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Edited Transcript of LO24.DE earnings conference call or presentation 14-Aug-19 7:30am GMT

Q2 2019 Lotto24 AG Earnings Call (German)

Hamburg Sep 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Lotto24 AG earnings conference call or presentation Wednesday, August 14, 2019 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jonas Mattsson

ZEAL Network SE - CFO & Member of Executive Board

* Petra Von Strombeck

Lotto24 AG - CEO & Chairman of Executive Board

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Conference Call Participants

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* Patrick Schmidt

Warburg Research GmbH - Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the half yearly financial report 2019 of ZEAL and Lotto24. (Operator Instructions) Let me now turn the floor over to Jonas Mattsson.

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Jonas Mattsson, ZEAL Network SE - CFO & Member of Executive Board [2]

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Thank you very much, and good morning and welcome to this first joint conference call of ZEAL and Lotto24 regarding half year financial report 2019. My name is Jonas Mattsson, I'm the CFO of ZEAL, and I'm together with Petra Von Strombeck, CEO of Lotto24. Thank you very much for your interest and for joining this call.

Following the successful acquisition and full consolidation of Lotto24 since May 14, we have decided to present the results together today but also in the future. We hope this will be well received since the business and markets we serve are so integral to each other.

I trust all of you have access to the presentation, which should have been distributed to you. If not, it's also available on the website in the Investor Relations section.

On Slide 3, you will find the agenda for today's presentation highlighting the main areas Petra and I will cover before giving you the opportunity to ask questions. So we start off with ZEAL highlights, the presentation of the consolidated figures and the first overview of the achievements of the Lotto24 integration. I will then pass over to Petra who will report on the highlights of the numbers of Lotto24. This will be followed by a brief guidance for 2019 for the ZEAL Group. Last but not least, we will summarize the key takeaways.

Let's start by looking at our joint important events in the first half year that you will find on Slide 5. We are very pleased that we successfully completed the acquisition of Lotto24 AG on the 14th of May 2019 and thus established the ZEAL Group as the leading online provider of state-run lotteries in Germany. Over 93% of Lotto24 shareholders have tendered their shares to us. We would like to thank you very much for this trust and do everything in our power to not disappoint you.

The first success of cost synergies we promised are already evident in the early phase of this combination. I will come back to this in more details later. But one milestone is that we already reduced the number of employees of the combined company from originally 350 to 271 in the first day.

Through efficient cost control and our group-wide restructuring program we kicked off already last year -- last quarter, we lowered our total cost base by EUR 10.5 million despite adding EUR 3.9 million from Lotto24, which now are fully consolidated into the ZEAL Group. Thanks to these cost savings, we almost doubled the EBITDA. And we have recently provided a guidance for the business year 2019 that I will elaborate on later.

The next slide shows our financial performance in more detail. So let's go to Slide 6. As mentioned, ZEAL has fully consolidated Lotto24 since the acquisition date, which was the 14th of May 2019. Billings and total operating performance increased by 26% to almost EUR 180 million and by 6% to just below EUR 80 million in the first half of this year. This was mainly driven by the positive contribution from Lotto24, partly offset by the negative effects from the closure of Lotto Network and Ventura24 in November and December last year. On a like-for-like basis, this represents an increase of 2%. But let me briefly remind you that the closure of the Spanish brokerage business had no impact on EBIT as this business was only breakeven in the past.

Development of jackpots for our individual product has [dipped] significantly in the first half, especially EuroJackpot suffered in comparison to 2018 with only 1 jackpot at EUR 90 million versus 8 last year.

As I mentioned, the total cost base was successfully reduced to EUR 10.5 million -- reduced by EUR 10.5 million despite absorbing the EUR 3.9 million from Lotto24.

Due to significantly lower head count, personnel expenses decreased by 27% to just about EUR 11 million.

Direct costs of operations fell by 21% to EUR 17.7 million primarily driven by lower hedging costs. The reduction in other costs of operations by 28% was mainly due to a decrease in legal and advisory, outsourced and rental costs following the adoption of IFRS 16, which, to be fair, is more of an accounting change.

Thanks to the increased revenues combined with the reduced cost base, EBITDA almost doubled to EUR 31 million.

Amortization and depreciation rose to EUR 2.5 million mainly due to the capitalization of intangible assets after the acquisition of Lotto24 and the application of IFRS 16. We think that the profitability of the new ZEAL Group is better reflection in EBITDA, and we will therefore concentrate on this key figure in the future. But clearly, we will also provide information on the other lines in the income statement.

