say that we are in close contact with them. We have a strong relationship. We monitor very closely their financial relation with us. So we -- today, it's difficult to answer to the question of whether some of them will be at risk of not reopening. We are also thinking and considering what type of support we could eventually imagine to give them, whether we would say their situation as being at risk because of the period but being viable in the long term, but it's a little bit early to say today. So that's for the point of sales. For our online lottery business because, of course, the online sports betting is in the same situation as the off-line sports betting, we have seen strong demand of new players to come to our online offer. Probably, of course, mostly because a lot of people do not want to go to the point of sales and particularly to play draw games. We have been -- of course, we have been eager to welcome them, to make them able to register as smoothly as possible. It's -- and we have had our, I would say, our regular promotion on the web. I think it would be a little bit delicate to use this situation as an opportunity with a lot of visibility to recruit online because as you've just mentioned, we have a strong off-line point-of-sale network. That is, I would say, in a risky situation. And we would not like, like in other countries, to have, I would say, adverse reaction to our online business. So we do try to develop it, but I would say, with not too much noise. Pascal, do you want to complement me on one of those 2 points?

[Pascal Chaffard]

No, it's okay. It's okay for me.

[James Robert Garforth Ainley, Director & European Hotels and Leisure Analyst]

Could I just follow up on the first question and say -- and ask if you've had any increase in bad debts from your point-of-sale agents? And maybe also, could you give us a split between the numbers of bars, tobacconists, newsagents, give us a rough sense of your exposure to each piece?

[Stephane Pallez, Chairman, President & CEO]

Pascal, do you want to...

[Pascal Chaffard]

Yes, yes, I can take this one. Yes, we have seen an increase in the bad debt of our point of sales. It's too early to categorize them from bars and -- or newsagents or tobacconists. But we see every week a very important number. If we compare it to the situation before COVID of retailers, that cannot -- that are not able to give us all the money that they should give us. We are quite comprehensive with this situation because we don't want to be the one that makes the point of sale fall. It's not a good period to do that. So we are working very hard with our service, which is dealing with those payments to try to find solutions for those point of sales. And we -- at this stage, we are doing quite well with that. And as Stephane said, we have stopped the -- with draws for the point of sale, which are closed, and we will see when they will be opened again, what will be the situation with those -- with draws. So every week, we have some more bad debt from the retailers, but we think that it's quite a good investment for us because we don't want to be the cause of the shutdown, definitive shutdown of the point of sales. As you have mentioned, it is a real concern for us not to end this crisis with a huge number of retailers that will -- that would close.

[James Robert Garforth Ainley, Director & European Hotels and Leisure Analyst]

Could you quantify the increase in bad debts, please?

[Pascal Chaffard]

What you have to have -- if I said a percentage, it will be a high percentage. But if I said it differently, we will see that it is for the moment, totally okay for us. Because we have a very low bad debt before the crisis, less than EUR 1 million a year as -- something like several billion euros are withdraws from the retailers. So we are facing -- it is multiplied by a factor of some points, but it's not impossible for us to deal with it at this stage. It's some millions.

[Stephane Pallez, Chairman, President & CEO]

Right. It's some millions. Yes, it's some millions. So it's quite -- sorry?

[James Robert Garforth Ainley, Director & European Hotels and Leisure Analyst]

Single digit?

[Stephane Pallez, Chairman, President & CEO]

No. Sorry?

[James Robert Garforth Ainley, Director & European Hotels and Leisure Analyst]

Double-digit millions then?

[Stephane Pallez, Chairman, President & CEO]

No, no, no. It's not double digit. It's less than double digit.

[Pascal Chaffard]

Single digits.

[James Robert Garforth Ainley, Director & European Hotels and Leisure Analyst]

Single digit-millions. Yes. Okay. Understood.

[Stephane Pallez, Chairman, President & CEO]

Yes, yes. Sorry, sorry.

[Pascal Chaffard]

That is why it is okay for us because it's not so high, and it's not as high as the problem would be if we shut those point of sales down.

[Operator]

We have Jaafar Mestari from Exane BNP Paribas.

[Jaafar Mestari, Analyst]

I've got 2 questions on the business. And maybe separately, I'll have a third one on liquidity. So just following up on your comments on online. Could you give us any more color, maybe numbers by channel and by business there, plus 16% growth in Q1? How has this been trending since the lockdown with online sports probably down in line with total sports? What does that imply for online lottery? Are you seeing physical players move online? Are you able to identify those trends? And second question on the business, just in terms of jackpots for Loto and EuroMillions. A couple of jackpots have been won in February, I think, for SuperLotto and for EuroMillions. So given the very low stakes intake at the moment, are you budgeting for a sort of vicious circle where stakes are low, therefore, the rollovers are too small to attract much interest, et cetera? Is that something that is the risk of happening?

