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Edited Transcript of TAH.AX earnings conference call or presentation 14-Aug-19 12:00am GMT

Full Year 2019 Tabcorp Holdings Ltd Earnings Presentation

Melbourne Victoria Sep 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Tabcorp Holdings Ltd earnings conference call or presentation Wednesday, August 14, 2019 at 12:00:00am 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

* Kane Hannan

Goldman Sachs Group Inc., Research Division - Research Analyst

* Larry Gandler

Crédit Suisse AG, Research Division - Director

* Matthew H. Ryan

UBS Investment Bank, Research Division - Executive Director and Research 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, CEO of Tabcorp. And with me is my Chief Financial Officer, Damien Johnston. I'll be taking you through the 2019 full year results presentation lodged with the ASX this morning and it'll take about 15 minutes, and then we'll open the line up for your questions.

So if I can take you to Slide 3. And it's worth noting that FY '19 was the first full financial year of the combined Tabcorp and Tatts businesses. The combination has created a group that's compelling investment fundamentals, a strong balance sheet, predictable earnings, high payout ratio, long-dated licenses and great assets. The strong financial result highlights the logic of combining these businesses and the benefits of diversification and scale. The final dividend is $0.11 per share, taking the full year dividend to $0.22 per share, up 4.8% on last year. And this represents a payout ratio of 100%, and that's in accordance with our stated policy. And we know many of our shareholders value the high payout and consistency of our franked dividends.

Our Lotteries & Keno business posted a record result, and that was driven by game innovation and digital growth. Wagering & Media is executing against its plan as it integrates UBET and TAB and transforms. Gaming Services has consolidated its operations under the MAX brand and now has a stronger platform to expand.

And pleasingly, the integration is now ahead of schedule on the realization of cost synergies, and that's helped keep overall expenses flat year-on-year. The integration program is on track to deliver between $130 million and $145 million of EBITDA from synergies and business improvement in FY '21. And our digitalization initiatives ramped up, and strategically, we are focused on continuing to invest in our digital capabilities and unique assets, especially our retail venues and media assets, and this will deliver exceptional products and experiences for our customers in every channel.

Slide 4 provides the headline numbers against reported and pro forma pcp, which you can also see on the group P&L on Slide 5. The pcp included 6.5 months contribution from the ex-Tatts business and has also been restated to reflect Sun Bets as a discontinued operation. The pro forma results adjust the reported FY '18 numbers as if the Tatts-Tabcorp combination had been in place for the whole year. Statutory NPAT was $362.5 million. NPAT from continuing operations before significant items was $397.6 million, up 42% on a statutory basis. And you can read about the significant items in greater detail in the appendices.

Slide 6 provides several metrics on our business unit and highlights how diversification gives the group a balanced profile across cost structure and capital intensity. The 3 businesses are also at different stages of integration, and that's reflected in their performance for the year. Lotteries integration is complete, and that's freed up the business to build strong momentum. Gaming Services is substantially complete, and Wagering & Media is doing some heavy lifting on integration and transformation, which is to complete later in FY '20.

Slide 7 provides more detail on the integration program. It's been a successful year of executing the bigger initiatives which underpin the majority of the targeted cost synergies. Over the full year, we delivered $64 million of EBITDA from synergies and business improvement, of which $57 million was cost and $7 million was revenue. In understanding where the cost synergies landed, around 60% benefited Wagering & Media; Lotteries & Keno, around 25%; and Gaming Services, around 15%. Our current cost synergy run rate into FY '20 is $70 million, and we're forecasting to deliver $75 million in EBITDA from cost synergies for the full year. The next 12 months and, in particular, the completion of the UBET integration, will set us up to realize the revenue synergies.

And what's unique about Tabcorp's business model and what supports our sustainability is that close to 70% of our revenues are returned to governments, the racing industry and our retail partners. And this equates to more than $4 billion, which you can see shaded in orange on Slide 8. We've always maintained the importance of gambling being well regulated, run by responsible operators and with the proceeds shared with the community. Tabcorp's business model continues to deliver on that objective.

