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Edited Transcript of TAH.AX earnings conference call or presentation 12-Feb-19 11:00pm GMT

Half Year 2019 Tabcorp Holdings Ltd Earnings Presentation

Melbourne Victoria Jun 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Tabcorp Holdings Ltd earnings conference call or presentation Tuesday, February 12, 2019 at 11:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Damien Johnston

Tabcorp Holdings Limited - CFO

* David Robert Henry Attenborough

Tabcorp Holdings Limited - MD, CEO & Executive Director

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Conference Call Participants

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* Anthony Longo

CLSA Limited, Research Division - Research Analyst

* David Fabris

Macquarie Research - Research Analyst

* Donald N. Carducci

JP Morgan Chase & Co, Research Division - Analyst

* Larry Gandler

Crédit Suisse AG, Research Division - Director

* Mark Wilson

Deutsche Bank AG, Research Division - MD, Co-Head of Company Research Australia & NZ and Analyst

* Matthew H. Ryan

UBS Investment Bank, Research Division - Executive Director and Research Analyst

* Rohan Sundram

MST Marquee - Gaming and Contractors Analyst

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Presentation

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David Robert Henry Attenborough, Tabcorp Holdings Limited - MD, CEO & Executive Director [1]

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Good morning, and thank you for joining us on the call. I'm David Attenborough, I'm CEO of Tabcorp. And I'm here today with our CFO, Damien Johnston. And for the next 20 minutes or so, I'll take you through our first half '19 results presentation and then open up the line for questions.

But before I get into our results, this morning, we announced that Damien intends to retire in FY '20. We've commenced the search process, and Damien has agreed to remain with Tabcorp until we have appointed his successor. And this will ensure an orderly succession and a smooth transition. And Damien has successfully led our finance function since 2011. He's overseen a number of strategic and capital management initiatives, which have helped underpin our strong financial position. And I should point out that his retirement will coincide with the substantial completion of the integration program later in FY '20.

Now on to the presentation. Our strong group results for the first half of the 2019 financial year highlight the benefits of scale and diversification that were delivered by the combination of Tabcorp and Tatts. It's now been more than 12 months since the combination became effective, and we've been executing against a carefully planned integration road map. We are upgrading the expected earnings from the synergies and business improvement initiatives to now be in the range of $130 million to $145 million in FY '21. And this view is supported by our progress on cost synergies, which we are upgrading today, and we are now targeting $95 million, up from $80 million, in FY '21. At the same time, we've stepped up the digitalization of our businesses with the 63% growth in Lotteries digital turnover, a standout.

Let's start with the group overview slide, Slide 3. And I'm pleased to report a strong group result with pro forma revenues up 6%; EBITDA, up 9%; and double-digit EBIT growth. And we have announced an $0.11 dividend, in line with the pcp. The result was driven by a very strong Lotteries performance. We were pleased to see accelerated digital growth in the half on the back of game innovation and the significant investment we are making in the digital customer experience. We also saw double-digit growth in our retail network, which is an excellent performance.

In Wagering & Media, TAB's active customer numbers and turnover grew in a market in which there was a significant step-up in customer generosities by operators, including ourselves. And by generosities, we're referring to customer promotions such as bonus bets or money-back specials.

UBET underperformed pretransition to the full TAB offering, and UBET will be a fundamentally different business by FY '21.

And Gaming Services, which is now fully integrated, performed to plan, and good progress was made on venue sign-ups and contract extensions. The result was impacted by the expiry of TGS contracts, as we outlined to the market at the full year.

The integration of Tabcorp and Tatts is ahead of plan. And as I've already mentioned, we've upgraded our FY '21 target for synergies and business improvements. And we're pleased that several key reforms have been introduced that strengthen the regulatory environment and improve the industry's long-term sustainability. The synthetic lottery ban is now in place, and point of consumption taxes on wagering are enforced in Mainland Australia. And due to the various offset and other arrangements, we expect minimum -- minimal financial impact on Tabcorp.

We have also made good progress on completing the organizational restructure and launching our new purpose of Excitement with Integrity. And we know that successful mergers depend on getting your culture and people strategy right, and we're building a strong, aligned, risk-aware performance culture and have continued to invest in the highest levels of regulatory compliance and responsible gambling.