[Stephane Pallez, Chairman, President & CEO]

So on the first question, on the online, I will start with this one and then hand over to Pascal for complement. So on the online, clearly, as we already explained, the online sports betting is very, very low because again on sports, the situation is not related to the opening or not of point of sale. It's related to the absence of events on which we can have our offers, our betting offers. So the online activity is definitely very, very small. But as also is the off-line sports betting activity, again for the reasons I just mentioned. So the online activity today is mostly the online lottery. And on the online lottery, there, we definitely see a significant increase of the stakes. Roughly, it's close to 40% increase in terms of the stakes. And it's related to a significant increase of the number of players which are coming to play the online lottery, mainly related to the draw games, of course. So it's quite consistent because the average stake has not increased that much. So it's really a high number of people which are coming to our online lottery because they don't want or they cannot accept the off-line offer. So again, it's difficult to say whether this is only a temporary -- a temporary trend or whether we will be able, of course, and we would like to, to keep some of those people coming to our online activity, but it's a little bit early to comment on that. And after that, of course, as you know, the online lottery, the size of the online lottery activity, even though we have again this interesting growth trend, does not, of course, compensate for what we lose on the off-line lottery business. So that's for the online. I'm sorry, but I think I didn't -- I don't remember your second question. Sorry.

[Pascal Chaffard]

It was about the draw games, Loto and EuroMillions and is there a vicious cycle. Stephane, if I can answer that?

[Stephane Pallez, Chairman, President & CEO]

Yes, Pascal, can you handle this one? Thank you very much.

[Pascal Chaffard]

We have verified one thing with those games is that are they able to bear reduction, an important drop on their stakes? And are they still financially healthy with this new size of business? And this answer is clearly yes. Loto and EuroMillions are not in danger with the level of reduction of their activity. The second point that you mentioned, is there a vicious cycle that we could see if -- because the stakes are very low and so the jackpots are not becoming higher as rapidly as they become usually. We think, no, because on French Loto, the jackpot is climbing by EUR 1 million by the draw. On Monday, if it's not EUR 1 million, it's EUR 2 million; and on Wednesday, it's EUR 3 million; and on Saturday, EUR 4 million, et cetera, et cetera. So there is no impact on that. On EuroMillions, you are right, there is an impact on and the step between 1 -- with the jackpot on one to another draw is less important, but still, we will probably have no winners. So we think that we will be able to have some long cycles on EuroMillions. So to answer quickly to your question, we don't think that we are in a vicious cycle on those games.

[Jaafar Mestari, Analyst]

And then separately, please, on -- just on financials. You've given an update on liquidity, where you state that you have EUR 800 million of cash and available cash. Just looking at your balance sheet, where am I looking? So in current assets, there's EUR 200 million of cash. And then in current assets, there's another EUR 270 million of short-term financial investments. So I assume your definition includes both of those. And then on top of that, are you also considering that some of your longer-term noncurrent financial assets fit into that definition? They're easy to mobilize if needed in the short term.

[Pascal Chaffard]

Yes, to be very precise about that, we take 2 things, 2 different things, cash deposits, cash we have on our different assets and monetary deposits. Those are about 1/4 of the total amount we disclosed, something about EUR 200 million. And on top of that, we have -- I would -- just 1 second, I have always the problem to remember in English, how we say it. Term deposits, yes, we have term deposits, EUR 600 million. I should remember the term in English as it is very important in number of millions. And both term deposits are available within 32 days. So we thought that it was okay to say that it's a short-term availability that we have. And so we have those EUR 600 million of term deposits, EUR 200 million of pure cash. And on top of that, we also have EUR 300 million of credit lines, secured credit line. So we are not really in a bad shape on our liquidity. What -- maybe to add another thing about our cash position. With the drop of our stake, we had also a drop of our working capital from -- of about EUR 400 million because our working capital was before that very high and then it has gone down. So we have been able to face this situation without any problem.

[Operator]

We have another question from Alexandre Gérard from CIC Market Solutions.

[Alexandre Gérard, Research Analyst]

I have 3 questions actually. The first one is related to the payback rates on the first quarter of the year. Could you comment a bit on their levels by category of the games? And could you also maybe comment further on what you described as an important event in sports betting, so that the consolidated payback rate decreased over the first quarter of the year? My second question is related to the competitive environment in online sports betting. Do you think the crisis at the moment might be an opportunity for you to strengthen your position in that segment of the market? And by that, I mean maybe some of your 12 or 13 other competitors in that segment of the market might not have the financial means to face the crisis, that might be an opportunity for you for some M&A, for example.And my last question is related to the interest rate that you will have to pay on your new EUR 380 million syndicated loan. Can we have the level of that loan, please?

