ZEAL Network SE

XETRA:TIMA

Earnings Call Transcript 2019-Q1

[Operator]

Dear ladies and gentlemen, welcome to the conference call of ZEAL Network SE. At our customer's request, this conference will be recorded. [Operator Instructions] May I now hand you over to Jonas Mattsson, CFO, who will lead you through this conference. Please go ahead, sir.

[Jonas Mattsson, CFO & Member of Executive Board]

Thank you very much. So good morning and welcome to ZEAL's earnings call presentation. Thank you very much for joining this call. I hope you all have access to the presentation, which should have been distributed with a calendar invite, but it's also available on our website in the Investor Relations section. On Slide 3, we have the agenda for today's presentation, highlighting the main areas I will cover before giving you the opportunity to ask questions. We will start off with ZEAL At A Glance continue with the business update and finishing off with a financial update. Let's start by taking a look at our performance on Slide 4. We have had a solid start of the year in terms of results. Please note, when we discuss the numbers, the billings and revenues were impacted by the closure of Spanish-consumer facing business, but it's also suffered a lower jackpot environment in the first quarter. So for this reason, billings fell by 7%, but less than 2% on the like-for-like basis. Of course, this also had an impact on our total operating performance, which fell by 6% compared to the previous quarter, but around 3.5% on a like-for-like basis. Through efficient cost control and our group-wide restructuring program, which kicked off last year, we delivered a reduction in total cost of operation by 16%, just shy of EUR 5 million compared to the previous quarter. This enabled us to deliver a 26% increase in adjusted EBIT to EUR 11.6 million and EBIT including these exceptional items of EUR 9.8 million. We have also improved our net cash position by 36% to EUR 102 million. Building on this positive trend developed in recent years, we delivered 182,000 new registered customers for the group and its partners, up 30% versus 2018, which is predominantly coming from the German market. And as you all know, on November 19, we announced our intention to acquire Germany's leading online lottery broker, Lotto24, to reunite and to transform our core German business model to online lottery brokerage. This means we will create a digital lottery group with currently more than 6 million customers, combined billings of more than EUR 600 million, a unique market position in Germany and developing international footprint. We're convinced that this will create a sustainable growth path for our group and our shareholders. Let's now get into a bit more detail, moving on to our business units on Slide 5. As mentioned before, our core Lottery Betting business was impacted by a lower jackpot environment in the first quarter of the year. For this reason, we saw a marginal reduction in billings in the first quarter. However, our new registered customer acquisition in this segment was up 25% or 131,000 new customers, and we achieved all this while further reducing the cost per lead. Let me now give you an update on our Lottovate segment. As I already communicated, we had to close our consumer-facing business, Ventura24, in Spain following the adverse court ruling back in October 2018; however, and more importantly, the Spanish lottery service business with ONCE is showing continued and profitable growth in the first quarter. Our external investment continued to perform in line with expectation. We also acquired a further 15% stake in the U.K. company, Wshful, a subscription-based lottery syndicate business. This brings our shareholding in Wshful to 20%. In terms of other areas of focus, of course, our main focus in 2019 has not changed, the completion of the Lotto24 unification, the implementation of our business model chain late in the year and the realization of the announced synergies. We're looking forward to switching to the brokerage business under these good conditions, but as long as we are still in the secondary lottery business in Germany we, of course, want to gain the most profits we possibly can get from this business. The next few slides show our financial performance more in detail. Let's now go to Slide 6. As already mentioned, the closure of Ventura24 negatively impacted our billings, but the underlying performance was solid. In the first quarter of 2019, we generated EUR 67.4 million in billings for the group, a reduction in 7% compared to the same quarter of the previous year. But more importantly, on a like-for-like basis, this represents a marginal decline of less than 2%. Let me briefly mention that the closure of the Spanish business had no impact on EBIT, as this business was only breakeven in the past. And the decline in billings compared to the fourth quarter of the previous year is not particularly unusual. As you know, we traditionally have a good Christmas business and the jackpot development in the last quarter of 2018 was very strong compared to the first quarter of this year. Moving on to Slide 7. Total operating performance and revenue was driven by weaker billings, and as already mentioned, the closure of Ventura24, but also the closure of Lotto Network, both down 6%, but 3.5% down on a like-for-like basis. As for the fourth quarter of 2018, total operating performance and statutory revenue were also impacted by the weaker billings development. Moving on to Slide 8. Through strong cost control and successful implementation of our group-wide restructuring, which we placed in the fourth quarter of 2018, we reduced our cost base by 16% year-on-year. I would like to emphasize that we will continue to focus on our cost development with great determination in the coming quarter, as already mentioned, with respect to our Lotto24 offer announcement. This is clearly an area of focus for me personally. In detail, we have exceptional items mainly related to the acquisition of Lotto24, offer of EUR 1.8 million for this quarter, which was offset by a decrease in personnel expenses of EUR 2.2 million and other costs of operations of EUR 3 million. The decrease in personnel expenses is due to the fall in average number of full-time equivalent employees from 272 to 192 people, which was mainly driven by the group-wide restructuring and the closure of the Ventura24 business. Let's move on to Slide 9 and talk about the EBIT. Driven by a strong focus on cost control and fewer exceptional payouts, statutory adjusted EBIT increased by 26% to EUR 11.6 million for the first quarter in 2019. On a normalized basis, adjusted EBIT with EUR 10.2 million was on the same level as in 2018. Net profit increased to EUR 6.9 million, and our earnings per share were up 11% to EUR 0.83 per share. Let's move on to Slide 10. We further increased our net cash position by EUR 27 million or 36% to EUR 102 million. This gives us a healthy platform long-term business and shareholder value creation. The increase of our net cash was mainly driven by the generating profit before tax of EUR 21 million. On slide, we talk about the integration with Lotto24. As I highlighted earlier, in November, we announced our intention to acquire Lotto24 to reunite and to transfer our core German business model to online lottery brokerage. In doing so, we'll create a sustainable growth path for our group by substantially de-risking our business at a point in time where the regulatory headwinds in Germany are getting stronger. We are proactively taking control of our own destiny and setting ourselves up for a future that enables us to accelerate the growth of online brokerage in the German market and to continue to pursue international ambitions. Meanwhile, all closing conditions related to the offer document have been satisfied. And finally, 93% of Lotto24 shareholders tendered their shares, and we expect to settle this transaction on -- in a weeks' time on 14th of May 2019. Before I wrap up and open up for questions, I would briefly touch on 2 other topics. Brexit. Brexit is still uncertain. As you know, the EU and U.K. agreed on Brexit postponement until the end of October. We have been working very closely with a multi-gambling authority in recent months and expect to be issued a license to mitigate any impact. German VAT. Since my last call with you in March, there has been no developing in the court case. We expect the first instance of ruling later in this quarter, but unfortunately, I can't be more precise on the time line. The court seems to be short on staff and apparently busy with other proceedings. But we still remain confident that ultimately, the outcome will be favorable for the group. So the key takeaways on Slide 13. We have delivered a solid start in 2019, with further improvements in cash generation. We significantly reduced our cost base and will focus on reducing this further over the following quarters. With reunification with Lotto24, we are creating a sustainable future growth path and significant value creation for our shareholders. With this, I would like to conclude and open up the call for questions from participants. Thank you very much.