Onto the business results now. And Slide 10 provides the results for all 3 businesses versus pro forma pcp on the one slide, and you can see these numbers when we move into the businesses in more detail. Commencing with Lotteries & Keno on Slide 11, and this was a record year in which we saw a positive step change in performance. Powerball has reinvigorated the Australian lottery market with big jackpots taking customer engagement to another level. Pleasingly, our strategic approach to managing the game portfolio has positively impacted other games, and as illustrated in the pie chart, we retained a well-balanced game portfolio.

A new remuneration model for our retail partners in most jurisdictions will give them exposure to growing digital sales and also performance-based benefits. This model accelerates the alignment of retail and digital. We're also improving the experience for customers through free membership win notifications and a digital wallet so they can use their account funds to make purchases in-store. This will be underpinned by investments in technology and data capability, which will see us lifting to a new level of customer personalization. The operating expense growth in the year reflects increased investment in marketing and call center operations to support the increasing use of digital accounts. Charitable games is now incorporated into the Lotteries & Keno result.

Slide 12 details the achievement for Lotteries & Keno across a number of measures. Jackpots, targeted marketing, investments in our digital assets and capability all help drive the growth. Customer engagement with our products is incredibly strong. Digital turnover grew at record levels, and this momentum continued into FY '20. We also benefited from a particularly favorable jackpot run for Lucky Lotteries and Oz Lotto, which added circa $30 million in incremental EBIT. And Keno Mega Millions was launched in Victoria during the year and is now pooling with the other Eastern Seaboard states and the ACT.

Onto Slide 13. And Wagering & Media is midway through a 3-year strategy to achieve sustained market leadership. This business has been managing significant change as a result of the integration as well as intense competition. FY '19 was primarily about progressing the integration and capturing synergies. The team executed well on the consolidation of trading teams, call centers and race day control. Maintaining active customer numbers and building our value perception was also a focus. Our monthly brand tracking research tells us punters perceptions of TAB offering great odds improved significantly in the last 4 months of FY '19 compared to our competitors. FY '20 is about completing the integration while also modernizing the offer. And in FY '21, we will have an integrated and transformed business under the one brand and on the one platform from which we can realize a full year of integration benefits.

Slide 14 provides an overview of the Wagering & Media performance. We're executing against our strategy in a market in which operators have continued to be aggressive on customer acquisition. However, we're starting to see signs of a more rational market. Our investment in maintaining active customers delivered 2.5% growth in TAB's numbers or 4% if you adjust for the Soccer World Cup. UBET's performance was challenged ahead of its transition to the full TAB offering this financial year but saw a big improvement in fixed odds yields. In racing media, we've just launched what is a game changer in Sky Racing active. This is revolutionizing the way racing is consumed and means punters can create a bespoke feed to watch the races they want either live or on demand. Early feedback from customers in the racing industry tells us it's been very well received. The OpEx reduction includes the cost synergy benefits I called out on the previous slide. We also finished the year with good momentum on product with the launch of Odds & Evens and Trio as well as Venue Mode, which gives digital customers offers that they can only access in retail. And this is another example of how we're integrating digital and retail to create unique retail experiences for the digitally savvy customer.

Onto Slide 15. And TAB digital growth was 11.2%. This slowed in the second half, but based on currently known data, is reflective of market conditions. TAB turnover growth of 1.3% resulted in a revenue decline of 3.6%, largely due to the step-up in generosities and higher gross yields in the pcp. TAB's fixed odds yields management is best in market, and this was one of the business improvement initiatives for UBET. And UBET's better revenue performance relative to turnover highlights early yield benefits. UBET revenues continue to be impacted by its legacy offering, but the rate of decline relative to market has reduced from premerger levels. And we continue to see a lot of opportunity in UBET through better product and digital growth, but we need to complete the integration before these benefits emerge.