If I can now take you to the statutory results on Slide 4, noting that the growth rates reflect that the combination was effective for just 18 days of the prior period. Statutory NPAT was $182.5 million. The significant items of $18.3 million after tax are expenses associated with the Tatts combination, the majority of which were implementation costs. And an expense of $6 million was booked, which was a top-up payment to meet the minimum amount of fees committed to Racing Queensland. And there is more detail setting out that arrangement in Appendix 1.

On this slide and throughout the rest of the presentation, we've also presented results on a pro forma basis, which allows you to examine the performance as if the combination had been in place for the full prior period.

Slides 6 and 7 give you the group and business results on a statutory basis.

I'll take you on to Slide 9. We have upgraded our target for cost synergies in FY '19, FY '20 and FY '21. We've entered into a set of new supplier arrangements, which come into effect on 1 July this year, and that's helped drive the upgrade. In FY '19 to date, we've made very good progress on cost realization, and we're set to deliver $55 million for the full year, up from $50 million, having delivered $24 million in the half.

We remain focused on maximizing revenue benefits. And during the half, we made good progress towards improving UBET yields. However, the revenue synergies from that work have largely been offset by new venue arrangements, including digital commissions in the retail network, an initiative that's important for alignment with retailers and our ability to drive digital growth in the future.

In terms of property, we're in the process of subleasing surplus space at Ann Street, Brisbane, and we will move our Brisbane teams to that site this year. We estimate that the integration costs will now be approximately $66 million after tax, up from our previous estimate of $49 million after tax, and the integration CapEx will be approximately $70 million, which is unchanged from our previous guidance.

Slide 11 provides the group pro forma picture, with pleasing revenue and earnings growth and OpEx supported by $23 million of cost synergies. You can see on the slide the adjustments that were made to the first half '18 reported results to arrive at the pro forma results.

Slide 12 sets out the results for each of the businesses on a pro forma basis. The VC margins of each business are essentially unchanged, with the reduction in group VC due to the mix effects.

And I'll now take you through the 3 businesses in more detail, commencing with Lotteries & Keno on Slide 14. On any measure, this business had a very strong half, with initiatives to enhance the portfolio of games paying off. This is a great business with an experienced team. We're innovating and investing in product and customer experience, and this is delivering positive outcomes. Lottery -- Lotteries revenues were up 19.6%, and Keno revenues grew 3.7%. Lotteries performance reflects a favorable jackpot sequence. And the changes to Powerball resonated with customers, with good sales momentum at each of the jackpot levels through to $100 million. The August $100 million jackpot was shared by 2 players, one of whom purchased said ticket online and the other at a news agency, a great illustration of our multichannel offering. And the other games in the portfolio were resilient, benefiting from large jackpots and targeted marketing campaigns.

Slide 15. The record Powerball jackpot sequence and increased investment helped to accelerate digital growth and customer acquisition. The digital turnover growth was the biggest Lotteries have had in recent years, and we've been very focused on ensuring the business has the resources and capability to power its digital growth. And to that end, we changed the operating model and deployed digital and marketing resources within the Lotteries business rather than using a centralized approach. Pleasingly, retail sales grew double digit on the pcp. Retail is an important and complementary channel, and we have planned to ensure its offer remains strong throughout the digital transformation. The growth in customer numbers was significant and demonstrates the extraordinary reach Lotteries has, with around 3 million active registered players. Nearly half of those players who signed up during the large jackpots went on to play more than one game in the following 3 months, reinforcing the benefits of our portfolio approach. Keno also performed well in the half, supported by strong digital growth.

Slide 16 covers the results for Wagering & Media. And it was a competitive half with unprecedented levels of promotional and marketing activity. And we estimate the market will spend twice as much on generosities this year than last year. We stepped out our rollout of offers and generosities to acquire and retain customers in the half and will continue to compete vigorously. This has been a deliberate strategy in the context of our longer-term plans. We set out to win in market, to grow revenue share and active customers. More often than not, we're first with our offers or have the best in the category. This is the right time to take this approach. But as you would expect, it has impacted yields on an absolute basis. TAB turnover grew 2.6%, but revenue was down 3.7%, impacted by a stronger fixed odds win rate in the prior period and investments in customer generosities. UBET turnover and revenue declined by 7%, and I'll talk about our progress on transitioning UBET to the full TAB offering in a moment.

