U.S. Markets closed

Edited Transcript of LO24.DE earnings conference call or presentation 13-Nov-19 9:00am GMT

Q3 2019 Lotto24 AG Earnings Call

Hamburg Dec 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Lotto24 AG earnings conference call or presentation Wednesday, November 13, 2019 at 9:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Jonas Mattsson

ZEAL Network SE - CFO & Member of Executive Board

* Petra Von Strombeck

Lotto24 AG - CEO & Chairman of Executive Board

================================================================================

Conference Call Participants

================================================================================

* Elicia Bravo

Lottoland - Chief Strategy Officer

* James Letten

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, ladies and gentlemen. Welcome to the quarterly statement as of September 30, 2019, of ZEAL Network and Lotto24. (Operators Instructions)

Let me now turn the floor over to Jonas Mattsson.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you very much. Good morning, and welcome to the second joint conference call of ZEAL and Lotto24 regarding the third quarter performance. My name is Jonas Mattsson, CFO of ZEAL, and I'm together with Petra Von Strombeck, CEO of Lotto24. Thank you very much for the interest and for joining this call. I trust that all of you have access to the presentation, which should have been distributed to you, but it's also available on the ZEAL website in the Investor Relations section.

On Slide 2, 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'll start off with the ZEAL highlights, the presentation of the consolidated figures and an overview of the achievements of the Lotto24 integration. Then I will pass over to Petra, who'll report on the highlights, numbers and also guidance on Lotto24. This will be followed by a brief guidance for 2019 of entire ZEAL group. And we will finish off by summarizing the key takeaways.

Let's start by looking at our important events in the first 9 months that you will find on Slide 4. As you know, we are very pleased that we successfully completed the acquisition of Lotto24 on May 14, and established the ZEAL group as the leading German online provider of state-run lotteries. Despite the organization changes, resulting from the takeover and a comparatively weak jackpot environment, ZEAL delivered a solid billings performance in the 9-month period, but the large jackpot win of EUR 26 million in August negatively impacted our EBITDA.

As promised, we realized additional synergies, and I'll come back to this in more detail later. We have reached the next milestone and we have already reduced the number of employees in the combined company from original 350 to 203. Following intensive preparation in recent months, we successfully transformed Tipp24 to German lottery brokers on the 15th of October. And we also relocated the company's registered office on the 25th of October from London to Hamburg.

As you can imagine, this is a major milestone and great importance of the ZEAL in the coming decades. A significance that should not be underestimated, as we have not only made ZEAL less risky and less volatile to fluctuations but also more sustainable as we aimed for and also explained from the very first start of this takeover.

Slide 5 shows our financial performance in more detail. As mentioned, ZEAL has fully consolidated Lotto24 since the acquisition date, which was the 14th of May 2019. Billing increased by 57% to almost EUR 333 million. This was predominantly driven by the positive contribution from Lotto24, partly offset by the negative effect 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 3%, despite this challenging jackpot situation.

Let me briefly remind you that the closure of the Spanish brokerage business had no impact on EBIT as the business was just breakeven in the past.

As you may remember, total operating performance was negatively impacted by the large jackpot payout in August, but please keep in mind, as part of the business model change, we've transferred a secondary lottery of Tipp24 back into German brokerage business, no fluctuations in revenues and other operating income due to jackpot related payouts are now to be expected.

Development objectives for our individual product has differed significantly this year, especially EuroJackpot suffered in comparison to last year, with only 2 jackpots at EUR 90 million versus EUR 9 million last year.

Total cost base was successfully reduced by EUR 11.6 million despite absorbing EUR 11 million from Lotto24. We also invested an additional EUR 2.2 million in marketing for the both brands. Due to significant lower headcount, personnel expenses decreased by 23% to just about EUR 17 million. Direct cost of operations fell by 17% to EUR 26.8 million, primarily driven by lower hedging costs and the reduction of nondeductible VAT. The reduction in other cost of operation by 20% was mainly due to decrease in legal advisory, travel and rental costs following the adoption of IFRS 16, which, to be fair, is more an accounting change and accounts for EUR 0.8 million.

As already mentioned, our EBITDA was negatively impacted by the big jackpot payout and fell by 6% to EUR 28.3 million. As we think that profitability of the new ZEAL group is better reflected in EBITDA, as you may remember from our last call, we'll continue to concentrate on this key figure in the future. Amortization and depreciation rose to EUR 5.4 million, mainly due to capitalization of intangible assets after the acquisition of Lotto24 and the application of IFRS 16. So our EBIT decreased by 56% to EUR 12.9 million, due to the higher amortization and depreciation as well exceptional items of EUR 10 million, mostly related to the Lotto24 transaction.