Our EBIT rose to 30% to -- rose by 30% to 21.5 -- EUR 21.4 million despite the extraordinary expense of EUR 7.4 million. The exceptional items incurred mainly in connection with the Lotto24 transaction, which came about EUR 7.9 million, but were reduced by the removal of a provision of EUR 0.5 million in connection with the closure of the Spanish brokerage business. After restructuring costs of EUR 3.8 million already incurred in 2018, EUR 11.7 million of the total estimated EUR 15 million to EUR 20 million have already been expensed at the end of June 2019.

Let's now move to Slide 7. We further increased our net cash position by EUR 21 million or 23% to EUR 111 million. But please keep in mind that ZEAL has reported a continued liability since -- already in 2017 due to the uncertainty as well as to VATs due for certain services of the myLotto sub-group. This stands now at EUR 76 million.

With marketing expense of EUR 11 million, the ZEAL Group gained 377,000 new registered customers. But due to weak jackpot environment, monthly active users of Tipp24 alone dropped as expected by 8% to 370,000. However, this effect was offset by the increase in average billing per user of Tipp24 by 9% to EUR 61.

One last remark about the KPIs. Of course, both companies will align and report the same KPIs in the annual report 2019. We're both operating the same business model.

Let's move to Slide 8. I would like to give you an update of the integration process that we have already achieved and the milestones ahead. First of all, we have clearly defined the future internal organizational structure. As of June 30, we already reduced the combined head count from 350 to 271 and we're confident to reach our target of around 200 employees by mid-2020. Our new colleagues from Lotto24 have already moved into the ZEAL office, so we're now sitting together, which allows the teams to work more efficiently together. And as I said, our internal cost restructuring program of EUR 4 million in annual savings is reflected in the current cost base.

At 30th of June, as I said, we have already incurred EUR 11.7 million of the restructuring cost of the estimated EUR 15 million to EUR 20 million. And we can further confirm that the planned annual cost synergies of at least EUR 57 million, of which 80% are to be realized after the end the first year and 100% at the end of the second year following the completion of Lotto24 transaction. Even though around 60% of the savings as well as the expected dissynergies will only take effect in the course of the business model change, the planned reduction in personal expenses and other operating expenses within the combined company account for around 40% of the expected total cost synergies. The first successes are already reflected in these numbers.

Last but not least, both business model change and the relocation of ZEAL's corporate seat back to Germany are planned for the end of October this year.

Before I hand over to Petra, I would like to briefly touch on 2 other topics on Slide 9. The Brexit, as already mentioned, our relocation is planned to happen in October, which means before a potential Brexit. So the Brexit will not have any material impact on the ZEAL Group.

German VAT. Since my last call with you in May, there has been no development in the court case. Unfortunately, I can't give you any new information on the time line. The court is short of staff and apparently busy with other proceedings. But we remain confident that the ultimate outcome will be favorable for the ZEAL Group.

Perhaps you wanted more information about our international business on this slide, which remains of interest to us. But here, we have learned from our experience and improved our internal business approach accordingly. In the ZEAL investment division, we have now made 4 start-up investments in external companies, which we're closely monitoring and supporting where necessary while continuing to pursue additional investment opportunities. Our objective is to learn from these companies, generate profits and integrate exciting business ideas into the ZEAL Group. As part of our activities to internationalize secondary lottery, we're now focused entirely on assessing the viability of the U.K. business before pursuing further international markets where permits are available.

At Lottovate, we continue to test promising ideas and opportunities to become active in the lottery sector as an operator ourselves like with UNICEF. We will let you know whenever exciting developments emerge here.

But I would like to be very clear: the #1 focus for the company is to make German integration and the business successful. This is where we, in the short and midterm can create most value for you as a shareholder, and that's where the focus should be.

With these words, I would like to hand over to Petra.

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Petra Von Strombeck, Lotto24 AG - CEO & Chairman of Executive Board [3]

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Thank you, Jonas. Good morning, everybody. My name is Petra Von Strombeck, CEO of Lotto24, and I would also like to welcome our participants and thank you for your interest.

So let's start on Slide 9 with Lotto24 stand-alone and an overview of the important facts of the first half of 2019. Just to avoid any misunderstanding, my part reflects the full first 6 months of Lotto24 while Jonas' part of the ZEAL Group only includes the last 6 weeks of Lotto24 since the completion date of the takeover.

First of all, we obviously became a member of the ZEAL Group and are now fully consolidated as of May 14. Due to the comparatively weak jackpot development, billings and revenues were below previous year for the first time, which was expected. Nevertheless, we have been able to double both EBITDA and EBIT.