Let's go now to Slide 16 and the Gaming Services business, MAX, which is currently a market at the Australasian Gaming Expo in Sydney. In FY '19, priority was integrating the Tabcorp and Tatts gaming businesses into a simpler structure with 2 units. A major objective was securing contract extensions in Victoria, and 40% of the network has now been signed up beyond 2022. As we've said, these extensions come at lower margins but support the businesses' sustainability. There will be a $6 million EBITDA impact from this in FY '20. All Victorian contracts now run to 2022 or beyond, and the team continues to work on venue sign-ups and has a strong pipeline of potential contracts. We've also been investing in monitoring and software capability, which will help us with opportunities such as ticket-in ticket-out in Victoria in FY '20.

Slide 18 outlines CapEx versus pro forma pcp. Two projects worth calling out. The consolidated data center in Brisbane has been delivered for $31 million, less than what we would have cost had Tabcorp and Tatts individually relocated their data centers, as had been planned precombination, and that's another example of value capture. And the new Brisbane office, which brings most of our Brisbane employees into the one modern workplace, will be fully funded by the sale of Woolloongabba and Albion sites.

On Slide 19 and the capital management. Our gearing ratio is in our target range at around 3.2x, and we retained $0.5 billion of headroom under existing banking facilities. So we have good financial flexibility for potential investment opportunities in the coming years. In FY '20, we'll target a dividend payout ratio target of 100% of adjusted NPAT.

Onto Slide 21, which captures the key features underpinning our investment proposition. Tabcorp today is a strong and diversified group with a portfolio of high-quality businesses and earnings diversified across many gambling entertainment categories. There is significant future upside potential from the ongoing shift to digital, optimizing our unique assets and value-accretive growth opportunities that are close to core.

And now to close with Slide 22. The strong financial results are being delivered notwithstanding the internal transformation taking place to integrate Tatts. It was the first full year of the combination, and the result demonstrates the strategic merits of the transaction. The integration program is being delivered successfully, is ahead of its cost targets, and we have a high degree of confidence in achieving our future targets. Our 3 businesses have started FY '20 with clear objectives. Lotteries & Keno is well positioned for sustainable growth from continued investment in game innovation and digital capability. Wagering & Media priorities are to complete the integration and transformation. And Gaming Services is focused on extending contracts, winning more customers and expanding its offer. These initiatives as well as continuing to invest in responsible gambling, risk management and regulatory compliance leave us well positioned to deliver sustainable and attractive returns. Thank you.

And I'll now open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have multiple questions in queue, but our first question here is from Kane Hannan from Goldman Sachs.

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Kane Hannan, Goldman Sachs Group Inc., Research Division - Research Analyst [2]

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Just 2 from me, please. Just firstly on that $30 million in EBIT Lotteries Luck. Please confirm that, that number doesn't have anything in there from the Powerball game, and then afterwards, how you're thinking about the performance of Powerball heading into FY '20. Given I think your model is pretty [keen], sort of 23 jackpots in a normal year.

And then secondly, just on the cost -- strong cost synergy performance in the second half. Given you didn't change your 2021 target, is it fair to say that's a pull forward of those future synergies? Or have you been finding incremental costs that you weren't previously expecting? Cheers.

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David Robert Henry Attenborough, Tabcorp Holdings Limited - MD, CEO & Executive Director [3]

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Okay. I'll try and answer all of those, and I might ask Damien to comment on the last one. The first thing is, no, it doesn't include Powerball, so nothing for Powerball in that $30 million of EBIT. We're really calling out that variation as being outside the usual bounds that you typically see. So it's the Lucky Lotteries and a smaller amount for Oz Lotto. That's what the $30 million EBIT is. The -- then the next part of the question was around?

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Kane Hannan, Goldman Sachs Group Inc., Research Division - Research Analyst [4]

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Just that game heading into...

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

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The momentum of Powerball into FY '20. We actually see the results of Powerball. You've seen the record jackpot in July, $110 million, which was great. We actually see the Powerball results in FY '19 as being within the normal favorable sort of bounds you'd see given the way the game is structured, and we're certainly looking forward to a strong year for Powerball, which is now our #1 game for lotteries.