Data from Racing Victoria tells us that despite increased turnover on their product, it was a difficult half for the wagering market in terms of revenues. Pleasingly, TAB actually grew revenue share on Victorian thoroughbreds, and UBET maintained revenue share during the period. Revenues benefited from expanded commercialization of digital vision. And you will note that Wagering & Media revenues have been combined in our reporting. Media is fully integrated with Wagering, and everything we do in Media is about providing enhanced value for our customers and partners.

In parallel with the integration, we are creating a highly differentiated customer experience using our unique assets. As an example of this, we have had a significant focus on customer engagement in the half, weighted towards a customer segment we call passion players. The introduction of a predictive analytics tool, known as The Edge, went live. And we have just launched unique retail-only offers using Pulse iD. This new geolocation technology enables us to talk to our account customers as they enter our venues. It's a real leap forward in digitizing retail and making it a greater point of difference.

On to Slide 17, which shows that TAB digital continues to grow strongly at mid-double digits and is on track to surpass cash retail turnover for the first time at the full year. Yields in the half were impacted by an unprecedented level of generosities, 120 basis points for TAB and 150 basis points for UBET. An important outcome from the increased investment in generosities was positive growth in active customers in the period, and we now have 723,000 customers across UBET and TAB. Market share growth remains a key priority.

On to Slide 18, which unpacks the UBET integration plan. UBET will be a different business once it transitions to the full TAB offering in FY '21. We anticipated UBET would have its challenges, and that is absolutely the case. The business continued to be impacted by legacy issues. The reality is some of UBET's pools are subscale; it doesn't have the full range of products that TAB does; the retail experience is patchy; and the brand has struggled to get traction with customers, especially in a very competitive market. We continue to see a very significant opportunity to reposition the business and grow margins through both cost and revenue opportunities. We're working at a pace to address the underperformance. However, there are still products and services we need to get into market to align the customer experience with TAB.

And we are making progress with our initiatives, including that we have changed the approach to customer segmentation, plus ID requirements to align with TAB. Our fixed odds risk management systems have been integrated. The full Sky Racing offer is now in all outlets. Digital commissions have been introduced in the retail network. And product expansion and the rebrand have commenced. And this rebranding commenced in November 2018, with racetracks and digital assets essentially completed and more than 400 of the 1,300 venues now rebranded TAB. We know that TAB is a much more powerful and trusted brand than UBET. It's worth noting that we've got good support from our retail and racing partners in the ex-UBET states as we deliver this program. TAB is the only wagering brand you'll be seeing on racetracks in South Australia, Queensland and Tasmania.

And last week, we announced TAB will be the naming rights sponsor of Brisbane's most iconic sprints such as the Stradbroke. We have the TAB Hobart Cup on Sunday and the TAB Adelaide Cup next month. The relationships with our racing partners are good, and we're pleased to be backing their big races.

Slide 19 covers Gaming Services. TAB's gaming businesses have now been fully integrated with Tabcorp's. We have implemented a simpler structure with 2 units: Regulatory Services comprises monitoring and related services, while Venue Services is made up of venue solutions, gaming systems and support services. Both will operate under the umbrella MAX brand, which we'll showcase to the market at the Australasian Hospitality and Gaming Expo in Brisbane next month.

And it makes sense to analyze this business sequentially, and this set of earnings is in line with the second half '18. Regulatory Services revenues were down around $0.5 million on the pcp, given less project work. However, it's a unit which is largely delivered in line with our expectations. As we flagged at the full year, the expiry of some EGM contracts impacted revenues, and you see this in the Venue Services line. We have made good progress in renewing contracts in Victoria, with 1/3 of the network signed up post-2022. And while these contracts generally come at a reduced margin from FY '20, they're locking in long-term earnings and offer good returns for the group. This new model is attractive for prospective customers, and we're making good progress on new sign-ups in both Victoria and New South Wales with 730 new EGMs contracted in the half. We're aiming to maintain the momentum in sign-ups to mitigate the EBITDA impact of the expired contracts and those extended at lower margins.

On Slide 21, you'll see that we invested $109 million in CapEx for the half. $17 million of that was for non-BAU projects we've previously spoken about. That will step up in the second half, driven by big projects such as the data center relocation and the move to our new premises in Brisbane.

And on Slide 22 in capital management. Our gearing ratio is in our target range of -- at around 3.3x, and we retained nearly $1 billion of headroom under existing banking facilities. So we have good financial flexibility for refinancing activity later this year and potential investment opportunities over the next couple of years. The interim dividend of $0.11 per share was in line with last year, and our FY '19 dividend payout ratio target is 100% of NPAT before significant items, amortization of the Victorian wagering and betting license and purchase price accounting.

