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Edited Transcript of ALL.AX earnings conference call or presentation 17-Nov-20 11:30pm GMT

·66 min read

Full Year 2020 Aristocrat Leisure Ltd Earnings Call NSW Nov 18, 2020 (Thomson StreetEvents) -- Edited Transcript of Aristocrat Leisure Ltd earnings conference call or presentation Tuesday, November 17, 2020 at 11:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Julie Cameron-Doe Aristocrat Leisure Limited - CFO * Michael Lang Aristocrat Leisure Limited - CEO of Digital * Mitchell Bowen Aristocrat Leisure Limited - CEO of Global Land Based & Chief Transformation Officer * Rohan Gallagher Aristocrat Leisure Limited - General Manager of IR & Treasury * Trevor J. Croker Aristocrat Leisure Limited - CEO, MD & Director ================================================================================ Conference Call Participants ================================================================================ * Anthony Longo CLSA Limited, Research Division - Research Analyst * Bryan Raymond Citigroup Inc., Research Division - Director * David Fabris Macquarie Research - Research Analyst * Desmond Tsao Goldman Sachs Group, Inc., Research Division - Associate * Larry Gandler Crédit Suisse AG, Research Division - Director * Matthew H. Ryan UBS Investment Bank, Research Division - Executive Director and Research Analyst * Sacha Krien Evans & Partners Pty. Ltd., Research Division - Executive Director of Gaming & Leisure ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank you for standing by, and welcome to the Aristocrat FY '20 Results Briefing Conference Call. (Operator Instructions) I would now like to hand the conference over to Mr. Trevor Croker, CEO. Please go ahead. -------------------------------------------------------------------------------- Trevor J. Croker, Aristocrat Leisure Limited - CEO, MD & Director [2] -------------------------------------------------------------------------------- Good morning. Welcome to Aristocrat Leisure Limited's financial results presentation for the 12 months to 30th of September 2020. My name is Trevor Croker, Chief Executive Officer and Managing Director of Aristocrat. It's a pleasure for me to be presenting today, along with Julie Cameron-Doe, our Chief Financial Officer. Thank you for joining us. Before we begin, please note the usual disclaimer statement on Page 2 of our investor presentation pack. Turning to Slide 3. Full details of the results are contained in the operating and financial review document released this morning. In today's session, we will first address our business' response to the challenges of COVID-19 during the reporting period, including the refinement of our group growth strategy. We'll then step through a summary of our group results and performance across our 2 operating businesses, Aristocrat Gaming, formerly referred to as our Land or Land-based business; and Aristocrat Digital. I'll close by saying a few words on our expectations for the 2021 financial year before opening the line for Q&A. For clarity, all references to prior corresponding period, or PCP, represent the 12 months to 30th of September 2019 and are expressed in reported terms unless otherwise specified. Normalized results refer to the reported results, excluding the impact of certain significant items during the period. As set out in the materials released today, these are: COVID-related government benefits; contingent retention arrangements related to the acquisition of Plarium; an onerous lease obligation with the Big Fish business; an expense related to the legal settlement disclosed in May this year; and recognition of a deferred tax asset of over $1 billion, in line with the group structure changes announced in November 2019. While the group was on track to deliver growth in line with our plans before the pandemic hit, results in our gaming business were materially impacted by customer venue closures and the implementation of social distancing measures that have been in place across key gaming markets globally since March 2020. In the context of this unique challenging year, I'll begin by speaking to our COVID response, the progress we've made and how Aristocrat is positioned heading into the 2021 financial year. Turning to Slide 4. At the outset, I want to express my deep appreciation and respect for the resilience and commitment shown by our people over the past 10 months. They care for each other. They're focused on our customers and players and their absolute determination to deliver what has been critical to getting us to where we are today. Their safety and well-being and the safety and well-being of our customers, suppliers and other stakeholders remain our first priority. It's never been more clear that our people at the heart of our business are our most important responsibility and our biggest asset. Our 2020 sustainability disclosures will be published to our website at the end of the month, and here we are sharing just a few of the inspiring ways our people have risen to the challenges we faced this year. I'd encourage everyone to review the report. And in the meantime, to the more than 6,000 Aristocrat people around the globe, let me simply say thank you. While today's results demonstrate the impact of the pandemic during the period, they also highlight the group's strengths and the effectiveness of our business' response over the past 10 months. As always, we're focused on what we can control to protect and extend our strategic advantage and position the business for future growth. We've accelerated our diversification over the past several years. We're entering more adjacent markets, segments and game genres. We've also driven scale in digital, adding a material B2B operational engine to the group and delivering further diversity to a revenue base that is now almost 80% recurring rather than one-off in nature. The benefits of this diversification are evidenced in our results for the period, during which we have maintained revenues in excess of $4 billion at group level while protecting the business and maintaining investment behind our strategic differentiators for the future. Throughout 2020, we confirmed our commitment to our industry-leading D&D, or design and development, organization while also maintaining strong investment in digital games and user acquisition and continuing to commit capital to further grow our gaming operations footprint. We also invested more in strategic capabilities, including customer experience, cybersecurity and data capability, among other priorities. At the same time, we took the opportunity presented by this crisis to improve. Aristocrat pivoted to an explicitly people-first focus, energizing our culture and offering more support, flexibility and recognition to our people. An average engagement score of 8.5 was achieved through the reporting period, which is significantly above industry benchmarks. We also experienced no loss of business momentum despite the disruptions and remote working arrangements. We made difficult but important decisions to further support our liquidity. This included a significant rebasing of our Big Fish business, which is now poised for more profitable, sustainable growth. We chose to reinvest a portion of the $100 million savings in operating expenses identified in the second half of the fiscal year 2020 compared to the PCP behind growth drivers such as our customer service, product development and user acquisition. In addition, we sharpened our operational priorities in gaming and focused on supporting customers with higher levels of service, flexibility and tailored commercial options to help them recover as quickly as possible. Furloughed staff were brought back to work early to help customers prepare to reopen safely and underline our commitment to being partners of choice to our customers. Aristocrat's long-term focus on lifting our competitiveness through its outstanding people and products positioned us to benefit in digital and in gaming as demand began to return through the later half of the reporting period. This is evident in the share gains achieved by our gaming business in key markets over the year, along with outstanding customer feedback and industry data on portfolio performance, particularly in our largest markets in North America and in Australia. Our digital business also took share across core genres, reflecting our investments in improving the Product Madness portfolio and scaling the world-class title RAID: Shadow Legends shadow, along with broader portfolio performance and COVID-related tailwinds. At period end, Aristocrat had excellent liquidity, low debt and a balance sheet that provides the group with full optionality. We have a revitalized team and people-first culture. Our strategy has been reaffirmed, and we are focused on accelerating it and making the most out of the opportunities presented by disruption. While we continue to manage the near-term impacts and volatility driven by the pandemic across global markets, we believe we are ideally placed and will continue to be proactive, ambitious and focused in our response to these unique challenges. I'll now turn to a summary of our group growth strategy on Slide 5. During the year, we took the prudent steps of reviewing our growth strategy in the context of COVID. Our strategy aims to deliver high-quality, sustainable profit growth by continuously improving the quality and breadth of our product portfolios. We achieved this by investing in great people, product and capability, building on foundations of strong culture, governance and financial rigor. Our approach is summarized in the diagram, iterations of which have been shared with the market previously. We took the opportunity to retest our short- and long-term assumptions and consider potential changes in underlying trends as relevant to our business, customers, players and broader markets. In summary, the review confirmed the soundness of our strategy and its ongoing relevance in a COVID-impacted world. We have expanded and reordered some priorities. And in some cases, we've been encouraged to move faster in executing our plans. The text in red represents new language, demonstrating some of the refinements implemented as a result of the review. For example, we're placing more emphasis on upskilling leaders and broadening new strategic capabilities. We're also bringing a deeper focus on people, drawing on the lessons of COVID and embracing opportunities presented by the changing nature of work. Customer experience leadership, or CX, as we describe it, is all about unlocking new value streams by delivering customers and gaming patrons connected products and services in line with their changing needs and underlying consumer trends. With the benefit of a dedicated CX team, we're increasingly leveraging our strong customer partnerships, compelling content and growing