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Damien Johnston, Tabcorp Holdings Limited - CFO [6]

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And in relation to the cost synergies being delivered earlier, essentially, your summary is right, Kane. We are actually ahead of program on delivering the FY '21 targets. So essentially, it's a pull forward, including those a bit ahead of schedule.

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Operator [7]

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(Operator Instructions) Our next question is from Anthony Longo from CLSA.

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Anthony Longo, CLSA Limited, Research Division - Research Analyst [8]

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I just had a couple of questions on UBET for the moment. So I recall at the Investor Day, you did mention that, I guess, you should have expected a bit of an uplift from UBET -- an uplift in UBET after all the TAB products were brought over. I'm just trying to get a sense as to what's left to bring over at this stage because, I guess, you did mention that the rate of decline is slowing versus premerger levels, but it doesn't feel like it is at this stage. So any comment on that would be great.

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

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Sure, Anthony. So actually, UBET is trading with its existing products essentially. It will only get the benefit of all the TAB products once we integrate the systems, which is scheduled for later in FY '20. So essentially, UBET is unchanged, except for the rebrand that we carried out earlier this calendar year in preparation for the changeover of the systems.

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Anthony Longo, CLSA Limited, Research Division - Research Analyst [10]

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Okay. And then in terms of that rebrand, I recall the first half result, you mentioned that 400 of the 1,300 stores were rebranded, and the target was for April 2019. Is that now completely done? Or are we still waiting on that front?

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

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No, it's done. Completely done.

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Anthony Longo, CLSA Limited, Research Division - Research Analyst [12]

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And then the other one I was just sort of thinking, what I just wanted to ask was in terms of looking at the generosities comment that, I guess, you have made a tactical decision to really invest back in the customer and get those market share gains in wagering. I mean how are you experiencing that to date? Because it sort of feels like with all the generosities that you are giving, digital growth is -- probably hasn't grown at the expectation that we would have thought. How hard are you finding to actually arrest market share losses in the mobile segment?

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David Robert Henry Attenborough, Tabcorp Holdings Limited - MD, CEO & Executive Director [13]

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So the first thing is the digital growth that we're getting is pretty much as we see it, largely in line with market. So -- and some of the data, we're seeing data points indicate that, that's the case, and we're certainly seeing some of the other results come through. So that's the first thing.

The second thing is that the use of generosities was very much around retaining and maintaining active customers through this period of transition, and we've seen TAB do that, and that's been particularly pleasing. And we're also seeing the perception of the TAB brand improve in market, and we saw that pick up over the last 4 months from a value perception and move ahead of our competitors, which was also an excellent result and positions us well for the coming year.

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Operator [14]

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(Operator Instructions) Our next question is from Matt Ryan from UBS.

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Matthew H. Ryan, UBS Investment Bank, Research Division - Executive Director and Research Analyst [15]

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David, maybe just a question to clarify on lotteries. So the $30 million of EBIT that you think was the impact to lotteries from higher jackpots, if we just gross that up at about a 25% VC margin, that's about $120 million of revenue. So it's about 4% of what you're doing at a given year. 4% is also around historical growth rates for lotteries. I guess what I'm asking is, looking forward into FY '20, in a normal year, judging on what we had last year, you could probably expect somewhere around flat. Would that be a reasonable guess given what you said those are?

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Damien Johnston, Tabcorp Holdings Limited - CFO [16]

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Matt, Damien Johnston. So yes, it is around $120 million, $130 million of revenue impact. And really, what we're calling out when you're comparing to FY '18 is the incremental bet of a luck that we saw from Lucky Lotteries and Oz Lotto. So I think as David described, the momentum this business takes from FY '19 into FY '20 is something that we haven't seen before, the digital growth rates, the digital customer acquisition. So we're in a different paradigm now, and there's significant momentum behind this business. So we started off the year well with reference to the $110 million jackpot in July, and Lucky Lotteries is still there. So it's a very positive start to a business that's tracking very well with really good momentum.