After restructuring cost of close to EUR 4 million already incurred last year, we have spent approximately EUR 40 million of the total estimated EUR 15 million to EUR 20 million of the expected integration costs.

Let's move on to Slide 6. As you see, we further increased our net cash position to -- by EUR 27 million or 27% to EUR 128 million. But please keep in mind that ZEAL has reported a continued liability since 2017, due to the uncertainty as well as the VATs due for certain services of MyLotto subgroup, which was as of September, estimated to EUR 80 million. With marketing expense of EUR 60 million, we gained 568,000 new registered customers for the group and our partners. We have a small, slight mistake on this slide, but it should be 568,000 new registered customers. With this quarterly statement, we also consolidated Lotto24 customer data for its monthly active users and average billing per user for the first time. So including Lotto24, monthly active users rose by 557,000 to 952,000. Average billing per user remained stable at previous level -- previous year's level at EUR 57.

Let's move on to Slide 7. I would like to give you a further update on the integration process. We have already achieved and the milestones ahead. You may remember that we defined the future internal organization structure, and we are already living it. As early as September 30, we reduced the number of employees from original 350 to 203, and are already very close to our target of around 200 people by mid-2020. The corresponding contract gathering our future cooperation with Lotto24 was signed. And Petra will talk about that in her section.

After intensive preparations, we've turned a secondary lottery business back to brokerage on 15th October. And since that day, Lotto24 now also brokers lottery tickets to the state lottery companies via the domain Tipp24.de and Tipp24.com. And there is another important organization message we would like to share with you. Our planned relocation is done. Since 25th of October, ZEAL is, again, a German company based in Hamburg. With this step, the ZEAL shares received a new German ISIN number, as you can see in the presentation. And as I said, we're well on track regarding our one-off implementation costs. And we can further confirm the planned annual cost synergies of at least EUR 57 million, of which 80% is realized at the end of the first year and 100% at the end of the second year following the completion of Lotto24 transaction, which means May 2021. Around 60% of these savings as well as expected revenue of dissynergies, have started to take effect with the conversion of the German business and had no impact in the first 9 months of this year. But the planned reductions in personal expenses and other operating expenses within combined company, accounting for 40% of the expected cost synergies have already been almost fully implemented and will show further effects in the coming quarters.

Before I hand over to Petra, I would like to briefly touch on 2 other topics, which you know from the past. First of all, let me say a few words about Brexit. As already mentioned, the business model change and the relocation are done. So any kind of Brexit has no effect on the ZEAL group, so we'll not pursue this issue anymore.

Secondly, you hopefully remember that we started to improve our international business approach. As part of the initiative to international and secondary lottery in MyLotto24 have been focused on assessing the profitability of the U.K. business, pursuing further international market where national licenses are available.

During this quarter, meaning last quarter, we determined that secondary lottery in the U.K. will not be able to meet this profitability target. So it was stopped. Also in view of the declining international market potentially, we have, therefore, decided to stop secondary lottery business in general, leading to even more stronger focus on our general business. With these words, I would like to hand over to Petra.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

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

So let's continue on Slide 10, with Lotto24 stand-alone and an overview of what happened in the first 9 months of this year. Just to avoid any misunderstanding, my part reflects the full 9 months of Lotto24, whereas Jonas part of the ZEAL group only includes Lotto24, since the 14th of May, which was the consolidation date.

With double-digit growth for billings and revenues in the third quarter, leading to billings above previous year and revenues slightly below previous year after 9 months, we succeeded in continuing to grow and improve profitability despite the significantly weaker jackpot development and the organizational changes resulting from the takeover. As you know, our general meeting was held in Hamburg on the 27th of September, 2019.

With the enlargement of the Supervisory Board from 3 to 6 members and the nomination of 3 independent candidates, we would like to demonstrate clearly once again that the interest of the minority shareholders are being adequately considered.

We are also pleased to inform you that we have returned the former Tipp24 secondary lottery to the German brokerage business and that as of the 15th of October, we now also broker lottery tickets to the state lottery companies via the domains Tipp24.de and Tipp24.com. The corresponding contracts governing our future cooperation with ZEAL were signed on the 30th of September. We were and remain highly aware that these agreements must stand up to scrutiny in compliance with the arms-length principle, and we have taken due account of the fact that both companies can benefit from the contractual relationships in a balanced manner. However, we are also pleased that the reunification of Tipp24 and Lotto24 has not only strengthened our market position, but we're also making a stronger contribution to good causes from now on.