To Slide 24 and in conclusion. The half was a period in which we delivered a strong group result, upgraded the delivery of integration benefits and continued to drive core business performance. We have a clear set of priorities. The first is to deliver the benefits from the Tatts combination. The second is to drive performance in each of our 3 businesses by investing in customer experience, product and digital innovation. The third is to ensure the highest levels of integrity and regulatory compliance. The fourth is to maintain a strong risk-aware and performance culture. And finally, we'll remain disciplined in managing OpEx, CapEx and the balance sheet. Our strong financial results for the half highlight the benefits of our enhanced diversification and scale. Tabcorp's strong fundamentals, together with our continued focus on innovating and investing, ensures we are well positioned for the future. Thank you.

And I'm now happy to open the line up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Mark Wilson from Deutsche Bank.

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Mark Wilson, Deutsche Bank AG, Research Division - MD, Co-Head of Company Research Australia & NZ and Analyst [2]

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David, was just wondering, looking at that reinvestment theme of Wagering, particularly just if we focus on the levels of generosity, just wondering how you were actually going to measure the returns that you get on that reinvestment and how long are you prepared to keep these levels of generosity up.

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Damien Johnston, Tabcorp Holdings Limited - CFO [3]

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Mark, Damien Johnston. I'll perhaps have first crack at that, and David can add if he likes. I think, essentially, the key measure of the returns are the turnover growth rates that we report. And you can see in the TAB performance numbers that we actually reported our numbers pretty similar with trends in the past and have a healthy digital growth rate of -- north of 15%. So when we think about the market we're competing in and what the market's doing on investing in generosities, ultimately, sales and revenue outcomes give us the guide to how we've gone. David referenced some data from Racing Victoria. And what that indicated was that our performance in revenue terms, which is ultimately what we're trying to achieve, was better than our competition. And we actually grew our revenue market share. So I think our team will be confident that, that was the right strategy and, ultimately, resulted in a better revenue outcome and market share outcome than had we just sat on the sides and let the competitors increase their generosities and us not respond.

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Mark Wilson, Deutsche Bank AG, Research Division - MD, Co-Head of Company Research Australia & NZ and Analyst [4]

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Great. And just in terms of how long you intend to maintain this strategy.

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David Robert Henry Attenborough, Tabcorp Holdings Limited - MD, CEO & Executive Director [5]

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So I'll take that one. So we are now very focused, and hopefully, you've heard that in, really, my introduction on growing customers and growing market share. And we are very well positioned with our -- with these businesses. And as we transition UBET, we believe there's a big opportunity to grow market share and customers in the UBET states that will deliver the revenue synergies. So you will see us stepping up and continuing to go with generosities, and we are going to be competing head-to-head and leading across many aspects of the wagering offers across all states.

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Operator [6]

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Your next question comes from Larry Gandler from Credit Suisse.

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Larry Gandler, Crédit Suisse AG, Research Division - Director [7]

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I might just switch to Lotteries. You've got a slide there showing the jackpot trend. And back in FY '16, it was a great jackpot year followed by a weak jackpot year. I'm just wondering if, say, luck normalizes, to what extent do you think luck will normalize? Obviously, any change in the Powerball math will -- has been a structural change. But what do you have in place to perhaps preserve revenue as we go into FY '20? I recall, in FY '17, Tatts had a drop in revenue, cycling a good jackpot year. How do you stave that off?

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Damien Johnston, Tabcorp Holdings Limited - CFO [8]

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Larry, Damien. I'll lead off. I think investors are aware that they're -- over the period of time, there are runs in jackpot sequences that are favorable and unfavorable. And that's a relative concept on a year-to-year basis. But over a period of time, those things -- maybe the concept of normalization doesn't quite apply, but they do tend to even out somewhat. I think the key point here is that the game -- the Powerball game has changed. And obviously, it's expected. It was intended that we'd see more frequent, larger jackpots. So I think what we'll see going forward is there'll be ups and downs in sequences. But on the whole, we'll be operating from average outcomes with higher-average jackpots compared to that pregame change. I think that's sort of the ebbs and flows of that jackpot sequencing.