To our great regret, Magnus von Zitzewitz, member of the Executive Board and my long-term colleague, has left the company by mutual agreement and on amicable terms as of the 30th of June. But I'm very happy that Jonas Mattsson joined the Board who is sitting here with me today and took the additional responsibility as CFO of Lotto24 as of 1st July.

On the regulatory side, there are points of views that Ministry of Lower Saxony for the first time prohibited a large internationally active payment provider from participating in payment transaction in connection with nonlocally licensed gambling in Germany. They are putting pressure on a number of payment companies and the majority of these companies have already reacted and stopped payment. Also the members of the Prepaid Association expressed their support for waiving participation in payments in connection with gambling in the secondary lottery sector. So the sea gets rougher for secondary lotteries, and I'm happy that Tipp24 is about to change the business model.

Moving to Slide 12, I would like to show you our business development in more detail. Due to the exceptionally strong EuroJackpot trend in the first half of 2018 with a total of 8 jackpots of EUR 90 million, this year we only had one, we were not able to achieve year-on-year growth for the first time. So in the first 6 months, our billings and revenues decreased by 2.5% to EUR 157 million and 7.4% to EUR 18 million.

Due to the jackpot-related lower share of Lotto collapse, our gross margin of 11.5% fell just short of the prior year figure of 12.1%.

Mainly due to the year-on-year increase in head count, personnel expenses rose to EUR 4.4 million. As of 30th of June, Lotto24 employed 101 people, 41% of our employees in marketing and another 41% in the IT department.

Other operating expenses decreased to EUR 10.5 million.

Due to the comparatively weak jackpot trend in the first 6 months, marketing expenses decreased dramatically to EUR 5.4 million.

And as they develop more or less in proportion with billings, direct cost of operations fell to EUR 1.3 million or 0.9% of billings. Indirect operating expenses increased to EUR 3.8 million. As we strengthened our internal IT department with freelancers due to the lack of skilled staff, there was a strong rise in the use of external IT management and consultancy services to [EUR 1.3]. At the same time, there was an increase in legal and consulting fees in particular to EUR 1 million, of which consultancy fees of EUR 632,000 were incurred in connection with the takeover.

Consistent with the ZEAL Group, we report EBITDA for the first time. Due in particular to the lower marketing expenses, EBITDA and EBIT more than doubled to EUR 2.8 million and EUR 1.5 million, respectively. Before one-off expenses of EUR 570,000, EBIT even reached EUR 2.1 million and thus tripled compared to the prior year figure. Nevertheless, net profit of EUR 1.6 million was down on the previous year due to a positive technical tax effect in the first 6 months.

Moving to Slide 13. You would see that our cash position at the end of June amounted to EUR 10 million. As you know, for reasons of efficiency, we manage our marketing activities according to the jackpot situation.

Regarding the comparatively weak jackpot trend, we gained 190,000 new customers in the first 6 months as a whole with a CPL of EUR 28.66.

Last but not least, I would like to confirm our outlook for 2019 Lotto24 on a stand-alone basis on Slide 14. In 2019, we still plan to extend our market leadership as an online provider of state-licensed lotteries. Subject to any guidance adjustment deemed necessary in the course of the year due to the takeover, we expect stable figures for billings, revenues and gross margin in comparison to the previous year due to exceptionally strong jackpot trends in 2018. We also anticipate fall in the number of new customers and rise in CPL. Depending on external conditions, especially the jackpot trend and marketing investments to attract new customers, our EBIT will continue to be well above the break-even point without considering any transaction costs incurred during the takeover.

I hope this short summary gave you a good overview, and I would like to hand back to Jonas.

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Jonas Mattsson, ZEAL Network SE - CFO & Member of Executive Board [4]

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Thank you very much, Petra. We are now on Slide 16. I would like -- I would, of course, like to add a consolidated guidance for 2019 for the entire ZEAL Group. As described in our last published reports, in view of this special situation with the Lotto24 transaction, we did not provide any financial guidance for this year until just 2 days ago together with the ad hoc announcements.

Let me start by saying we are unfortunately in the secondary lottery held by myLotto, customer won EUR 26.3 million just a few days ago. The self-retention specified in myLotto's hedging instrument will be utilized, part of which will be covered by those instruments. Total operating performance and EBITDA in the current fiscal year will therefore be impacted by EUR 21.5 million. Possible further jackpot winning this year will have no negative impact on EBITDA due to the full utilization of our self-retention.

In addition to this future jackpot development, the exact timing of the planned business model change is a decisive importance for the ZEAL Group forecast. The more profitable secondary lottery business will be converted to a more stable brokerage business from this date. ZEAL expects with -- negative effects on the revenues and profitability in the fourth quarter of 2019.