capability to deliver seamless experiences beyond the gaming floor. During the reporting period, CX successfully launched our first mobile loyalty products for a major U.S. customer. In the context of COVID and with the encouragement of our customers, we will continue to significantly escalate our focus on convergence products and services in the period ahead. We are also emphasizing our readiness to invest to accelerate our progress. Where we see quality opportunities, we will consider unlocking them through organic investment, M&A or internal synergies and collaboration. For example, in the period, we concluded 2 deals to acquire access to more world-class game development capability in digital. Investments in the proven game studios Neskin and Proteus signaled our intent. We have the balance sheet strength and the track record to support bold moves as well as incremental ones. These are changes in emphasis and in some cases, priority, but the foundations of our approach won't change at all. We'll continue to grow our market-leading portfolios with strong investment in gaming D&D, digital pipeline expansion and smart user acquisition. We will continue to focus on taking share wherever we choose to play whilst driving strong operating cash flow, good governance, balance sheet strength and operational excellence remain core, along with our commitment as a group to grow strongly and sustainably. Taken as a whole, COVID has helped to confirm our strategic direction as a business while sharpening our focus and highlighting our priorities. Moving to a summary of Aristocrat's performance for the 2020 financial year on Slide 7. Aristocrat's group results for the 2020 financial year were materially impacted by COVID-related headwinds as previously flagged. Normalized profit after tax and before amortization of acquired intangibles, or NPATA, of $476.6 million represents a decrease of 47% in reported terms and 49% in constant currency compared to the $894.4 million delivered in 12-month period to 30th of September 2019. Revenue decreased by 6% to approximately $4.1 billion, with COVID impacts on the gaming business partly offset by strong growth in digital, again demonstrating the benefits of our diversification strategy. Earnings before interest, tax, depreciation and amortization, or EBITDA, fell around 32% compared to the PCP to almost $1.1 billion. Fully diluted earnings per share before amortization of acquired intangibles of $0.747 represents a 47% increase compared to the PCP. Operating cash flow of over $1 billion was achieved, reflecting a relatively modest decrease of 5.8% compared to the PCP. This demonstrates the business' strong underlying cash flow capabilities enhanced by targeted COVID responses. Balance sheet quality was once again a feature of Aristocrat's results. Net gearing at period end was 1.4x, flat on the PCP. This was driven by positive cash flow generation throughout the period. Liquidity was further enhanced by proactive measures, including increasing the group's revolving credit and Term Loan B facilities and canceling the interim dividend. In view of Aristocrat's effective COVID response and confidence in our strengthening performance, the directors have authorized a fully franked dividend of $0.10 per share, AUD 63.9 million, in respect of the period ended 30th of September 2020. This represents a decrease of 82% or $0.46. The record date will be 2 of December, and the payment date will be the 18th of December. The underlying operational strength of the business was evident during the period with a further lift in share and market-leading fee per day for the North American Gaming Operations segment. Digital performance reflected our success in building the competitiveness of our Social Casino portfolio through investment in Live Ops, features and new slot content as well as the momentum of RAID: Shadow Legends and new game launches. Performance also benefited from the tailwind of COVID stay-at-home mandates. As I mentioned, we took a strategic decision to maintain industry-leading D&D investment through the period to protect our core advantages in product, fuel expansion into new adjacencies and position the business for longer-term growth. We experienced no loss of momentum in our product organization with high productivity and full focus on recalibrated priorities. Over the 2020 full year, D&D investment fell fractionally in absolute terms by $2.5 million to $49.8 million. This is a strong result at the top end on the range of 11% to 12% of revenue the business has allocated across recent years. At the same time, we invested aggressively in user acquisition, or UA, to support growth in digital at a time of opportunity. UA investment of just under USD 450 million represented 28% of segment revenue, up 1.7 percentage points compared to the PCP. I'll now invite Julie Cameron-Doe, Aristocrat's Chief Financial Officer, to take us through further details of group results beginning on Slide 8. Julie? -------------------------------------------------------------------------------- Julie Cameron-Doe, Aristocrat Leisure Limited - CFO [3] -------------------------------------------------------------------------------- Thank you, Trevor, and good morning, everyone. I will first step through the composition of Aristocrat's reported NPATA performance of $476.6 million normalized for significant items and reconciled to the PCP. As Trevor mentioned, this result represents a 47% decrease, or 49% in constant currency, compared to the PCP and has been fundamentally driven by COVID-related impacts across all regions of the gaming business, partly offset by strong growth in digital. NPATA performance was also supported by a range of prudent cash-preservation measures Aristocrat implemented across our nondigital operations in response to the pandemic. Stepping through the chart on the left-hand side. Profit in the Americas business fell $414 million compared to the PCP. This reflected a material reduction in capital spend by customers and lower overall gaming operations revenue due to venue closures and the impact of social distancing measures experienced since March. In the outright sales markets of ANZ and International Class III, profits fell $112 million and $45 million, respectively, compared to the PCP, reflecting COVID impacts as well as the broader economic impact of bushfires and drought in ANZ. Underlying performance remained robust, with leading ship share sustained across key markets. The digital business delivered almost $130 million in incremental profit, demonstrating strong portfolio performance, as Trevor mentioned, including growth in Social Casino, the ongoing success of RAID: Shadow Legends and new game launches. Corporate cost and interest increased by $12.3 million compared to the 12 months to 30th of September 2019, largely driven by lease interest. D&D represents the business' investment in talent and technology to drive long-term differentiation and sustainable growth. We continue to invest strongly in D&D over the years with deliberate and rigorous prioritization of resources, resulting in a modest $9 million reduction in spend compared to the PCP. A decrease in the group's effective tax rate from 27.5% to 24.9% compared to the PCP drove a $10.9 million reduction in costs with the recognition of a deferred tax asset of approximately $1.1 billion. This reflects the impact of changes in group structures announced in November 2019. Finally, favorable foreign exchange movements reflecting a weaker Australian dollar increased profit by a further $16.4 million compared to the PCP. Turning now to Slide 9. Net debt for the full year of just under $1.6 billion compared to net debt of around $2.2 billion reported at 30th of September 2019. This represents a net debt-to-EBITDA leverage ratio of 1.4x, in line with the PCP. As at 30th of September 2020, Aristocrat had total liquidity of just under $2 billion comprised of cash and $277 million in available credit. This reflects a number of steps taken during the year to optimize our liquidity, including an increase in the group's revolving credit facility limit from $150 million to $286 million in April 2020 and issuance of a new USD 500 million incremental Term Loan B facility in May. Our debt facilities remain competitively priced at a weighted average of LIBOR plus 217 basis points. Credit agreements remain covenant-light and provide the group with ample financial flexibility. The business also maintained stable credit ratings through the recent volatility. The group's balance sheet strength and debt profile continues to provide us with financial certainty, flexibility and full optionality going forward. Turning now to cash flow on Slide 10. The group cash-generating fundamentals remained strong despite the impact of COVID with operating cash flow of over $1 billion for the period. This represented a modest 5.8% fall compared to the PCP. This again highlights what is a core strength for Aristocrat and also demonstrates a further increase in the proportion of recurring revenues in our total group revenue mix. Capital expenditure decreased almost 22% from around $317 million in the PCP to just under $250 million, reflecting investment in hardware required to support growth in the North American Gaming Operations installed base. This expenditure reduced significantly in the second half of the period compared to the PCP due to the impact of COVID. As Trevor mentioned, significant items in the period are detailed in the OFR document released this morning. That concludes the summary of group performance. I will now pass back to Trevor to comment on operational performance and outlook for the 2020 financial year. Trevor? -------------------------------------------------------------------------------- Trevor J. Croker, Aristocrat Leisure Limited - CEO, MD & Director [4] -------------------------------------------------------------------------------- Thanks, Julie. I'll now share more detail about operational results beginning with our gaming business previously referred to as Land-based operations. Over the course of 2020, Aristocrat Gaming continued to execute its growth strategy and took further steps forward in terms of portfolio breadth and performance. Despite the disruptions driven by the pandemic, a relentless focus on people, portfolio competitiveness and customer engagement was the hallmark of our operational response across key gaming markets and segments. As I mentioned, at the outset of the pandemic in March, our gaming business took the opportunity to sharpen product portfolios and double down on customer service. We chose to not furlough D&D staff and maintained our product development momentum throughout the period. Our commercial teams also made the most of opportunities to deepen partnerships to bring forward new solutions and help customers prepare to reopen safely. Customer feedback