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David Robert Henry Attenborough, Tabcorp Holdings Limited - MD, CEO & Executive Director [9]

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And just to sort of give the overarching, how I see it, you've got a real drive that you're seeing on customers registered, active customers. And we're seeing really good growth here, and we are looking to expand across retail and online the number of registered active customers and to then make sure, using the combined portfolio approach by different games, that we do really focused, targeted promotional and marketing campaigns that support play on all our products. So obviously, jackpot events that will be based on statistical norms but through managing customers' experience and increasing the number of customer -- registered customers and communicating well to them and using targeted campaigns, we think we can drive some very good performances going forward.

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Larry Gandler, Crédit Suisse AG, Research Division - Director [10]

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Okay, good. And should we expect any product development to help drive revenue or protect revenue next year?

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David Robert Henry Attenborough, Tabcorp Holdings Limited - MD, CEO & Executive Director [11]

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You can expect that we are looking at our whole portfolio, and we continue to do. We gave some insight into that on Investor Day last year. And it really, if you look back historically, we like to let a game change settle in. And Powerball's fairly recent, and it's settling in. It was really pleasing to see that we got a very similar sort of take-up by customers in the second lead-up to $100 million in January that we got in August, some really sort of predictable and strong numbers that show that it is settling nicely. And -- but we continue to evaluate all our product portfolio and what changes will best suit the evolving market.

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Operator [12]

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Your next question comes from Don Carducci from JPMorgan.

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Donald N. Carducci, JP Morgan Chase & Co, Research Division - Analyst [13]

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So if you exclude the revenue benefit from selling digital vision, it appears that OpEx as a percentage of revenue has actually increased for Wagering & Media. Can you talk about some of the OpEx benefits that you said were achieved?

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Damien Johnston, Tabcorp Holdings Limited - CFO [14]

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Yes, Don, Damien Johnston. Actually, the OpEx performance is very good in Wagering. Clearly, there's synergy benefits coming through, which are very important at this time as the business goes through an overall transitioning phase. That underlying expense growth rate has been maintained at a fairly low rate, probably in the sort of 2% to 3% range. So I think it's tight management of the usual things you'd expect the team to be focusing on as well as seeing the benefits of the cost synergies going through. A lot of the investment in generosities, of course, is above the line. But on the whole, I think the team's very focused on improving margins and running that business tightly.

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Donald N. Carducci, JP Morgan Chase & Co, Research Division - Analyst [15]

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Okay. So regarding TGS and EGM renewals, how significant of a revenue step-down should we expect for machines recontracted at a lower rate?

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Damien Johnston, Tabcorp Holdings Limited - CFO [16]

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I think looking into the commentary there about lower margins from 2020, in the order of $5 million of EBITDA impact from FY '20, I think, would be a reasonable allowance for those extensions. I mean, ultimately, what we've achieved with those contracts are contracts that would otherwise have expired in 2022, and a majority of those contracts now run out to 2030. And what we've done is essentially made a decision that's provided for like a better quality of earnings for a longer period of time rather than just letting them run off in 2022. So I think the progress the team made in terms of getting from 11% of contracts beyond '22 to 33% in the half really augurs well for the -- for longevity of the -- of that business.

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Donald N. Carducci, JP Morgan Chase & Co, Research Division - Analyst [17]

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Good. And then just a quick last one. What's been the initial market condition with the point of consumption tax? And is that going to benefit you and allow you to focus on yield and as you turn over growth without having to kind of double your promotional activity?

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David Robert Henry Attenborough, Tabcorp Holdings Limited - MD, CEO & Executive Director [18]

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I mean we've just seen point of consumption tax introduced largely across the major states. We are focused on our strategies. We are less focused now on what the competitors are doing. We are actually pretty much leading a lot of what's happening as we approach each, particularly weekend activity. Critically, the introduction of point of consumption tax will have a minimal impact on us. And therefore, really what you can expect is us to continue to look to grow market share and customer numbers, and we'll see how our competitors adjust to point of consumption tax.

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Operator [19]

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Your next question comes from Matt Ryan with UBS.

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Matthew H. Ryan, UBS Investment Bank, Research Division - Executive Director and Research Analyst [20]

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Just a question on underlying OpEx, in particular, within Wagering. So we can see the uplift, I guess, to the synergy target, which you've put through. But I'm just a bit curious on what your thoughts are moving forward around underlying OpEx growth. And I guess where I'm coming from is, I think historically, you guys have talked about the Wagering business trying to achieve 2% to 3% of revenue growth, perhaps underlying OpEx sort of at or below inflation, which gave you sort of 4% or 5% EBITDA growth and a little bit more as you went below that line. So I guess the question is, has that changed? And can you sort of talk a little bit about what you think underlying OpEx growth would be without synergies moving forward?