[Operator]

[Operator Instructions] The first question received is from Patrick Schmidt from Warburg Research.

[Patrick Schmidt, Analyst]

I was just referring to your combined billings volume of more than EUR 600 million, previously you communicated more than EUR 500 million. Is that just taking the sum of Lotto24 and your billings? Or do you have a better view now on what billings will be also valid for your new broker? That would be my first question. And the second, just to clarify that you have EUR 1.8 million in exceptional items, so the personnel expenses and costs of other operations of EUR 3 million, I guess, they are sustainable, right?

[Jonas Mattsson, CFO & Member of Executive Board]

Thank you, Patrick. Yes, so the announcement that we did last year was building on the 2017 pro forma numbers. Today, we have the official outcome for both ZEAL and Lotto24 for 2018, and both companies have been growing versus 2017. So if you add these together, you come to a number above EUR 600 million, so that's why we now announced. The offer document was based on the 2017 official audited numbers. Your next question, yes, the exceptional items is really related to the integration project or the transaction, which is mainly legal costs and severance payment for people that unfortunately have to leave the business. But the savings in staff and others that I mentioned, they are sustainable. So this is coming through to our profit and loss, and we expect to continue delivering synergies we announced in the offer to the Lotto24, the EUR 57 million that we talked about in the past.

[Operator]

[Operator Instructions] Next question we received is from Berenice Lacroix from Kepler Cheuvreux.

[Berenice Lacroix, Equity Research Analyst]

Just one on my side. You have EUR 102 million of available cash, plus EUR 21 million also of hedging reserve, how this cash would be dedicated for? Will the new group spend it in marketing efforts and in acquiring new customers?

[Jonas Mattsson, CFO & Member of Executive Board]

Thank you. You are absolutely right with your numbers. So the EUR 70 million is already set aside for the VAT case. As I had said in the presentation, I am still confident we're going to win that, but to being confident and taking my fiduciary responsibilities, I need to make sure that in any eventuality, I have cash set aside for this one. We have then some free cash to potentially invest in growth opportunity, not internationally, but also more in marketing. We see that in the German market, there are opportunities to even more aggressively acquire more customer when we're now combining with Lotto24. So we have some reserves for doing more aggressive marketing, if and, I say if, if we see that the payback time is reasonable, which it has been in the last couple of years. But we always make sure that if we can acquire a customer and get a payback within or less than 2 years, we think that's a good investment for ourselves and our shareholders.

[Operator]

[Operator Instructions] As far as there are no further questions, I hand back to Frank Hoffmann.

[Frank Hoffmann, Investor Relations Manager]

Yes. If there are no further question, we would like to close the call. We thank you for your participation and wish you a nice day. Our next regular call will be in August with publication of our half year results, and we will be pleased to welcome you again. Thank you, again, and bye-bye.

[Operator]

Dear, ladies and gentlemen, thank you for your attendance. This call has been concluded, and you may disconnect.