suggests that significant goodwill was generated by Aristocrat being first among competitors to bring back service staff safely and engage proactively. We're already seeing early benefits in terms of increased strategic customer dialogue and new commercial opportunities, particularly in North America and ANZ. While financial results were materially impacted by COVID in the reporting period, we also saw sustained underlying momentum that will position us to maximize opportunities and return to growth as conditions continue to improve. Focusing firstly on Americas, and turning to Slide 12. In local currency, Americas revenue decreased around 31%, and profit fell over 52% to approximately $935 million and over $356 million, respectively, over the reporting period compared to the PCP. As I referenced earlier, North American Gaming Operations business continued to grow, with our Class III premium gaming operations footprint expanding by 5.9% to over 24,300 units at period end, driving further share growth despite market conditions. This performance was fueled by a combination of market-leading cabinets with strong growth in MarsX and powerful game content. Dragon Link remains the #1 premium game family, supported by the scaling of Dollar Storm and Buffalo Diamond in the period. In Class II gaming operations, placements grew 0.3% over the full year to over 25,300 units, driven by growth in the second half off the back of continued strength in the mechanical installed base, coupled with increased Ovation performance. Key titles included Hunt for Neptune's Gold, Buffalo Xtreme and Welcome to Fantastic Jackpots. On a combined and adjusted basis, Aristocrat's average gaming operations fee per day improved 1.1% to over USD 51, driven by portfolio strength and resilient demand. On an unadjusted basis, average fee per day for the period was USD 35.55 and remained market leading. In Class III outright sales, revenue decreased 46% and volumes reduced 44% compared to the PCP, reflecting COVID impacts. MarsX Dual continued to be an outstanding performer, driving over 40% of all cabinet shipments supported by strong titles, including Buffalo Gold Revolution, Fu Dai Lian Lian and Mighty Cash Ultra. Aristocrat also revealed the most anticipated title, Buffalo Chief, on the Helix XT cabinet. The average sales price declined 5% compared to the PCP, reflecting the impact of our expansion to lower-priced strategic adjacencies. Aristocrat continued receiving outstanding customer feedback in North America, consistently ranking as the leading gaming equipment supplier across a number of key casino customer surveys. For the second year running, Aristocrat was named top land-based supplier at the Global Gaming Awards and was the most awarded supplier overall. The business also won Land-Based Product of the Year for MarsX cabinet, along with Slot of the Year for Dollar Storm. Strong game performance enhanced by the new hardware releases also saw Aristocrat claim 14 of the top 25 premium leased games in North America according to a report released by Eilers in September 2020. Turning now to the ANZ International Class III results on Slide 13. In ANZ, in constant currency, revenue decreased 38.5% to $280.5 million, while profit decreased 72.5% to $58.8 million, respectively, compared to the PCP. Again, this result reflected challenging market conditions, mainly COVID-related, as well as the impact of droughts and fires on customers and the broader economy earlier in the year. ASP reduced to $20,786 from the $21,252 achieved in the PCP, driven by the maturity of the product portfolio and changes in the selling model mix as a result of COVID. The ANZ business sustained its market-leading ship share performance in financial year 2020 as it focused on providing flexible and responsive service and support the customers to position them for recovery. International Class III revenue and profit decreased around 38% and 66%, respectively, to $126 million and $32 million compared to the PCP, again, reflecting the material impacts of COVID-related shutdowns, social distancing restrictions and travel restrictions across Asia and EMEA. I will now provide more detail on the performance of our digital gaming segment on Slide 14, and please note the figures on this slide are in U.S. dollars. Over the course of the reporting period, we made further significant strides in Aristocrat Digital operations. Under the leadership of a dedicated Aristocrat Digital executive team, the business focused on pipeline and portfolio growth, maximizing booking performance and continuing to invest in marketing and efficient UA to scale. Aristocrat Digital generated over $1.6 billion in bookings during the reporting period, a 31% increase on the PCP, while revenue increased 29%. The business delivered almost $0.5 billion in segment profit, up almost 34% compared to the 12 months to 30th of September 2019. Average bookings per daily active user, or ABPDAU, increased almost 44% to $0.59, with the portfolio benefiting from strong investment in game development, including Live Ops, features and new slot content in Social Casino and continued portfolio diversification. This momentum was supported by marketing investment and the tailwinds associated with COVID-related stay-at-home mandates. We've previously referenced our focus on increasing the efficiency of our UA spend by implementing a common platform and dynamic investment based on clear return metrics. I would highlight that in the period, we delivered almost 34% uplift in profit off the back of a 1.7 percentage point increase in UA allocation as a percentage of revenue, demonstrating the material efficiency and effectiveness benefits we're now capturing. Overall, UA allocation increased to 28% of revenue in order to continue successfully scaling rate as well as new games, including EverMerge and Undersea Solitaire Tripeaks. Segment margin increased over 1 percentage point to 30.8% over the full year compared to the PCP. Social Casino benefited in particularly from the successful rebuilding of performance in the Product Madness portfolio over the past year. Investments in Live Ops, features and new slot content drove Aristocrat to strengthening its #2 position globally in this important genre and delivering $815 million in bookings in the period. Meanwhile, the strategy in role-playing genre, or RPG, contributed $539 million in bookings, reflecting significant growth in RAID. The Social Casual genre delivered $258 million in bookings, a decrease of 11% on the prior corresponding period. Newly launched titles improved top line performance. Legacy games continued to contribute to profitability, while the business maintained its focus on daily active users, or DAU, quality. Total DAU at 30th of September 2020 decreased to 6.7 million from 7.5 million in the PCP. However, ABPDAU increased significantly from $0.41 to $0.59 over the same period, again underlining our progress in focusing on DAU quality and building long-term engagement. The performance of the Aristocrat Digital business over fiscal year 2020 underlines its gathering scale, momentum and sophistication and the excellent progress being made in leveraging best practice across core functions such as insights, data and marketing. It also reflects the building out of core digital capabilities and focused leadership. The bay of this growing B2C engine to our group was amply demonstrated during the year, and we remain bullish about its potential and broader strategic significance, particularly in a post-COVID world. Turning now to more detail on our digital portfolio on Slide 15. Charts on the left show the evolution in mix across Social Casino, RPG and Social Casual games in terms of total bookings contribution between financial year 2019 and 2020. While overall bookings grew, a good diversity in terms of genre mix was also retained. At the same time, the charts on the right demonstrate the mix of game titles that contributed more than USD 50 million in bookings over both 2019 and 2020. Over the course of 2020, established games such as RAID and Lightning Link further grew their contribution, while EverMerge and other new games also began to scale, improving overall portfolio strength and diversity. Turning now to Slide 16, which provides an additional lens on our pipeline management and the quality of our digital portfolio. This slide updates the disclosure we've previously shared and demonstrated our investment in expanding and diversifying the portfolio over time. We continue to actively target new, high-value segments while also creating more player value within established franchises through content development and feature developments. An aggressive talent acquisition strategy underpins this progress, including the recent investments in Proteus and Neskin. I'll now turn to a brief recap of our results for the 2020 financial year on Slide 18. In May, we said that Aristocrat entered the COVID challenge in good shape. 6 months on and notwithstanding the uncertainties that remain, we believe we're well placed to emerge from this period in even better shape. Aristocrat's result for the year demonstrate that we have enhanced our financial fundamentals and further accelerated our underlying momentum despite the exceptional challenges and volatility generated by COVID on our business, customers, players and people across the majority of the reporting period. Aristocrat Gaming performed well and in line with expectations through to mid-March, for which time all key markets were materially impacted by broad-scale mandated venue closures and social distancing restrictions. Nevertheless, in North America, we continued to take share over the full year in gaming operations while maintaining a market-leading combined adjusted fee per day. We also maintained market leadership in ANZ with an increased focus on customer service and engagement. Continued investment in new hardware and games delivered superior performance and supported resilient demand. Aristocrat Digital delivered exceptional operational performance with strong double-digit growth in revenues, bookings, ABPDAU, profit and margin. The business continued to diversify and strengthen its portfolio and pipeline of new games, releasing 2 new casual titles in the second half, continuing to scale our world-class RPG game and investing in improving our Social Casino portfolio. The business experienced further growth in Social Casino while also growing or entering other attractive genres and making significant strides in organizational scale, capability and effectiveness. We also enhanced our strong financial underpinnings with liquidity of just under $2 billion as at 30th of September 2020. In addition, we delivered an operating cash flow result above $1 billion for the year, strengthened our balance sheet and held leverage at a prudent 1.4x. The group also recognized a $1.1 billion