Super Group Q2 2024 Earnings Call Transcript

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Provided by Quartr
August 7, 2024

There are 10 speakers on the call.

Operator

Good day, and welcome to the Super Group Second Quarter 20 24 Earnings Conference Call.

Speaker 1

All participants will be in

Operator

a listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Brett Malott, ICR. Please go ahead.

Speaker 2

Good morning, everyone, and thank you for joining us today to discuss Supergroup's results for the Q2 of 2024. During this call, Supergroup may make comments of

Speaker 3

a forward looking nature that

Speaker 2

are subject to risks, uncertainties and other factors discussed further in its SEC filings that could cause its actual results to differ materially from historical results or from the company's forecasts. Supergroup assumes no responsibility to update forward looking statements other than required by law. On today's call, Supergroup may refer to certain non GAAP financial measures. These non GAAP financial measures are in addition to and not a substitute for measures of financial performance prepared in accordance with GAAP. Supergroup has provided a reconciliation of the non GAAP financial measures to the most comparable GAAP measures in the press release issued earlier today and available on the Investor Relations page of Supergroup's website.

Speaker 2

In addition, Supergroup will speak to its financial results and metrics in 2 parts, highlighting Supergroup's profitable and cash generative global business separately from its investments in the U. S. This aligns with the annual guidance that Supergroup has provided for 2024 and is consistent with both how Supergroup views its business internally and how Supergroup will report going forward. Supergroup recommends that investors approach its supplementary presentation posted to their website. On this call, I'm joined by Neil Manashi, Chief Executive Officer.

Speaker 2

And during the Q and A session, we will be joined by Linda Fenwick, Chief Financial Officer and Richard Hassan, President and Chief Commercial Officer. I will now turn the call over to Neil.

Speaker 4

Thank you. Good morning, everyone, and welcome to Supergroup's 2nd quarter 2024 Earnings Call. Q2 was exceptional, our strongest quarter ever, and one in which we set some new records. Total revenue ex the U. S.

Speaker 4

Is a quarterly record of €408,000,000 reflecting 9% year on year growth. Adjusted EBITDA ex the U. S. Also set a record of €98,000,000 representing growth of 11% year on year and a very strong margin of 24%. This year, we have been prioritizing operational efficiencies, including the successful integration of the Apricot Sportsbook.

Speaker 4

During quarter 2, we incurred redundancy costs of €3,300,000 Adjusting for these costs and the associated salaries, our margin would have been 26%. Our strategy of being nimble and decisive is paying off and we are well on our way to consistent EBITDA margins of over 20%. We continually assess and optimize our footprint, ensuring that capital is deployed into markets that generate the highest returns. And this is leading to further investment into core markets across the globe. We obsessively tailor our offerings to each local market, which includes a continued rollout of our leading casino brand, Jackpot City into new and existing markets.

Speaker 4

In markets where we don't see a path forward, we pivot. We weren't happy with the status quo in the U. S. And after an extensive review, we announced last month that we plan to exit the U. S.

Speaker 4

Sports betting market. We aren't, however, totally divesting from the U. S. We are maintaining our iGaming presence in New Jersey and Pennsylvania, where we plan to operate 2 brands, including Jackpot City from our spin portfolio. Our focus on high gaming aligns with our non U.

Speaker 4

S. Business in which about 80% of our revenue is from iGaming. Like any other parts of the world, we are open to expanding our U. S. Footprint for the right opportunities.

Speaker 4

In terms of costs, we estimate that the cash costs of shutting down our U. S. Sports book business will not exceed €45,000,000 the bulk of which comprises existing contract obligations and redundancy costs. This figure is easily manageable within our existing financial resources. We are just beginning this exit process and will provide an updated figure of the shutdown costs in Q3.

Speaker 4

To date in 2024, the U. S. Business has incurred an adjusted EBITDA loss of €39,000,000 across both sports and iGaming. And looking ahead to the rest of the year, we expect to incur an adjusted EBITDA loss of €20,000,000 for iGaming only operations. We have recently announced 2 new and exciting brand marketing deals I'd like to highlight.

Speaker 4

Bedray becoming the official title sponsor for South Africa's Premier Soccer League, which is now known as the Betway Premiership. And in the English Premier League, teaming up with the current champion, Manchester City, to become their official global betting partner. Adding this iconic team to our brand portfolio further solidifies Betway's global recognition across the world's most popular sport. Branding is only one part of our multichannel marketing strategy, a key driver of growth across the business. This quarter, we spent 23% of our net revenue on marketing, a figure which is higher than the industry average and reflects our long term approach to the business.

Speaker 4

However, we are also focused on this number to ensure that we are extracting the appropriate returns from every euro spec. Moving on to the balance sheet. Our financial position remains strong. We ended the quarter with unrestricted cash of €307,000,000 and no debt. In June, we announced our 1st cash dividend of $0.10 per share paid in July.