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Matthew H. Ryan, UBS Investment Bank, Research Division - Executive Director and Research Analyst [17]

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Yes, I agree with that. I was probably thinking maybe the downside risk from the high lottery jackpot in FY '19 might have been a bit greater than flat, but that's encouraging that you think that's the case.

Let me just -- talking about wagering, how are you actually judging whether generosities are working at the moment? So I recognize your comments about the broader market being a little bit weaker than expected, but Tabcorp has gone through a much bigger change with generosities relative to the competition over the last 12 months. And the second half run rate, just within the TAB business, the digital number was only up about 7%. You've averaged about 15% historically. So can you just talk through on how we're actually supposed to judge whether these generosities are working or not?

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

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So how we're looking at them, a, is very much around active customers and maintaining good engagement with our customers. That 7% growth you're calling out in the second half very much, we would say, is in line with the softening growth that we've seen across the market. And how we're judging generosities is very much about week by week, making sure that our customers are well engaged with our products and that we're maintaining a good base of active customers and keeping the brand very well in market.

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Matthew H. Ryan, UBS Investment Bank, Research Division - Executive Director and Research Analyst [19]

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Yes, I mean, I recognize all that. I can see active dropped somewhere around 2.5%. The -- I guess the point or the question I'm asking is that I would have expected in a period where you took a pretty significant step change up in generosities, you took a margin hit, that you might actually outperform the competition. The 2 largest competitors that we can see averaged about 10% growth in the second half, and you've come in at 7%, which totally implies that the generosities didn't do much. Can you just provide any comments around that?

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David Robert Henry Attenborough, Tabcorp Holdings Limited - MD, CEO & Executive Director [20]

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So the first thing is that generosities, our step-up in generosities was very much in line with the market. The market is very active in that space. And the offers that are out there from a number of our competitors around different products are not dissimilar often. And if you're following the market weekly, it's quite interesting to see how you're now seeing a broad range of midweek offers as well as Saturday offers. We're extremely competitive and need to be at this time, and we believe we're taking the right decisions around generosities for the business. And certainly, we're focused on continuing to invest in generosities in the right way, thoughtfully around different products at the right time, and we believe we're executing well.

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Damien Johnston, Tabcorp Holdings Limited - CFO [21]

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And Matt, it's Damien. I just want to make a point on -- our interpretation of the results that you've pointed to will be the average growth is below 10%. We analyze those numbers to be more mid to high single-digit growth rates. And with reference to other external market data, as you know, we closely follow Victorian thoroughbred turnover trends because we're joint venture partners with those guys. And in the second half, TAB's digital turnover growth was in line with the market. So our expectation is our performance in H2 will be largely in line with the market.

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

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Okay. We might (inaudible) numbers off-line. So I mean your best guess though for wagering net yields in FY '20, I think there's some, I guess, confusion out there, whether you need to take another step-down again. Would your best guess be at the moment that you probably hover around that 13.5% level?

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Damien Johnston, Tabcorp Holdings Limited - CFO [23]

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Matt, Damien. We're not guessing. I think in terms of the drivers, gross yields are not going down. We've made that comment consistently. What we saw this year was a comp at 15.4% for TAB, which is above expectations. 14.8% for the year is broadly around where we'd expect to be around 15%. And you'll see that our competitors are essentially going up and over around. So there's no reason to think our gross yields will come down. We have stepped up in generosities, and again, I think you could assume that, that's pretty much the level at which it's at. So I think the risk of lower net yields is very low and the [risk cut] to actually improving net yields over time.

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Operator [24]

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Our next question in queue is from David Fabris from Macquarie.

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David Fabris, Macquarie Research - Research Analyst [25]

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I just wanted to focus on the wagering costs. For us, the OpEx to revenue ratio was higher than we had anticipated in the second half '19. Are you able to sort of give us an indication of how we should think about underlying OpEx growth within wagering when you strip out the synergy benefits? And then secondly, on that, can you comment on where you think the VC margin will land in FY '20 relative to FY '19?