deferred tax asset, which will reduce cash tax over the long term and further enhance our ability to invest aggressively behind our strategy and high-quality, long-term growth. We have reviewed and confirmed our strategic direction as a business. While sharpening our focus and highlighting our priorities in the context of COVID, Aristocrat has effectively manage what we could control over the 2020 financial year and implemented a proactive and successful COVID response and recovery plan. We are well positioned to weather volatility and to take advantage of opportunities presented in the period ahead. This brings me to the outlook for the 2021 financial year. Turning to Slide 19. Aristocrat plans for continued growth over the 2021 full financial year, reflecting the following: maintained or enhanced market-leading positions in gaming operations, measured by the number of machines that are operating and game performance; sustainable growth in floor share across key gaming outright sales markets globally; further growth in digital bookings, with user acquisition, UA, spend expected to remain between 25% and 28% of overall digital revenues; continued D&D investment to drive sustained, long-term growth with the investment likely to be modestly above historic levels on a percentage of revenue basis; an increase in SG&A across the business as we continue to scale and deliver our growth strategy. This includes continuing to identify adjacencies that expand our capabilities to create new business and growth through product, distribution and investment. For nonoperating items, additional detail is provided on the table in the slide. While we can't predict how the pandemic will affect our operating environment in the months ahead, in terms of what Aristocrat can control, we're pleased to be entering the 2021 financial year with excellent operational momentum, a proven strategy, strong team engagement and belief. We believe we're well placed to maintain our long-term trajectory of high-quality, sustainable growth. With that, I'll conclude the formal presentation and open the line to any questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question comes from Matt Ryan with UBS. -------------------------------------------------------------------------------- Matthew H. Ryan, UBS Investment Bank, Research Division - Executive Director and Research Analyst [2] -------------------------------------------------------------------------------- My first question is just on the digital guidance. I see that you're guiding to growth in bookings, which I think is encouraging given the tough comp that you've achieved in the 2020 year. Can you talk about what you've assumed within this guidance for market growth over the next 12 months and also what you've assumed in terms of new titles being successful in order to achieve the guidance? -------------------------------------------------------------------------------- Trevor J. Croker, Aristocrat Leisure Limited - CEO, MD & Director [3] -------------------------------------------------------------------------------- Yes. Thanks, Matt. Appreciate the question, and thank you. So the way we've looked at it is that we still -- the way we looked at it is the way we finished the 2021 year was off the back of a number of changes. First of all, we implemented the Live Ops, the features of the new slot content into Product Madness, which was an important part that we've been talking to the market about addressing for around 12 months now, and that saw a lot of good momentum in our portfolio. We also through the year were able to scale away and continue to scale that business and make that a strong business through investing in UA. And then Mike and the team also addressed Big Fish, both structurally but also around the priorities around the genre and markets in which to enter. So that's what's driven a fair component of what we thought has contributed to our performance this year. And then, obviously, the tailwinds of COVID coming through behind that. We expect the market rates to moderate into '21. And it's a little bit hard to pick them at the moment, but we expect them to moderate, and they certainly won't be at the levels that we saw in financial year 2020. And we continue to see games like EverMerge scale. And we have a number of games -- we've got 5 games in soft launch now plus another portfolio of games that we're looking to bring forward through the year, and that's been phased across the year. And as you know, soft launches don't necessarily generate straight into worldwide launch. So there is a component of tests and retesting until we actually go to market. But we have a pipeline coming through for this year and further development as well. -------------------------------------------------------------------------------- Matthew H. Ryan, UBS Investment Bank, Research Division - Executive Director and Research Analyst [4] -------------------------------------------------------------------------------- And this might be a question Julie might be able to answer. I'm just trying to think through, I guess, the margin outlook from here. And I know that you haven't given any margin guidance specifically, and we can all say that the Land-based margins in particular were impacted a lot from COVID. But is there anything structural which might stop you from getting back to historical levels of margins that you used to achieve in the Land-based segment? And given the level of growth that you're sort of talking about in your guidance statement, which is largely around revenue, is that an amount of revenue which would allow for you to see those sorts of margins that you did historically? -------------------------------------------------------------------------------- Julie Cameron-Doe, Aristocrat Leisure Limited - CFO [5] -------------------------------------------------------------------------------- Thanks, Matt. In terms of the margin, I mean, I still -- I'll help you understand it in a few different ways. And obviously, the outlook we've put out, though, is in relation to FY '21 so we're trying to help people understand our expectations for FY '21. So we're not trying to talk about the full period of recovery that we anticipate for the Land-based business. If you think about what we've seen in the Americas and the ANZ businesses in terms of those margin declines in the year, there's a good chunk of that, obviously, that's down to operating deleverage because, obviously, we have significant margins. And given the impact of COVID during the period, that really hurt us. And then there is an element of some of the provisions we've had to take in the year for bad debt, for inventory and some of the sort of necessary sort of prunings that, I think, we've done with our workforce as we've gone through this as well. So that's impacted. And if you think about the overall declines in the margin, I'd say there's about 80% of that's down to operating deleverage, and about 20% is down to some of those impacted -- those sort of like onetime or specific items that I've gone through there. So in terms of the go-forward, in terms of the margin expectations for the future, certainly, as we grow, we do anticipate that we'll be able to recapture operating leverage. And obviously, we'll cycle over some of the provision-type items. But I would say that as we grow, there's a higher expectation on us from a kind of social license to operate and also from just the case of just being a mature business now, where the cost of things like cybersecurity, privacy, good governance generally, headwinds from things like insurance premiums, those are the kind of things that we'll sort of focus from a margin perspective, but they're absolutely the areas that we need to invest in as we grow the business. We talk about the investments we're making in people and in different skill sets. And obviously, we see those as long-term investments to grow the business sustainably. But clearly, from a short-term perspective, they would have an impact on margin. Now that's from a land-based perspective. If we think about the margins in the digital business, you'll have seen an improvement in the margin this year. And clearly, we've had a fantastic year, and we've had significant growth in Social Casino, which has improved the share of casino as part of the overall digital portfolio. And as you're well aware, the margin for the Social Casino business is higher than Social Casual. So given that mix shift, we've had some strength there. But long term, as we grow that portfolio, we should expect that margin to moderate because we wouldn't expect Social Casino to continue to be such a high share. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- Your next question comes from Larry Gandler with Crédit Suisse. -------------------------------------------------------------------------------- Larry Gandler, Crédit Suisse AG, Research Division - Director [7] -------------------------------------------------------------------------------- Is my -- am I being heard? -------------------------------------------------------------------------------- Trevor J. Croker, Aristocrat Leisure Limited - CEO, MD & Director [8] -------------------------------------------------------------------------------- We can hear you, Larry. -------------------------------------------------------------------------------- Larry Gandler, Crédit Suisse AG, Research Division - Director [9] -------------------------------------------------------------------------------- Great. I'd like to extend on Matt's question, if I can, around digital. Trevor, you had very good growth in ABPDAU to $0.59 from $0.41. That perhaps suggests the exit rate for the year might have been as high as $0.75, $0.80. I'm just wondering, to what extent do you think that ABPDAU can be maintained through FY '21? Or do you think COVID may have artificially boosted that and we might see some retracing? -------------------------------------------------------------------------------- Trevor J. Croker, Aristocrat Leisure Limited - CEO, MD & Director [10] -------------------------------------------------------------------------------- Yes. Thanks, Larry. Well, first of all, I think there's a little bit of abnormality in these numbers. I think when we spoke to you in May, we were talking about seeing strong signs early days of both DAU and ABPDAU growth as a consequence of work-from-home or stay-at-home orders. More recently, we've seen the DAU moderating and coming back, and you can see that in the overall numbers. And from that perspective, we think that the ABPDAU that we finished the year with is a solid ABPDAU. It is a mix because, as you know, there's higher ABPDAUs across the 3 genres in which we're in. Obviously, RAID has scale to become a much bigger and more significant part of our ABPDAU mix as well and so it's an important part of driving that. What