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Damien Johnston, Tabcorp Holdings Limited - CFO [21]

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Matt, Damien. So I think a reference point probably and, obviously, I'm not going to provide a forecast as such, but I think a reference point would be the Investor Day materials where we showed the historical CAGR for the business, which indicated about a 4% -- well, a CAGR OpEx growth of 4%. But half of that growth rate was from investment in advertising and promotions. So investment in advertising and promotion spend grew at about a 20% per annum rate and actually resulted in the overall cost growth of about 4%. So when you strip that out, we are managing and have managed underlying costs ex advertising to around CPI or a bit lower. So I think, ultimately, what we will see come through will really depend on what the business focuses on. And I think advertising and promotions will continue to be a factor that would perhaps have you lowering the range or higher-ing that range depending on kind of decisions that are taken and how that interacts with other customer strategies like the generosities strategy we've seen implemented this half. So I don't think that's probably a reasonable range to be thinking of. For the next couple of years, of course, with synergies coming through, as you mentioned, we'd expect to see, obviously, a much better performance with the synergies coming through. And they'll be coming through. You saw the benefits in this half, they'll be coming through, obviously, for the next couple of years as well.

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Matthew H. Ryan, UBS Investment Bank, Research Division - Executive Director and Research Analyst [22]

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Do you -- I mean do you ultimately need to see the 15% digital turnover growth increase then? And I guess where I'm coming from is, last year, I think you did 16%. The average over the last 3 years has been about 14%. You've spent about 4% of revenue in increased generosities, yet I guess the digital turnover growth number seems pretty similar to what we've had in the past. So if that's the case, and I guess you do have this sort of underlying 4% OpEx growth come below the revenue line, then do you really need to see that digital turnover number increase in order to get a better outcome?

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Damien Johnston, Tabcorp Holdings Limited - CFO [23]

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Not necessarily. And I think there's a couple of reasons for that. One is that digital is increasingly a bigger share of the pie. And I think it -- you'll see that very shortly, digital will surpass retail. So when you've got digital growing at 15% and it becomes a bigger percentage of the pie then, clearly, you get better overall turnover growth outcomes. And that 2% to 3% sales growth that we've been reporting in recent years would sort of be looking to move north of that.

In terms of the question about how it interacts with the generosity strategy, I think just a couple of points. One is -- and David referenced the Racing Victoria thoroughbred data, which is the only data we have. It's a significant and important part of the market. In the half just completed, our digital growth rate was on par with the competitors. So actually, that was as good as the market on average across that competitor set. So these are -- it's a good result. But the translation to revenue was superior. And when you look at the yield movement -- and we've actually split out for you in the deck the gross win rate and the impact of generosities. Actually, the bigger contributor to the reduction in yield was just the period-on-period variability in gross win. The actual increase in generosities was meaningful, with a lesser impact. Last year, the gross win rate for TAB was something like 15.8% in the half which, compared to historical norms of around 15% was -- that was an above-average outcome. And we saw that come back to a tad below average in this particular half.

So I think what we've demonstrated in the half is that the digital growth rate is in line with market. The generosity spend is less than market. The translation to revenue was superior to market. And as a consequence, we have seen a growth in revenue market share. And it's a meaningful data point because it's an important part of the product set. And I think it indicates that the underlying performance of TAB is very similar to the second half, other than the adjustments that go through variability and win rate and competing with the market on generosities.

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Matthew H. Ryan, UBS Investment Bank, Research Division - Executive Director and Research Analyst [24]

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Okay. And then just a question on Lotteries. So a lot of the changes that you made over the last 6 to 12 months were obviously intentional, and the outcome from the pricing changes and changes to game maps within Powerball obviously came through and paid huge dividend. So just sort of curious on the 20% growth that you achieved. How much of that was sort of baked into the plan as opposed to, I guess, getting a little bit lucky? And I guess if you could put that in the context of looking forward, historically with sort of start of the year thinking somewhere around 4% growth might be the right number, but it just seems like there's a lot of, I guess, structural changes to Lotteries and Powerball, in particular, which would suggest that number, at least, starting for second half '19, might be far too low. Could you just comment on that?