Moving to Slide 11. I would like to show you our business development in more detail. In the first 9 months of 2019, we achieved billings of EUR 240.5 million, which corresponds to a plus of 2% versus last year and revenues of EUR 27.5 million. This is minus 2% versus last year and a gross margin of 11.4%. The decrease in margin in this revenue was primarily due to the lower share of lottery clubs as a result of the weaker jackpot environment. As of 30th of September, lotto24 employed 90 people. As costs of Lotto24 employees on [garnering] these has been classified as one-off costs and a recharge to ZEAL, personnel expenses for the 9-month ended the 30th of September, decreased by EUR 411,000 to EUR 5.9 billion. Other operating expenses decreased to EUR 15.9 million compared to prior year of EUR 18.5 million. The decrease in marketing expenses of EUR 3.9 million was mainly driven by the weaker jackpot environment. Moreover, compared to the more

(technical difficulty)

commercials conducted in 2018 were not repeated in 2019. The decrease in direct operating expenses of EUR 265,000 was primarily driven by EUR 145,000 decrease in commission fees resulting from a fall in revenue of our B2B partners. By contrast, indirect operating expenses rose by EUR 1.6 million, especially legal and consulting costs rose by EUR 906,000 linked to the takeover. IT consulting costs rose by EUR 590,000 as we look to strengthen our internal IT and app teams with freelancers. Due in particular to the lower marketing expenses, EBITDA and EBIT rose to EUR 5.3 million and EUR 2.8 million. Before one-off expenses of EUR 1.3 million, EBIT even reached EUR 4.1 million. Nevertheless, net profit of EUR 3.4 million was down on the previous year due to a positive technical tax effect in the first 9 months of 2018.

Moving to Slide 12, you will see that our cash position at the end of September amounted to EUR 10.9 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 287,000 new customers in the first 9 months as a whole, with a CPL of EUR 28.

On Slide 13, I would like to share our outlook for 2019 with you. We still plan to extend our market leadership as an online provider of state-licensed lotteries. For Lotto24 stand-alone, we continue to expect stable figures for billings and revenues due to the exceptionally strong jackpot trend in 2018. As Lotto24 now also brokers tickets via the domains Tipp24.de and Tipp24.com, total billings and revenues will be higher than the corresponding prior year figures. Our

(technical difficulty)

expected to remain slightly below the prior year level. Originally, we anticipated it to be stable at the prior year's level. In addition, we continue to anticipate a fall in the number of new customers. This excludes Tipp24 customers added as a result of the ZEAL business model change and Lotto24 stand-alone, we also expect to 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 breakeven point without consideration of any transaction costs incurred during the takeover. Please understand that the exact financial implications resulting from the Tipp24 integration can only be predicted more accurately when the Tipp24 customer migration has been more advanced. This has only happened less than 4 weeks ago. So we will keep you posted.

And last but not least, you may have read, but I believe Lotto24 by mutual agreement and on amicable turns as of the 31st of December this year. After 12 years in the lottery business, of which more than 7 as a CEO of Lotto24, I will now become a member of the Executive Board and later CEO of NEW WORK SE, formerly known as XING SE. So I would like to use the opportunity to thank all of you for your trust as well as countless interest in challenging discussions. Many thanks for a great and exciting time in the lottery business.

And I hand back to you, Jonas.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you very much, Petra, and of course, you will be deeply missed. We're now on Slide 15, and I would like to confirm that consolidated guidance for 2019 for the ZEAL Group. There have been no changes since the publication of this guidance. The secondary lottery business has now been converted to the brokerage business. As a result, ZEAL expect negative effects on revenue and profitability in the fourth quarter of this year as we talked about in the past. Based on this business model change in mid-October, the effects on the customer base that is difficult to conclusively assess and the large jackpot into -- in August, we anticipate total operating performance for 2019, significantly below previous year, and EBITDA between EUR 18 million to EUR 21 million. Due to the transfer of our registered office back to Germany, we will no longer pay interim dividends in accordance with German practice. Accordingly, no dividend will be paid in December, but we will publish a proposal of a preparation of profits and a new dividend policy at the latest in our 2000 (sic) [2020] financial statement that goes live in March next year.

You have heard a lot today, and probably you won't remember all of it. Nevertheless, we would like to briefly summarize on Slide 16, what you just heard. Next our stable business development. We're in a very good position to achieve our goals. The majority of our planned implementation costs have already been spent. We're well on track with implementation of our promised cost synergies. Tipp24 are returned to German lottery brokerage, and we've relocated the corporate seat back to Hamburg. Of course, we still have a lot things to do, but we're well on the way to fully reunify with Lotto24. And just to reiterate, we are convinced that the combination of the 2 companies will provide the best path to sustainable growth for the ZEAL Group, and will lead to tangible added value for our customers, employees and shareholders.