does it look like going forward? I wouldn't necessarily give you a number because I think we're still looking at what are the benefits of -- or what are the impacts of the game changes that we've made, the investment in UA, the new features and then what's happening with the tailwinds from COVID as to whether they're moderating. And we think that they are going to moderate over time and that the ABPDAU that we finished the year with was a reflection of both the portfolio strength, the investment that we've made in the portfolio, both from features and games and the diversification and some tailwind from COVID. But I haven't got a future view on ABPDAU. -------------------------------------------------------------------------------- Larry Gandler, Crédit Suisse AG, Research Division - Director [11] -------------------------------------------------------------------------------- Can I just ask whether the exit rate's higher than the average? -------------------------------------------------------------------------------- Trevor J. Croker, Aristocrat Leisure Limited - CEO, MD & Director [12] -------------------------------------------------------------------------------- I'd say you'd have to -- based on your math, yes. -------------------------------------------------------------------------------- Larry Gandler, Crédit Suisse AG, Research Division - Director [13] -------------------------------------------------------------------------------- Okay. And again, similar -- if I can continue with some questions around digital. With DAU, is the declines in users more related to casual or social? -------------------------------------------------------------------------------- Trevor J. Croker, Aristocrat Leisure Limited - CEO, MD & Director [14] -------------------------------------------------------------------------------- It's actually some of the legacy games. So it's more in the casual market. So things like Lost Island, which had large numbers of DAU; things like Toy Story, which has large numbers of DAU. We started to see those games because we don't see them as investable games going forward. So it's more in the casual aspect of it. There are some legacy games, too, that are no longer investable from a UA point of view that have actually seen some of the legacy games starting to slow down as well. The degradation in Social Casino, which I think we've been talking to the market about for a number of years now on the basis that we saw that gradual decline, that has actually slowed. -------------------------------------------------------------------------------- Larry Gandler, Crédit Suisse AG, Research Division - Director [15] -------------------------------------------------------------------------------- Okay. Great. And the new studio you guys purchased in digital, I was looking at Neskin. It does look like it comes with some games and some users. Is that going to materially influence margin and some of these statistics like DAU and ABPDAU? -------------------------------------------------------------------------------- Trevor J. Croker, Aristocrat Leisure Limited - CEO, MD & Director [16] -------------------------------------------------------------------------------- I might just make a couple of quick comments. First of all, Neskin is the company behind EverMerge. So they are the ones that have actually made EverMerge. And the investment there is around focusing on talent, and they're helping us build our content pipeline. I might just ask Mike Lang, who's the CEO of Digital, who's on the call, just to make a couple of quick comments on that strategy around talent. Mike? -------------------------------------------------------------------------------- Michael Lang, Aristocrat Leisure Limited - CEO of Digital [17] -------------------------------------------------------------------------------- Thank you, Trevor. Larry, nice to meet you. In regards to Neskin, we saw it as a really great opportunity for us to not only invest in talent but invest in a group that was in Eastern Europe and could provide some low-cost capabilities for us like we've really successfully achieved with Plarium and in terms of its business and as a result, could help us then take the EverMerge business going forward given, as you know, so much of a game, as you're starting to develop, and it's not just the original launch, but the ongoing features and Live Ops that need to be created. And so I think you're going to see us do more of these very targeted investments where we can bring in the right talent to help kind of accelerate our product pipeline and really drive the business, as you've seen this year, and drive future growth. -------------------------------------------------------------------------------- Operator [18] -------------------------------------------------------------------------------- Your next question comes from Bryan Raymond with Citi. -------------------------------------------------------------------------------- Bryan Raymond, Citigroup Inc., Research Division - Director [19] -------------------------------------------------------------------------------- My first one is just on digital as well and just thinking about RAID. Now you've got more than $400 million annualized bookings there. How do you think about that one in terms of breakeven? The second half '20 didn't quite get there. And then if you can just talk about how that contributed to your UA spend over the period, whether that was still the majority or a very large portion of that overall UA spend is similar. -------------------------------------------------------------------------------- Trevor J. Croker, Aristocrat Leisure Limited - CEO, MD & Director [20] -------------------------------------------------------------------------------- Yes. Thanks, Bryan. I appreciate the question. First of all, RAID is modestly profitable in the second half. And now as we're switching away from scaling that into -- towards new content, Live Ops and features is what we're doing. I think if you look at the rough numbers, RAID is annualizing at about $368 million, 3 -- somewhere $360 million, $368 sort of million at this point in time. So really, what it was is we invested around about 50% of the UA in driving RAID, in driving that growth because it was a scalable and an investable app and still remains so. But that ability to continue to scale now is somewhat less possible. But there are still, as we know, long-term value in apps through building in live content, Live Ops and features to sustain profitability longer term or to increase profitability. -------------------------------------------------------------------------------- Bryan Raymond, Citigroup Inc., Research Division - Director [21] -------------------------------------------------------------------------------- Great. And just to confirm, was that 50% in the second half '20 or full year '20? I recall it's something like that in the first half as well. I'm just trying to confirm. -------------------------------------------------------------------------------- Trevor J. Croker, Aristocrat Leisure Limited - CEO, MD & Director [22] -------------------------------------------------------------------------------- I think it was around about second half. We had a strong investment in the first half because it was actually scaling very aggressively for -- at November through. So it was a big part of first half and around 50% in the second half. -------------------------------------------------------------------------------- Bryan Raymond, Citigroup Inc., Research Division - Director [23] -------------------------------------------------------------------------------- Okay. Great. And then just thinking about the other investment in RAID outside of user acquisition costs. Just thinking about that other operating costs, which I noted for the overall digital business were up 20% in the second half '20 despite some cost out in Big Fish restructure, et cetera. Can you just help us understand there's a variable cost element within that bucket versus fixed costs? And then also what sort of incremental cost-in that needs to happen in RAID as it scales further? Because I'm hearing from channel sectors there's server capacity issues and some -- yes, some additional investments required there to scale again further. So perhaps if you can just talk us through your other cost bucket, please. -------------------------------------------------------------------------------- Trevor J. Croker, Aristocrat Leisure Limited - CEO, MD & Director [24] -------------------------------------------------------------------------------- Sure, Bryan. I'll hand you over to Julie to give you some commentary around that fixed and variable cost. -------------------------------------------------------------------------------- Julie Cameron-Doe, Aristocrat Leisure Limited - CFO [25] -------------------------------------------------------------------------------- Thanks, Trevor. And hi, Bryan. Yes. In terms of the ongoing cost of RAID, I think you have to think about these gains, as we've talked about them previously, as kind of live services. So there's a real element of having the ongoing costs around the Live Ops and continuing to create the features and keep those games going to continue to drive engagement and bring new users in and continue to engage with the existing users to keep that kind of virtuous cycle going within the game. So there's definitely an element of that. And as we look at how we can continue to develop new games and grow the business beyond where it's at today, we actually have to -- we'll be investing more heavily in talent and in the product pipeline to be able to do that. So that will -- it kind of is variable cost, you can think about it in that sort of point of view, we're bringing in resources. But I mean from a fixed cost point of view, we'll be expanding in existing studios and building out larger teams to be able to do that. So there's definitely an element of kind of ongoing costs and increased costs on that given it's such a big game. If you think about the success that Vikings has had and continue to have. I think Vikings has been going for over 5 years now. There's a dedicated team still that's very focused on Vikings, continuing to keep that game fresh and continuing to drive promotions and a lot of those Live Ops within that game, and you'll see a similar situation with RAID. -------------------------------------------------------------------------------- Bryan Raymond, Citigroup Inc., Research Division - Director [26] -------------------------------------------------------------------------------- And just a few comments, just a follow-up there. Just on the server capacity issues in RAID at the moment, which is constraining spend for some players since they can't really add in more share teams in terms of that capacity and what they can do and some of (inaudible) that