Speaker 4

We intend to maintain this dividend and will consider paying a larger dividend if business conditions allow. Finally, given our strong performance for the 1st part of the year, we are raising our 2022, 2024 ex U. S. Adjusted EBITDA guidance to greater than €300,000,000 representing a margin of over 90%. We feel confident about the remainder of the year and look forward to making 2024 a super year for Supergroup.

Speaker 4

I'll now turn the call over to the operator to open the call up for questions. Operator?

Operator

The first question comes from Jed Kelly from Oppenheimer. Please go ahead.

Speaker 3

Hey, great, great. Thanks for taking my question and good quarter. A couple of things. Can you just talk about where you are globally with sports betting and just interpreting some of the results? I know you exited India, but how is that trending ex India and then just with your sport results?

Speaker 3

And then there is some chatter about Alberta potentially legalizing sports betting. Can you just talk about how we should be thinking about if that market goes legal and just given your experience in Ontario? Thanks.

Speaker 4

Hi, Geoff. It's Neil here. Yes, so listen, sports betting is going well across the globe. Obviously, our casino part within our business is still consistent like at almost 80% and of our businesses are gaming. But we think sports results have been fair to us.

Speaker 4

So it's really good there. In Canada, obviously, there is regulation coming in Alberta. We are super ready for it. We everything we did in Ontario, we've learned. We've learned how to do it even better.

Speaker 4

So, the teams are ready and waiting when Alberta regulates. And across the board, in all these markets, we are optimizing everywhere. So Canada, Alberta would be no different, same as Ontario, same as our business in Africa. So listen, from this quarter, we are super happy of how our results and how our cost efficiencies are dropping down to the bottom line.

Speaker 3

Okay. And then just as a follow-up, you're obviously record EBITDA ex U. S, you're generating a decent amount of cash flow implementing the dividend. Can you just think broadly how we should be thinking about just your capital allocation policies? Do you want to do more acquisitions like Man, Target International Markets?

Speaker 3

Just can you give us just an overall update on your capital allocation strategy? Thank you.

Speaker 5

Hey, Jed, Richard here. So like we said previously, we are constantly looking for potential opportunities for full acquisitions, and we keep doing that across potentially new markets and also within existing markets. On the broader capital allocation, as you would have seen, the dividend that was announced and paid, we mentioned there that it will be our intention to maintain at least that dividend going forward. And that's all part of it. As we generate cash, we'll look for the best uses of that cash.

Speaker 5

If there is nothing more advantageous, we'll continue to look at ways of returning that to shareholders.

Speaker 3

Okay. And then just my final question. Just as we think about the back half, anything we should be thinking about in terms of comps, in terms of some markets opening, some markets closing? And I think in October last year, maybe it was September, you had unfavorable outcomes in European football. So just anything you could talk about there and how

Speaker 2

we should be thinking about the whole comps? Thanks.

Speaker 4

Okay. So I think for the second half, obviously, we had, as I mentioned, quite a bit of redundancy costs in Q2 and some in Q1. So obviously, those are ones offs. So we should get good optimization in the second half. Again, the second half just depends on sometimes in some of the months that we had last year, you can have a bad sports margin, but we're hoping with a bigger customer base, we should be able to even that out.

Speaker 4

But I think from our point of view is even into July, July continued the momentum of April, May June. And the very important part that I said is, we have got a large masking budget of €400,000,000 We are optimizing that. We are looking at that. We are turning over every campaign there to make sure that we can make that as effective as possible. And with that, with all the rest of the optimization, we hope to even bring more to the bottom line.

Speaker 4

Hence, why we increased our EBITDA focus.

Speaker 6

Yes. Alinda, yes. And just to add to that on the question on new markets. We're continuously assessing the markets and investing always back into markets, which has high margins on the long run. There is a few movements, extra markets in Africa, but we've also looked at 1 or 2 smaller markets that have no profitability for us that was eliminated.

Speaker 6

But this is a continuous assessment of marketing spend like Nielsen and where we will have the highest return on our investments.

Speaker 5

Thank you.

Operator

The next question comes from Michael Graham from Canaccord Genuity. Please go ahead.

Speaker 7

Thank you. Couple of questions if I could. The first is on just talk about the decision that you made to keep your iGaming presence in the U. S. And maybe just frame it out if you could in terms of the unit economics, how your cost of acquisition is different for iGaming compared some of the other markets you operated in?

Speaker 7

And related to that, do you think we could see your iGaming footprint expand to more states over time if what you have currently goes well?

Speaker 5

Hi, Michael, Richard here. So, yes, as Neil mentioned, we completed a very extensive review of the full footprint and ended with the view of remaining with iGaming in New Jersey and Pennsylvania. Like we said before and not to apply to all markets, we need to obviously see appropriate returns being generated in those markets. And so far July running according to what we were expecting in the budget in the forecast, but of course we'll track that on a continuous basis going forward. So no different, but it's just a focus on iGaming and that's also very much aligned with the rest of the business where about 80% of the revenue is generated in iGaming.

Speaker 5

In terms of the footprint across the rest of the country, for sure, if we see appropriate opportunities to expand the footprint within iGaming within the U. S, then we will look at those as and when other states are given.