[Stephane Pallez, Chairman, President & CEO]

Okay. So maybe I will answer to the second question, and Pascal will take the first one and the third one. So on the opportunities that might arise from the situation on the sports betting, I think you have to have in mind that as we explained actually during the IPO process, yes, we are a strong sports betting operator, but we have also another characteristic, which is that we don't have another online activities, such as poker or horse racing, which are the other online activities. So when you actually look at the situation of the French market, again, it's -- maybe it's a little bit difficult to make this analysis. But probably, at the end of the period, you will have some operators that -- I'm not talking about us, but some operators that will have played the cards of, if I may say so, of the poker. It's, for instance, we know that Winamax, which is the stronger player in poker is playing this card very, very strongly to compensate for the quasi absence of sports betting. So it's difficult to say as of today whether -- how this might play and put -- and with situation, it will be the different players at the end of the day. Because as you rightly said, on one hand, sports betting is down. On the other hand, poker is high, and horse racing is not completely down due to the fact that there are still some horse racing growth. So I think today, it's too early to say whether some actors will come in a situation where they will be forced one way or another to exit the market. And therefore, I think we will look at that later on. So we are -- again, we are only sports betting. So we are not in a situation to compensate with poker or horse betting. We have -- since we are not only a sports betting player, we have the lottery, which is a nice way to again have a more resilient situation than people that are only sports betting players, but we don't have poker or horse racing. So sorry to have been little long, but I will pass -- hand over to Pascal for the explanation on payback rates in sports betting at the beginning of the year and interest rates on our line.

[Pascal Chaffard]

Okay. So regarding the player payout ratio, the only thing that was not in line with our expectations in the first quarter is sport betting and on the draw games and scratch games, it was just like we thought it would be as some differences -- very low differences. But on sports betting, it was already significant drop on the player payout. But we were not the only operator that have faced this good positive situation. All the operators in France, and I think in Europe, have faced also both the situation. Because it's due to the results of different sports betting events, that were really unexpected by the players. And it was -- for us, it's a good thing because if we have a low player payout, we have a high revenue because we share the gross gaming revenue between stake and FDJ. And if the gross gaming revenue is high, we have a better part of that. We thought it was a good thing for us at the beginning of the year because we expect the EURO 2020 to be a competition with a high player payout ratio. Obviously, we will not have to take it this year because EURO 2020 is postponed in 2021. But this is the main explanation why we had this low player payout ratio in the first part of the year.

[Alexandre Gérard, Research Analyst]

But can we have the numbers for the payback rates for each category of game?

[Pascal Chaffard]

Okay. I can do so -- I can give you some color about that. For our sports betting player payout rate, it was something like 5 points under the one it was last year at the same period, and this delta was the same on online and sports betting point of sales. For scratch games, it was a little bit over 70% like last year, a small difference between last year and a little -- and something like 60% on draw games, a little bit higher than last year. Is it okay for you?

[Alexandre Gérard, Research Analyst]

Yes.

[Pascal Chaffard]

And your second question was the interest rate of our loan. What I can say is that it's a EUR 380 million loan over 20 years repayable on a straight-line basis, on a quarterly basis. And we have a variable rate based on 3-month Euribor with flow at 0%, at a margin around 1%.

[Operator]

We have no other questions for the moment.

[Stephane Pallez, Chairman, President & CEO]

Okay. Okay. Well then, thank you very much for your questions. Well, I didn't say that all the team -- the management team of the company is in good shape. And actually, we have managed very well to protect our employees from the COVID because we have very few cases and at this stage, not any serious cases. So thank you for also questioning us about this. So we hope, of course, that this period will evolve during the month of May in a -- again in a progressive recovery. And we will, of course, be talking to you if there is anything new, but at the latest for our first half results at the end of July. And I hope that at this point, we will be in a better situation to describe and give you some more precise perspective on this year. Before that, we will have our general assembly on the -- on June 18. As I said, due to the sanitary restrictions, we will have this assembly purely online, but of course, there will be possibilities to ask questions. So thank you very much for attending this call. And I hope that you're all in good health and keep safe, and see you soon, I hope.

[Pascal Chaffard]

Goodbye.

[Stephane Pallez, Chairman, President & CEO]

Bye-bye.

[Operator]

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation. You may now disconnect.