we're talking about adding additional capacity. But if we talk about tech investment, [there are] people in order to create more opportunities to grow, grow [revenue and margin]. -------------------------------------------------------------------------------- Julie Cameron-Doe, Aristocrat Leisure Limited - CFO [27] -------------------------------------------------------------------------------- Yes. I might just start that and then pass back to Trevor. I mean, overall, from a technical perspective, it's -- yes, I mean, I'm not going to speak specifically to the reference you made to RAID. But I think generally, one of the key things that we have to do as we now have this digital business with scale is make sure that we don't accumulate technical debt and that we are keeping our platforms current and investing in them. And in FY '21, we do have that commitment to invest in that area across the digital portfolio. But I'd like to hand back to Trevor -- to Mike, who can comment on the RAID technical difficulties. -------------------------------------------------------------------------------- Michael Lang, Aristocrat Leisure Limited - CEO of Digital [28] -------------------------------------------------------------------------------- Yes. I'm not really aware -- nice to meet you, Bryan. Not really aware of many technical issues that we have heard of. But clearly, we're always on top of that and making sure that we're providing the best customer experience. I will say where the significant investment is around the content capacity, and we've got a whole new set of new game features coming over the next 30 to 60 days that I think we're going to have a major impact in terms of just improving the overall content experience and continuing, as Trevor said, this long-term opportunity in RAID that we have right here to make it truly a very evergreen and profitable product long term. So -- but in terms of technical server capacity, we'll keep on track of that. But I've not heard much in terms of the big issue on that. -------------------------------------------------------------------------------- Bryan Raymond, Citigroup Inc., Research Division - Director [29] -------------------------------------------------------------------------------- Good. Just final one for me, just on land-based. It's great to see the big performance (inaudible). But just thinking about the October and November to date. We've seen cases in the U.S. -- new COVID cases kind of triple from where they were at the exit rate in the full year '20. So just -- and the (inaudible) states that have increased some constraints or restrictions on the casino. Just interested if there's been any material change post balance date around some of those trends that have been quite encouraging through the second half. -------------------------------------------------------------------------------- Trevor J. Croker, Aristocrat Leisure Limited - CEO, MD & Director [30] -------------------------------------------------------------------------------- Yes. Thanks, Bryan. I think it's a little bit too early at the moment. Certainly, we've seen a few venues closing, but I think it's also fair to say that most venues haven't been operating 100% capacity. Our focus is really around making sure that we measure the number of machines that are switched on and then keeping our market-leading fee per day, and we believe we can continue to do that. I'll hand to Mitchell Bowen, who's the CEO of our gaming business, to make a couple of comments on how we're seeing the market. -------------------------------------------------------------------------------- Mitchell Bowen, Aristocrat Leisure Limited - CEO of Global Land Based & Chief Transformation Officer [31] -------------------------------------------------------------------------------- Yes. Thanks, Trevor. Bryan, look, it's a pretty fluid scenario at the moment. Obviously, our focus is making sure we keep as many machines switched on as humanly possible. The markets like New Mexico, Pennsylvania, Indiana, Colorado, which are talking about either closing for a couple of weeks or adding some of those additional restrictions maybe down to circa 25% capacity and maybe shutting out some times, maybe from 2 a.m. to 10 a.m. type scenario, that doesn't materially impact the number of the fleet activation that we've got. Markets like Oklahoma, where we've obviously got a very strong footprint, remain pretty resilient in their approach to staying open. But we'll keep everybody updated. And obviously, it's a pretty fluid environment at the moment. We don't see a material impact at this point. -------------------------------------------------------------------------------- Operator [32] -------------------------------------------------------------------------------- Your next question comes from Desmond Tsao with Goldman Sachs. -------------------------------------------------------------------------------- Desmond Tsao, Goldman Sachs Group, Inc., Research Division - Associate [33] -------------------------------------------------------------------------------- Maybe just firstly a question on land-based, similar to the prior question. At the end of October, you guys noted 75% of Class III premium and 90% of Class II gaming ops machines were operating. And if you could just maybe just remind us of how that has trended in the sort of prior months leading up to October. And then perhaps if you can comment on the run rate for the average fee per day in October in light of the machine on commentary. -------------------------------------------------------------------------------- Trevor J. Croker, Aristocrat Leisure Limited - CEO, MD & Director [34] -------------------------------------------------------------------------------- Yes. I'll make some comments. I think the comparisons that we can give you at the moment is -- and then thanks for the question, is that we finished September at 73% of machines switched on in Class III gaming operations, which then went to 75%. I think that's a little bit about how performance of the fleet caused a lot of that. And then the second part is more [midstream], that period of time. In Class II, that number went from 88% at the end of class -- financial year '20 in September to 90% in '21. So we're seeing gradual increases in the percentage of the machines switched on. We're seeing pretty stable fee per day from those periods of time. So if you think about it, the fee per day [call-in] seems be standing at a pretty stable level, and we're getting -- we're just really getting a slow increase of the machines switched on. And I think it's, as I said, consequence of good game performance, good technology investment. You would have seen that we actually increased our installed base for both Class II and Class III in the year as well. Mitchell, if you'd like to make any more comments. -------------------------------------------------------------------------------- Mitchell Bowen, Aristocrat Leisure Limited - CEO of Global Land Based & Chief Transformation Officer [35] -------------------------------------------------------------------------------- No, Trevor. I think that sums it up. It's trending in a positive direction. -------------------------------------------------------------------------------- Desmond Tsao, Goldman Sachs Group, Inc., Research Division - Associate [36] -------------------------------------------------------------------------------- Okay. Great. That's very clear. And then maybe just a question around digital, Slide 28. It's a very interesting one. Perhaps if you can flesh that out a bit more. Maybe talk to anything you can on the vertical axis. And I guess, if there's any sort of differences across casual and casino games? And then whether or not this curve, I guess, has sort of shifted over time. -------------------------------------------------------------------------------- Trevor J. Croker, Aristocrat Leisure Limited - CEO, MD & Director [37] -------------------------------------------------------------------------------- Yes. Thanks, Desmond. I think this is -- it's an illustrative piece of work, and I think Rohan Gallagher has been communicating this with the market through the last 18 months. He's probably best just to give you the side of this. Rohan? -------------------------------------------------------------------------------- Rohan Gallagher, Aristocrat Leisure Limited - General Manager of IR & Treasury [38] -------------------------------------------------------------------------------- Thanks, Trevor, and good morning, everybody. Essentially, this is really about the investment in user acquisition to demonstrate long-term growth. That user acquisition investment is dynamic, and it's really dedicated towards the key performance indicators to ensure that the lifetime value of each game delivers a great return for shareholders. -------------------------------------------------------------------------------- Operator [39] -------------------------------------------------------------------------------- Your next question comes from Anthony Longo with CLSA. -------------------------------------------------------------------------------- Anthony Longo, CLSA Limited, Research Division - Research Analyst [40] -------------------------------------------------------------------------------- Just a quick one on digital. So just looking at, I guess, the interaction between DAU and monetization. So I do appreciate, in the first half '20, we did see a compression of that 10% in the DAU base, and then we did see that again across the balance of the year. Look, I do appreciate the legacy gains and the things in runoff, but how should we ultimately be thinking about that DAU base going forward? Is there still much to run on that front before you get that appropriate DAU base to monetize off? Or is there still some leakage that still has to happen? -------------------------------------------------------------------------------- Trevor J. Croker, Aristocrat Leisure Limited - CEO, MD & Director [41] -------------------------------------------------------------------------------- Yes. Thanks, Anthony. I appreciate the clarifying question. Certainly, from where we're going at the moment, you have seen a decline over the last couple of periods in DAU in total, and that's been against our deliberate strategy of monetization, which is to find investable apps and continue to do that. We are -- we have done that this quarter. We have stabilized the decline in casual -- or, sorry, (inaudible) as we mentioned earlier. I think what you'll see is you'll see growth from new products, so things like EverMerge. You've seen dynamic growth from RAID. You'll see growth from EverMerge, from Undersea Tripeaks to a lesser extent. And then the new portfolio of games that are coming through will also drive DAU growth, but it's really going to be driven by the content -- new content coming through as older games become more into profit as opposed to investable games from a DAU point of view. -------------------------------------------------------------------------------- Anthony Longo, CLSA Limited, Research Division - Research Analyst [42] -------------------------------------------------------------------------------- That's great. Understood. In terms of -- so I just wanted to get a sense as to that slide where you essentially carve up the bookings of games. So it looks like Cooking Craze has gone back a fair way year-on-year. Just in the other games, when you back out the number that represents about $240 million, I just wanted to get a sense as to how EverMerge and Undersea Solitaire are contributing to that and then also how those annualized run rates are looking, too, at the current stage. -------------------------------------------------------------------------------- Trevor J. Croker, Aristocrat Leisure Limited - CEO, MD & Director [43] -------------------------------------------------------------------------------- Yes. Okay. Good question. So realistically -- and I'll make a couple of comments, and then Mike, you might want to just step it up from there. Really, this is where some games are becoming legacy games. They're actually starting to become uninvestable either because of the CPIs or because of the LTVs on those games. They run into -- they then become what we call legacy or they become part of their profit opportunity. If you look at what's happened from the new games, things like EverMerge, it's still very early, but the indications are quite positive. And if you think about where EverMerge is competing, it's in the Merge segment, which was really created by the Zynga, Gram Games business. It's circa about $250 million, $300 million per annum, and we think we can take a meaningful share of that and actually grow that segment going forward. Tripeaks Solitaire is in a more congested segment, and it's nowhere near as -- it's actually larger, but the growth rates aren't there. So it won't be the same size as EverMerge. It will be smaller, just the size of -- the amount of competitive games in that genre and also the type of game that it is. So EverMerge is showing good early signs, and we continue to see ability to invest in it. And, Mike, you might just want to talk about how you feel about the pipeline of those games. -------------------------------------------------------------------------------- Michael Lang, Aristocrat Leisure Limited - CEO of Digital [44] -------------------------------------------------------------------------------- Yes. I think the one thing I'd add on EverMerge is it is the best launch that Big Fish has had in over 3 years. And I think it's a great signal of the work that the team has done there to kind of restructure and focus its effort on new product and -- with this first game being a great first step of that. And our hope is for more to come as we're able to find ways to develop new products in the casual segment that are not only comparable to what you see out in the marketplace but starting to mash up various genres. That's where a lot of the success in the casual space seems to happen. And so on that particular area, that's where I'd focus it. And then in regards to solitaire, I think Trevor says it right. I mean it's a competitive market out there. Some games work right away. Some games, we have to keep tweaking and improving upon them to see where they're at. And I think solitaire is one of those where it needs additional work to figure out how we can really differentiate within that segment. But that's really what the strategy is, to get more opportunity to get the games out there in the pipeline to fund success. -------------------------------------------------------------------------------- Trevor J. Croker, Aristocrat Leisure Limited - CEO, MD & Director [45] -------------------------------------------------------------------------------- So maybe one commentary, maybe one comment on that slide is just the size of the digital business now. It's over AUD 2 billion in revenue, 30% margin. It is a very strong and a very comparable part of our business now and complements our strategy around diversification. -------------------------------------------------------------------------------- Anthony Longo, CLSA Limited, Research Division - Research Analyst [46] -------------------------------------------------------------------------------- Yes. Absolutely. Look, congratulations on the results. I've got a few more questions, which I'll take off-line, but I'll let a few others have a go. -------------------------------------------------------------------------------- Operator [47] -------------------------------------------------------------------------------- Your next question comes from David Fabris with Macquarie. -------------------------------------------------------------------------------- David Fabris, Macquarie Research - Research Analyst [48] -------------------------------------------------------------------------------- Look, I've got a question for Julie, and then I have a follow-up one for Trevor. Can you help me understand the thought process around the liquidity position? Is there a need to hold so much cash given the improving outlook, which is coming at that cost given the drawn facilities? I mean if we don't see M&A near term, could you possibly repay the Term Loan B facility and potentially arrange more attractive finance on an M&A deal? -------------------------------------------------------------------------------- Julie Cameron-Doe, Aristocrat Leisure Limited - CFO [49] -------------------------------------------------------------------------------- Thanks, David. Yes, it's a very good question. We're pretty pleased with what we've been able to do with our liquidity in closing the year with almost $2 billion in available liquidity. It's a very strong position to be in. And certainly, when we came into this situation sort of 10 months ago, we really were in a period of high uncertainty and not really clear what opportunities would be out there from a market perspective to raise liquidity. So we were -- we've been focusing on putting ourselves in the best possible position to come out of this. We know that we entered the position strong from a fundamentals perspective with a strong portfolio and a strong balance sheet, and we absolutely want to preserve and enhance that, if we could. So that's why we took the actions we did to, to raise the debt that we did at the time. And then as you'll recall, we identified what our cash burn would be on a worst-case basis, and we've been able to really improve on that as we've gone through the second half. So we see the debt that we took on as a kind of form of insurance given the uncertainty. And if you think about what's going on currently, as we're heading into winter in North America, that uncertainty isn't over. So we're comfortable with the optionality that having such a strong liquidity position gives us. In terms of the flexibility to pay down, certainly, on a long-term basis, we wouldn't expect to have a balance sheet with this level of liquidity and gross debt. But in terms of the paydown with the TLB, we'll absolutely have the possibility to restructure and change that as we contemplate potential M&A in the future. -------------------------------------------------------------------------------- David Fabris, Macquarie Research - Research Analyst [50] -------------------------------------------------------------------------------- Yes. Okay. So there's no intent to reduce that now, I guess, is the point you're making. -------------------------------------------------------------------------------- Julie Cameron-Doe, Aristocrat Leisure Limited - CFO [51] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- David Fabris, Macquarie Research - Research Analyst [52] -------------------------------------------------------------------------------- And then just one for Trevor. I mean just looking at some of your comments around expanding into adjacencies, is this more a land-based comment or digital as well? And can you help us understand where you see these opportunities? Is there anything close to commercialization within these adjacencies? -------------------------------------------------------------------------------- Trevor J. Croker, Aristocrat Leisure Limited - CEO, MD & Director [53] -------------------------------------------------------------------------------- Yes. Thanks, David. It's actually -- there's 2 lenders to this. First of all, there is our current businesses in gaming and digital where we both -- we're comfortable with our current position. But as you know, we've made some talent plays and some studio plays in the digital business in the last 12 months. It's across both. We also see opportunities in the land -- or sorry, the gaming business. And there are adjacencies in the gaming business that we want to continue to focus on. There's adjacencies that we can enter naturally through normal product and access, which we'll do. There are also other areas where we can build on our organic growth and accelerate that by doing good and smart M&A. And we'll continue to focus on where is the right price and what's the opportunity. And it's also really about how we listen to our customers. Our customers are informing our views on this at the moment because some of the relationships that they have with their customers has changed, and they're seeking different solutions. So I actually see good opportunity in our land-based business. I see good opportunity here in our digital business. And I also see good opportunity for other expansions outside of that, which we've referred to in the past, with the natural expansions in things like RNG with online slots so we know our content gives very good content. So it becomes an opportunity for us longer term. -------------------------------------------------------------------------------- David Fabris, Macquarie Research - Research Analyst [54] -------------------------------------------------------------------------------- Got you. But in the next 12 months, is there anything new that's going to commercialize? Or is it just wait and see? -------------------------------------------------------------------------------- Trevor J. Croker, Aristocrat Leisure Limited - CEO, MD & Director [55] -------------------------------------------------------------------------------- I won't go into it, but I can say that we have been very proactive during this period. And we've always been proactive in looking at what the options are, and we'll keep you updated on that. -------------------------------------------------------------------------------- Operator [56] -------------------------------------------------------------------------------- Your next question comes from Sacha Krien