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

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question is from James Letten of Berenberg.

--------------------------------------------------------------------------------

James Letten, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [2]

--------------------------------------------------------------------------------

Firstly, on the dividend. You've stated this is going to be under review until the end of the year, and you'll tell us by March. I'm wondering, if you can clarify at all whether you're considering a return to shareholders in the form of a special dividend or whether you're thinking more about a normal dividend policy? And along these lines, it'll be good to get your view on what kind of a leverage ratio you'd be comfortable with going forward? And actually, I'll take my questions one at a time, if that's okay. That's my first question.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, James. As I said, we are under review the dividend policy. And I think it's -- the best is that I come back to you early next year with a dividend policy that will be announced. So I don't rule out anything, but we'll come back with the proposed dividend policy.

--------------------------------------------------------------------------------

James Letten, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [4]

--------------------------------------------------------------------------------

Okay. And then also, I think it's -- I know you've stated that it's too early to say conclusively what the billings dissynergy will be and the customer churn following the shift to secondary broking, but you've cited -- it started in the past, a 25% figure. And presumably, you have more information now than then. So are you comfortable that, that 25% figure still stands? Or do you think it could be better than that?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So look, we're three weeks in. We changed the business model on 15th October. So it's only three weeks. We also now, we have a very high jackpot situation. EuroJackpot has EUR 90 million, so it's obviously a good sign for us. But we don't know how this will affect, and it's very early on. I can say, that the first signs are fully in line with our expectations. But it's way too early to draw any conclusive results of this one. So I have to come back to you when we have a little more data. But like I said, there is no red flags on the contract in line with our expectations.

--------------------------------------------------------------------------------

James Letten, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [6]

--------------------------------------------------------------------------------

Okay. And then just 2 last questions. Firstly, any update on the VAT court case on timing? And with your view on the outcome of the case has changed at all? And then also, Petra, I wonder if you could just give us an indication of what uplift you're expecting from brokering tickets via the Tipp24 domains in Q4?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So let me start with VAT. We will not provide any running commentary on VAT, as always, we will share new information when there is shareable new information. I think that's better than starting to speculate. So as soon as we hear anything, you guys will be the first ones to know.

--------------------------------------------------------------------------------

Petra Von Strombeck, Lotto24 AG - CEO & Chairman of Executive Board [8]

--------------------------------------------------------------------------------

And concerning the uplift we expect on the Lotto24 side, as Jonas pointed out, rightly, we had just 3 weeks after business model changed, and it's too early to give a guidance on the expected uplift. But we're going to come back in due course as soon as we have more data and more information.

--------------------------------------------------------------------------------

James Letten, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [9]

--------------------------------------------------------------------------------

Okay. All right. And congratulations, Petra on your time at Lotto24 and building up the business. And best of luck to you in your future roles.

--------------------------------------------------------------------------------

Petra Von Strombeck, Lotto24 AG - CEO & Chairman of Executive Board [10]

--------------------------------------------------------------------------------

Thank you. Thank you very much, James.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

The next question is from Elicia Bravo of Lottoland.

--------------------------------------------------------------------------------

Elicia Bravo, Lottoland - Chief Strategy Officer [12]

--------------------------------------------------------------------------------

I just had a quick question with respect to the MyLottery24 (sic) [MyLotto24] casino business in the U.K., which I understand you're still operating. I was wondering if you could give us a bit more background on what the logic and thinking is there.

(technical difficulty)

Hi everyone. I'm not sure if my question was...

--------------------------------------------------------------------------------

Jonas Mattsson, ZEAL Network SE - CFO & Member of Executive Board [13]

--------------------------------------------------------------------------------

Oh, yes, sorry. Your question was heard. I was just unmuting the telephone. Like you heard from my presentation, we have actually stopped all secondary lottery in the U.K.. And when you talk about casino business, maybe you're referring to the instant win games, perhaps. Clearly, we are not pursuing anything of instant win games and secondary lottery in the U.K. market.

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

[Operators Instructions)

There are currently no questions in the queue.

There are currently no further questions.

--------------------------------------------------------------------------------

Jonas Mattsson, ZEAL Network SE - CFO & Member of Executive Board [15]

--------------------------------------------------------------------------------

Okay. Thank you. If you have no further questions, then we will end this call, and thank you for the participation. Our next regular call will be for the full annual report, which we publish in March, next year on the 26. Thank you, and goodbye.