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Damien Johnston, Tabcorp Holdings Limited - CFO [25]

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Yes, I can comment on that. I think -- I mean, I don't have any sort of disagreement with sort of the sentiment of the question. I think the way we perceive the, call it, the luck element in the revenue growth were the 2 things that we called out: Lucky Lotteries, 1 in 10-year run; Oz Lotto, 1 in 4-year run. So I think that's luck, and it's abnormal, and you don't necessarily expect to see that, by definition, happen very often. But as you pointed out, I think going into the year, investors were expecting to see a positive lottery performance underwritten by the game change and the price increase and also I think with the prospect of digital, which appeared to be accelerating. And I think what we've seeing -- you can't guarantee that you'll get $100 million and $80 million in every half, obviously, but we certainly expect that in a business case sense and in a budgeting sense to see $100 million jackpots. And we haven't seen one of those previously in Powerball. We'd seen one in one of the other games. Going forward, yes, absolutely, you'd expect to see that, and then you'll just be subject to the usual vagaries of jackpot sequences.

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Matthew H. Ryan, UBS Investment Bank, Research Division - Executive Director and Research Analyst [26]

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I guess I don't want to belabor the point, but the majority of the upside, the majority of the 20% did come from Powerball, right?

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Damien Johnston, Tabcorp Holdings Limited - CFO [27]

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Yes. But as I say that was partly a result of price increase and plan. And I think we have had a positive jackpot sequence in Powerball. I mean, that's just the way the business rolls in a sense.

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David Robert Henry Attenborough, Tabcorp Holdings Limited - MD, CEO & Executive Director [28]

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Also, I mean, what Powerball's enabled is an acceleration in digital take-up of registrations and active customers. And what we've tried to indicate to you is insight into the fact that a lot of those customers then go on to play other portfolio games. So it is -- and there has been this shift in the market. The Lottoland changes. The -- as we've rolled out and continue to invest in -- with our retail partners, digital point-of-sale, there is a lot of energy, money and focus campaigns going to make sure that we grow the lottery business.

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Operator [29]

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Your next question comes from David Fabris from Macquarie.

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David Fabris, Macquarie Research - Research Analyst [30]

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Look, just another question on Lotteries. I'm sort of surprised that the variable contribution grew at a slower rate than revenue. I would have thought with the shift to digital and the gain in commissions, that would have grown at a faster rate. Can you just talk through what's happened there, please?

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Damien Johnston, Tabcorp Holdings Limited - CFO [31]

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Yes, David, Damien. Actually, your expectation is correct. What you're seeing there is the, I guess, the blended average of Lotteries & Keno. So the VC margin for Lotteries is up around nearly 3% in the period, but averaging that in with the Keno business brings it back to what appears to be a more modest increase. But the underlying VC expansion is there, as you indicated.

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David Fabris, Macquarie Research - Research Analyst [32]

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Yes. So to that point, how should we be thinking that into second half '19? Should we continue to think that VC grows below revenue? Or when does it sort of return to above revenue growth?

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Damien Johnston, Tabcorp Holdings Limited - CFO [33]

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VC grows above revenue growth, that is the margin expansion. I'm just saying it hasn't got the same increases as what you'd expect if you're just looking at Lotteries stand-alone. So there is absolutely margin expansion there.

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David Fabris, Macquarie Research - Research Analyst [34]

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What I mean is, in the combined segment, should we assume that this trend continues into second half? Or should we assume that you do get a faster rate of VC?

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Damien Johnston, Tabcorp Holdings Limited - CFO [35]

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I think it just depends on your assumptions on Lotteries growth relative to Keno growth.

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David Fabris, Macquarie Research - Research Analyst [36]

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Yes, okay. And just a question, just to clarify on those revenue EBITDA synergies. I mean, the UBET business has continued to moderate since you acquired the business. And just to be clear, are the targets only based on the uplift through your initiatives? Or do you need to recover beyond from what it was tracking when you acquired the business?

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Damien Johnston, Tabcorp Holdings Limited - CFO [37]

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No, the targets are based on our ability to improve the business. So your -- the former.

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Operator [38]

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(Operator Instructions) Your next question comes from Rohan Sundram with MST Financials.

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Rohan Sundram, MST Marquee - Gaming and Contractors Analyst [39]

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Just a couple of questions on the synergy guidance. I'm not sure if you mentioned it, but can you just please repeat or just indicate what is driving the increase in your cost synergy guidance? And what's driving the range? So where do you see upside above the $130 million?