Based on the expectations of a business model change and the effect of customer base cannot be conclusively assessed from today's perspective but including the big prize payout, ZEAL anticipates total operating performance of 2019 financial year significantly below previous year, which was at EUR 160 million and EBITDA between [EUR 18 million and EUR 21 million]. Last year, we had EUR 48 million.

The dividend policy of 2019 remains under review.

You've heard a lot today and probably you won't remember all of it. Nevertheless, we would like to briefly summarize on Slide 7 (sic) [Slide 17] what you have just heard.

Next to our stable business development, we are in a good position to achieve our goals: we defined our internal organizational structure, we are on track to achieve our announced cost synergies, the majority of our planned implementation cost have already been spent and we almost doubled the EBITDA, thanks to the lower cost base. By both of the business model change and the relocation back to Germany are in preparation and planned for October 2019.

Even though we still have a lot of work to do, we are well on the way of achieving unification with Lotto24 and the transformation of our German core business into online lottery brokerage as planned. We are convinced that this combination of the 2 companies will provide the best path to sustainable growth for the ZEAL Group and will lead to attainable added value for our customers, employees and shareholders.

With this, I would like to conclude and open up the questions from participants. Thank you very much.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And first up is Patrick Schmidt from Warburg Research.

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Patrick Schmidt, Warburg Research GmbH - Analyst [2]

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And couple of questions from my side. In terms of your cash position, the difference and to your stated EUR 130 million on your balance sheet and the reported net cash position of EUR 110 million on Slide 7 of your presentation. I assume customer deposits and hedging reserves or is there anything else we should have to consider?

And next question, just moving forward then. I mean you just announced a large price payout for Q3, so I assume Q3 will be loss-making as well as Q4 owing to the change of business model obviously. So where do you see your net cash position at the end of the year? And what kind of potential do you see for additional free-up cash? And what kind of cash reserve do you associate with the potential VAT payment at the end of the year? That would be great to know.

And lastly, maybe what is included in your financial asset position and is there room for some cash realization, or how do you look at this position?

And then maybe 2 small follow-up questions. IFRS 16 effects, could you tell us the figure?

And on your EBITDA guidance, EUR 18 million till EUR 21 million, is that before or after exceptional items because now your EBITDA is reported before exceptional items, but I guess these EUR 18 million to EUR 21 million are reported, just to clarify that.

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Jonas Mattsson, ZEAL Network SE - CFO & Member of Executive Board [3]

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Thank you very much, Patrick. I will see if I'm able to respond to all of the questions, but let's start from the bottom. You talked about EBITDA. Yes, this is before the exceptional items and before the amortization of -- and depreciation. We think this is a better measurement in order to compare year-over-year because we didn't have this amortization last year. So this is a better reflection. But just to be clear, this is before exceptional costs.

The cost for IFRS 16 or the -- is EUR 0.8 million, so EUR 800,000, which is the savings over the move from the P&L to the balance sheet.

In terms of the cash position, you are absolutely right. We have to take into account the hedging reserve of EUR 21.5 million. We are now talking as at date of 30th of June. And you have also the customer liability and all other liability, that's how it is coming to the amount of EUR 111 million. Normally, you would assume that you could release the hedging reserve, but that will be fully utilized in August. So that's where we are at this point in time.

I cannot now give you any guidance on the net cash, we just give you on the EBITDA level.

You also talked about profit and for the Q3 and Q4. We only see a negative impact on the Q4. In the Q3, we will have mostly the secondary lottery or lottery betting and so this will be a Q4 effect only.

Freeing up cash. Of course, we're freeing up cash where we can, but I think the hedging reserve has been the biggest impact, which will now be utilized in August.

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Patrick Schmidt, Warburg Research GmbH - Analyst [4]

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Okay. Just quickly follow-up on Q3. I assume it will be negative owing to your price payout -- owing to the business model change. Is that correct?

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Jonas Mattsson, ZEAL Network SE - CFO & Member of Executive Board [5]

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That's right. So the business model changes happened before it, but the EUR 21.5 million hit will come into the Q3. You're so absolutely right on that point.

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Patrick Schmidt, Warburg Research GmbH - Analyst [6]

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Okay. And the free-up potential from the hedging reserve, that will happen at the end of the year when you are kind of restructuring your -- or getting rid of your hedging structure from the off-balance sheet bond, right?

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Jonas Mattsson, ZEAL Network SE - CFO & Member of Executive Board [7]

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Yes and no. So we will free up every cash we can do, especially when we are now operating a much better business model. But the hedging reserve that we have talked about in the past will be fully utilized in August when we pay out to the customers. The customer won EUR 26 million. We will use the EUR 21.5 million in hedging reserve. So there is, after that point in time, no -- nothing more to collect.