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Damien Johnston, Tabcorp Holdings Limited - CFO [26]

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David, Damien. So looking at the operating cost performance of the Wagering & Media division, our cost-to-income ratio is around 23%, and that actually compares very favorably with competitors that tend to be 30%, 40%, even as high as 50%. So that's -- we're well-placed in terms of the efficiency of that model. We did actually report an overall reduction in expenses, and that actually reflects the benefits of the synergies. And below that, we're continuing to make investments in areas that make us more competitive. So technology-related expenses is an area of investment, and that's been the case for quite some time.

In terms of VC margins, I think what we saw in FY '19, as expected, that there were some headwinds from race field increases, rolling out of digital commissions and the like into the UBET state. Most of that is now behind us, so I think you could expect to see VC margins in FY '19 broadly translate through to FY '21. And some of the underlying trends are in digital growth and fixed odds margins, adding we'll continue to be there.

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David Fabris, Macquarie Research - Research Analyst [27]

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Got it. And just another question. Just looking at the revenue synergies, you guys have reconfirmed the target there. And if we look at the yield within TAB and UBET, that's largely converged in fixed price. I know you made some comments on an earlier question that you may reduce generosities then going forward, but can you talk through the drivers of the revenue synergies? We just don't sort of anticipate you getting (inaudible) unless we see a big shift in the fixed price yield.

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Damien Johnston, Tabcorp Holdings Limited - CFO [28]

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So the first thing is we've done the changes structurally to the bookmaking and the way we operate the UBET book to really sort out the yield side of that business. But really, it's all about making sure that we now integrate well, we implement all the items that are necessary to bring that business, that UBET business in line with TAB, with all the products and channels, benefits of that will deliver, and that is set for the second half of FY '20.

As we do that and we deliver that, that sets our business up to then move forward and capture the revenue synergies. And remember, that includes things like Trackside, and it includes things that are better management around racing and sports and the way that is delivered over the digital channels and within retail. You'll notice, if you look at the numbers, the mismatch between retail and digital in the UBET states compared to what you're seeing in the TAB states, there's a big gap of almost $600 million that sits there where, digitally, is well below retail compared to the TAB states. That's a big opportunity. So we're looking forward to completing that integration, getting that done in the latter part of FY '20 and then getting those revenue synergies under our belt in FY '21.

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Operator [29]

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(Operator Instructions) And our next question is from Larry Gandler from Credit Suisse.

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Larry Gandler, Crédit Suisse AG, Research Division - Director [30]

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David, with regards to personalization in wagering, you would have seen Paddy Power's announcement or Flutter's announcement sort of boasting about their personalization capability and delivering results. And in your slides, you've got -- perhaps acknowledging the need for it in the market, that you're going to be making an investment to be delivered in FY '20, '21. Why now? I would have thought data analytics is something that was obvious to all participating in the wagering industry. So why make the investment now? Why hasn't it been done before? And what do you need to do to put this, I guess, database in place, if that's what it is?

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David Robert Henry Attenborough, Tabcorp Holdings Limited - MD, CEO & Executive Director [31]

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So Larry, as we are bringing these 2 businesses together, we also bring together the data and connect all the different data into one data lake, and then you build the ability to provide individual personalization of communication and offers to each customer. That's the endgame. We've been doing investment in this space, but we've upweighted that considerably over the last 12 months. We have a large project running right now that's had some initial drops in the last few months, and we'll continue to improve over the coming months to position us to be really strong on the personalization side at least as good, if not better, than our competitors such as Sportsbet. We are actually looking to make it better than what we can see in market. There's no point in planning to match because by the time you match, they've already invested and improved. So there's a huge amount of effort going into this. It's all part of what we call our transformation of the business that's happening in parallel with the integration.

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Operator [32]

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There's no more further questions at this time. I'd like to hand the call back to David for any closing remarks. Please go ahead.

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David Robert Henry Attenborough, Tabcorp Holdings Limited - MD, CEO & Executive Director [33]

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I just want to thank you all for joining us on the call. We believe these are extremely strong results at a group level. We're very pleased with them. Thank you again.

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Operator [34]

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You may all disconnect.