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Damien Johnston, Tabcorp Holdings Limited - CFO [40]

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Yes, Rohan, Damien. So the guidance now is that we expect to be between $130 million EBITDA and $145 million EBITDA synergy benefits in F '21. That uplift has been driven by an upgrade in the cost synergies from $80 million to $95 million. Essentially, the uplift comes from Wagering. There's been some really good work there on efficiencies in terms of the -- managing the business and also marketing and advertising strategies. There's an uplift in technology-related savings as we've locked in a core part of our operating model going forward and bringing some services in-house and saving costs from an outsourced provider. And thirdly, we've made a bit more progress on the property side, so we expect to see more savings from property rationalization over the next 12 months or so.

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Rohan Sundram, MST Marquee - Gaming and Contractors Analyst [41]

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Okay. And -- now that's helpful. But what's driving the range? Do you see -- are you still believing that there are potential synergies outside of Wagering? And is that included in the $145 million? Or is that still in your thinking? Or is that outside of the guidance range?

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Damien Johnston, Tabcorp Holdings Limited - CFO [42]

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Yes, so those synergies I just spoke to were group-wide synergies. The technology and property-related savings benefit Lotteries and Gaming as well as the Wagering division. So they were group-wide synergies. The revenue synergy guidance also includes Keno initiatives as well as Wagering, so it is a broader view.

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Operator [43]

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Your next question comes from Anthony Longo from CLSA.

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Anthony Longo, CLSA Limited, Research Division - Research Analyst [44]

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Just a quick one for me. In terms of the synergy targets, so if you look at the total cost synergy target of $95 million, to what extent do you expect -- or how much of that $95 million do you expect to fall to the bottom line, particularly in the context of some of those comments you made about leading promotions and trying to get that market share and reinvestment in generosities and marketing?

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Damien Johnston, Tabcorp Holdings Limited - CFO [45]

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Well, essentially -- I mean, it's a fair enough question, but all of those benefits go to the bottom line. Decisions that are taken in terms of how to respond in competitive markets are decisions that are taken to -- in that context. So the bottom line, I think they're particularly valuable currently because we are transitioning a number of the businesses and having the savings coming through at that time is really welcome. You see that in this set of results. But I would say that they are bottom line benefits.

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Anthony Longo, CLSA Limited, Research Division - Research Analyst [46]

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Yes, sure. And then just in terms of the Wagering EBITDA number, I thought that coming back sort of 4-ish or so percent, notwithstanding those synergies that came through, and I know -- I guess, we did speak a little bit about some of that underlying OpEx, are you able to disaggregate how that cost was built up within Wagering? Even particularly, with lucks bit year-on-year, it feels like that result would have been a whole lot less.

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Damien Johnston, Tabcorp Holdings Limited - CFO [47]

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Yes. But allowing for that, I think there was an earlier question, we felt that the underlying cost growth in Wagering was around 2.5%.

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Anthony Longo, CLSA Limited, Research Division - Research Analyst [48]

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Okay. Fair enough with that. And then in terms of the extent of those promotions, actually, we thought that the turnover growth would have been a lot higher than what it was, given the generosities coming through. Are you able to speak to maybe some of the dynamics that, I guess, impacted more turnover growth than you would have expected as a result of some of those initiatives?

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David Robert Henry Attenborough, Tabcorp Holdings Limited - MD, CEO & Executive Director [49]

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I'll comment on that. I mean essentially, we've raised generosities with several of the other operators. So turnover growth reflects essentially activity in the market, share of activity. And we've commented that digitally, we achieved a similar level of activity to our competitors, 15%-plus sales growth. Overall, we've talked around the sales growth that we have achieved of around 3% overall. And that really, certainly, if we'd increased our generosities in isolation and no one else had increased their generosities, you're quite right, you would have expected a higher sales growth. For our sakes, we would have grown market share more strongly than indicated. But the pleasing thing that we've seen is from the data we've got from RVL is that we have grown revenue market share on Victorian thoroughbred product and the strategy is working in this environment to grow our customer numbers, our active customer numbers.

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Operator [50]

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There are no further questions at this time. I'll now hand back to Mr. Attenborough for closing remarks.

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David Robert Henry Attenborough, Tabcorp Holdings Limited - MD, CEO & Executive Director [51]

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Thank you, and I look forward to meeting many of you over the coming days to discuss these results further. Thank you.