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Operator [8]

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So the next question comes from [Andreas Massik, Tech Trade 93].

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Unidentified Analyst, [9]

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I have 3 questions concerning the dividend policy and also what concerns the stock exchange quotation at the moment. You are telling us that you are reviewing the dividend policy since many months. So what can we expect as tenancy? Will you more increase or decrease it coming from EUR 1?

Furthermore, could you please tell us your -- maybe already existing plan or conception to structure the dividend policy in the future maybe in percent of the net profit?

And last but not least, would you comment that the stock exchange quotation is slowest in the history of ZEAL? And what is your intention or maybe also plan to promote it in the future.

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Jonas Mattsson, ZEAL Network SE - CFO & Member of Executive Board [10]

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Thank you very much for these questions. As I stated, the dividend policy is under review, so therefore, we cannot comment on any specific guidelines for this one. It's under review and the company will come back to the investors in due course, which will happen this year with our future policy.

In regarding to stock exchange, of course, management should not comment on the stock price, but it's clearly that management are not satisfied with developments so far, and we will do everything we can in order to increase the shareholder value. The first priority is to make the integration with Lotto24, the transformation successful. And that will lead to strong numbers and also having even stronger communication when you explain how the business will develop further. That will help and support a better understanding, and hopefully, that will be taken into account by the market.

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Unidentified Analyst, [11]

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Yes. Let me ask, you don't plan any structure of the dividend policy in the future may be based on net profit or what else as key figures?

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Jonas Mattsson, ZEAL Network SE - CFO & Member of Executive Board [12]

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So what I just said was that we are reviewing our dividend policy. So therefore, I can't comment on any potential structures, how we will do with this in the future.

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Unidentified Analyst, [13]

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When can we expect your statement concerning this? Your final statement?

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Jonas Mattsson, ZEAL Network SE - CFO & Member of Executive Board [14]

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So we are planning to come out with the market before the end of the year with our dividend policy.

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Operator [15]

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At the moment, there seem to be no further questions. (Operator Instructions) And a follow-up question comes from Patrick Schmidt from Warburg Research.

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Patrick Schmidt, Warburg Research GmbH - Analyst [16]

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Just a quick follow-up. As you said, the EUR 18 million to EUR 29 million -- to EUR 21 million EBITDA for the full year is before special -- exceptional items. What do you plan as exceptional items until the rest of the year?

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Jonas Mattsson, ZEAL Network SE - CFO & Member of Executive Board [17]

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Thank you. So we have assumed or estimated EUR 15 million to EUR 20 million for the full transaction of this integration with Lotto24. Last year, we incurred roughly EUR 4 million. So that means that the full year 2019 will then have somewhere between EUR 11 million and EUR 16 million on exceptional costs. And there could be a small part that is also following in 2020, but the majority will be this year.

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Operator [18]

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And the next question comes from [Heinz Fincken] from [APUS].

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Unidentified Analyst, [19]

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I have one question concerning the migration of the customer base to the Lotto24 system. How will this proceed? How are the customers been asked to migrate to the new -- or other platform? Is this process very complicated or is it just doing a click and everything is done?

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Petra Von Strombeck, Lotto24 AG - CEO & Chairman of Executive Board [20]

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[Mr. Fincken], let me answer your question. Obviously, for data protection reasons, we need the consent of the customer to do the transfer. But what we are currently doing that everybody -- or all ZEAL customers to 24 customers that lock into the Tipp24 platform are shown a page where they give their consent. So we are currently collecting customer by customer even before the business model change take place to make sure that the maximum of customers is already informed, involved and has given their consent so that we can transfer the maximum of billings and revenue to Lotto24.

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Unidentified Analyst, [21]

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What is your experience for the time being?

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Petra Von Strombeck, Lotto24 AG - CEO & Chairman of Executive Board [22]

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It works out very well, and we have almost no refusals. So we are very positive.

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Operator [23]

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(Operator Instructions) There are no further questions.

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Jonas Mattsson, ZEAL Network SE - CFO & Member of Executive Board [24]

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Yes. If there is no further questions, we would like to thank the participants for this call and obviously happy to take further questions if you have send it to our Investor Relations team. And thank you so much for taking the time and the interest in the ZEAL and Lotto24 subgroups. So thank you very much, and have a great day.

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Petra Von Strombeck, Lotto24 AG - CEO & Chairman of Executive Board [25]

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Thank you. Bye.