with Evans & Partners. -------------------------------------------------------------------------------- Sacha Krien, Evans & Partners Pty. Ltd., Research Division - Executive Director of Gaming & Leisure [57] -------------------------------------------------------------------------------- Just a couple of questions. First of all, on the cost base for Julie, and then I've got a question for Mike on the digital business. Just wondering, first of all, did you achieve $100 million of cost out in the second half of '20 that you guys had originally flagged? So I just noted you did seem to bring staff back on earlier in the U.S. in particular. -------------------------------------------------------------------------------- Julie Cameron-Doe, Aristocrat Leisure Limited - CFO [58] -------------------------------------------------------------------------------- Yes. Thanks for the question. Yes, we identified $100 million of savings, as you know, when we went into this in response to the COVID situation. As we went through the second half and we could see the reopening start to happen in -- across land-based, we started to return people to work. Particularly, we really wanted to be there to support our customers. And as our customers were reopening, we were -- we would be the manufacturer that was available to actually get out there and help them reset their stores and get ready for opening. So very important to us to do that. So we chose to reinvest. While we identified the $100 million, those savings were largely temporary in nature. If you think about it, there would have been variable compensation costs in that. There would have been the variable cost in terms of furloughed employees, the pay cuts that we had announced. There were some redundancies. So really, a big chunk of those costs that we identified were temporary in nature. So we did choose to reinvest a portion of those through the year. We talk about reinvesting in UA and product development and in customer service, and I kind of talked about wanting to be there for our customers and bringing people back. So absolutely, we invested there, and we see that as really our point of differentiation and why our customers have come to us. It'll help us gain share and grow the business sustainably over the long term. -------------------------------------------------------------------------------- Sacha Krien, Evans & Partners Pty. Ltd., Research Division - Executive Director of Gaming & Leisure [59] -------------------------------------------------------------------------------- Okay. And when I look at the -- some of the -- so, I guess, maybe you call them one-off costs that were above the line, sort of the bad debt provisioning, the write-down of inventory. It looks like there's been some abnormal legal costs during the period. It looks like that adds up to about $120 million. I was just struggling -- just wondering whether you -- whether we should be assuming that you're going to get a lot of -- much cost growth coming through in FY '21 when you back out that number. And you've also -- as you said, you've also had seen redundancies during the period. I mean I understand you have an underlying investment going on, but that's going to have to be pretty significant in order to grow the OpEx base on FY '20 at this point, isn't it? -------------------------------------------------------------------------------- Julie Cameron-Doe, Aristocrat Leisure Limited - CFO [60] -------------------------------------------------------------------------------- So if you -- yes. I'll sort of start at the beginning in terms of the above -- below the line. We take a principal approach. And really, the significant items that we've identified in the period have to be -- they have to be truly nonrecurring and [not cause] the business to go below the line. That's going to be material in size, and we look at how things like this has been treated previously. So you'll see there's 5 different items that we treat as significant. We called out JobKeeper and the other stimulus because we wanted to make sure that the result was clean from that perspective. And while we've highlighted -- while we benefited from it, we put it out separately. We've got the onetime deferred tax asset recognition, which was significant in the period. And then we've got the contingent consideration for Plarium, the onerous lease to Big Fish following the restructuring that took place at the end of the fiscal year there and then the (inaudible) and settlement costs, which will probably flow back in May. So those are the really significant items. And then, yes, if you think about what's gone through in the normal course of business, you've got the bad debt provision, you've got some legal costs, you've got the inventory provision. And you'll see also, and I think it's in Note 1.3 of the accounts, you'll see what's called postemployment benefit other than superannuation, which actually means termination costs. So you will see that there is an increase there as well. In all of those items, it's kind of tough to make the call of how much is normal course of business and how much is related to what we've been through this year. Clearly, an element of this related to what we've been through this year. But in all of those cases, we have less costs in the normal course of business, and they do tend to fluctuate period to period, which is why they've gone through the numbers. So we like to think -- as we look at the results this year, while we're disappointed in it from a quantity perspective because, obviously, the number is well below where we've been in the past, we see real quality in the result we've been able to deliver because we've gone in there with the principle of preserving our strong fundamentals, preserving our balance sheet and optionality to invest in future growth. And we've been able to get through this quite strong liquidity position at the end of the period and continuing to have a strong balance sheet at the end of the period as well. -------------------------------------------------------------------------------- Sacha Krien, Evans & Partners Pty. Ltd., Research Division - Executive Director of Gaming & Leisure [61] -------------------------------------------------------------------------------- Okay. Maybe we can discuss that a little bit more off-line. Just a quick question for Mike. I'm just wondering, Mike, if you can talk a little bit about the changes the digital team has made or is making ahead of Apple's privacy changes next year and whether you're at all concerned about any impact on UA and bookings from those changes. -------------------------------------------------------------------------------- Michael Lang, Aristocrat Leisure Limited - CEO of Digital [62] -------------------------------------------------------------------------------- Sure. Nice to meet you, Sacha. So listen, it's still very early days in regards to the IDFA changes and what's happening there. We have our marketing brain trust across the organization looking at the issue, talking to Apple, talking to Google to try to figure this out. I think the other thing you have to keep in mind is there's a lot of interested parties within the marketing ecosystem that are also trying to figure it out, in particular Facebook and Google. And many of the things that's going on with them will ultimately be a way to solve the various issues that may come out here. Clearly, we have to acknowledge there could be risk here. However, here's why I'm more comfortable. First of all, it's clear to me that the scale and synergies that we have across our entire portfolio kind of puts us in a good position to manage that ever-changing situation, which typically happens in many media industries, where you see certain things happen. You have to kind of adapt to it. Much better to have the scale and scope that we have related to that. Second, and this is happening even before IDFA, is there's going to be continued diversification in marketing channels. The Plarium team has had tremendous success with YouTube as a vehicle. There's been success in other vehicles like Snapchat. Who knows what other vehicles will come. So as you go forward, you will find different ways of diversifying and being successful. So I feel very good, although I have to -- we all, like any publisher, have to look at it and say there could be short-term risk. I think the final thing for us, too, is kind of a consequence of this is there could be, over time, seeing more and more consolidation of smaller players in the business because it just becomes tougher and tougher to compete with these big changes, which, a, is an opportunity for us for more share; but b, also for M&A down the road. So all in all, still a lot to learn, but I feel good about our long-term strategic position to respond and adapt based on what happens. -------------------------------------------------------------------------------- Operator [63] -------------------------------------------------------------------------------- That is all the time we have for Q&A today. I will hand back for closing remarks. -------------------------------------------------------------------------------- Trevor J. Croker, Aristocrat Leisure Limited - CEO, MD & Director [64] -------------------------------------------------------------------------------- Thank you, and thank you for your interest in Aristocrat. We very much appreciate the opportunity to talk to you today. I think Julie referenced the fact that this is a quality result. I think quality, whilst it's difficult with the results themselves, the quality is very strong, and the fundamentals are actually stronger. When we came into the COVID period, we saw ourselves in a strong position from a strategic point of view, from an operating point of view and a financial point of view. Through this period, we've taken time to address each one of those, and I believe we've come out of this in a stronger position. We're far more confident about our ability to continue to grow the organization and continue to be a growth stock -- to maintain the gross stock status because we're looking at the sustainable, long-term profitability. We generated over $0.5 billion -- sorry, $1 billion of cash flow, which allows us to continue to reinvest and self-fund our growth and to add capacity that we got from the financial structures to further growth, whether it's inorganic or organic. So with that, I would like to thank you for your interest in Aristocrat on behalf of the Board and the team, and we look forward to keeping you up-to-date, and stay well and stay safe. Thank you very much. -------------------------------------------------------------------------------- Operator [65] -------------------------------------------------------------------------------- That does conclude our conference for today. Thank you for participating. You may now disconnect.