Speaker 7

Okay. That sounds good. And then can I just ask for a comment on the competitive environment in over the recent quarters we've seen some of your mature markets some regulatory changes like UK, Canada and the Netherlands? Just wondering if you can comment on generally how the competitive environment is evolving in some of those markets?

Speaker 4

Okay. So I think the competitive environment is always there and we have to keep and that's where it becomes in your marketing and your product, right? And we keep on honing in on it. I think probably in the past, we had too many countries that we were honed in. And so we closed a few of them and that allowed us then to focus on the other ones.

Speaker 4

And that was the same process we took in the U. S. Sports book. If we do not see a path to profitability, we'll rather go in other markets where we are seeing returns. Again, in these markets, the regulations make a big part of it.

Speaker 4

And in the UK, they seem to be easing up a little bit, whereas obviously, the Netherlands was far worse. So, the Netherlands, we decided not to go for, right? It's just not going to build your product. I mean, the one that's probably been the worst and our results would even be better if it hadn't been, would be Germany. There they've got its regime, we've done all the work, but it's literally so onerous that the black market is just the customer just goes to the black market.

Speaker 4

So we can't compete as we could in the past. But I think over time, the regulator will get on to that, understand that they're using the customers to the black market and be more reasonable with the people who are regulated. And that's always going to be a battle and that's going to be the and that's been the story of our industry for the last 25 years.

Speaker 7

Okay, sounds good. Thanks so much for the additional information.

Operator

The next question comes from Mike Hickey from The Benchmark Company.

Speaker 1

Please go ahead. Hey, Neil, Richard, Linda. Great quarter, guys.

Speaker 8

Thanks for taking our questions. First, just on the U. S. Exit, Neil, it looks like, I think, it

Speaker 1

looks like, I think, it looks like, I think, it looks like, I think, it looks like, I think, it looks like, it looks like, it looks like it's a

Speaker 8

U. S. Exit, Neil. It looks like just running 2 states on iGaming, you're saying you're expecting a €20,000,000 loss for the second half of twenty twenty four. You compare that to last year with the sports book, it looked like you lost $28,000,000 So you're saying an incremental maybe $8,000,000 here.

Speaker 8

Just I guess, 1, I thought the savings would be a bit more. And 2, with just the incremental $8,000,000 is it worth losing the optionality, I guess, on the sports book side?

Speaker 4

Okay. Hi, it's Neil here. So a couple of things. The $20,000,000 is only for this next 6 months, right? But that's for iGaming and including the marketing spend in there.

Speaker 4

But of course, as I said, is we have to be getting the targets in each month. So if we do not get our net win targets, then we have to reassess that those two markets. As far as we're concerned, those two markets, New Jersey and Pennsylvania, are larger than Ontario. And we're going to give it a go there and then try and compete because we think our product can compete. We did say last year that overall, let's say, would be around €80,000,000 or €90,000,000 for the year.

Speaker 4

So, the investment is coming down. We just had the redundancy costs now for the sports book. And in the U. S, we've literally halved our workforce. So, I think we've got the right number of people to give it a good shout in the next 6 months.

Speaker 4

But again, like every other country we're in, we treat each one, New Jersey and Pennsylvania, by themselves as a country and we see is there a path to profitability or not.

Speaker 8

Thanks. Just to clarify, Ben, so should we think an annualized investment in the U. S. Of $40,000,000 ish here

Speaker 5

moving forward?

Speaker 4

Yes, for 2025, yes. Yes, for 2025, yes.

Speaker 8

Still feels like a big number. I guess, can you sort of dig in on the path?

Speaker 4

Well, we won't you won't actually get to that number if you're not hitting your monthly targets. So we've said monthly targets, monthly net win, monthly EBITDA losses and if it's not then we would scale back. So 40 would be the maximum.

Speaker 5

Just to add there, Mike, so after 2025, when the forecast is just less than EUR 40,000,000 investment in 2026, it will be significantly less than that. So that would be the mass spend over the next 3 years.

Speaker 8

And you said that in the U. S, you're going to continue to operate 2 brands on the gaming side. Can you walk us through the rationale? It seems like running 2 brands would be more expensive than just sort of focusing on one brand and just 2 stages?

Speaker 4

Okay. So now we've been in this casino business, our game scene business for 25 years, you need more than 1 brand. So and also running the second one isn't really expensive because of the same teams who run them. It's just the look and feel are slightly different. And in our spin portfolio, we have JetBot, Cities, Spin Casino and a few others.

Speaker 4

And remember, 3 or 4 of the brands make up the bulk of it. So it's that same strategy. So from our point of view, that's how we've always done it and then you always need 2 in the race effectively for to optimize your CPAs, etcetera.

Speaker 8

Okay.

Speaker 4

But I think something quite clear, if you look at this in the U. S, I'll just give you one other point. You say $40,000,000 would be the most we would invest next year. Just to put it in perspective, the month of June, we almost made that profit in our existing business. So, we are optimizing, we are clever, we are looking at the ways to bring this business to profitability.

Speaker 4

And if it cannot come to profitability, then we will have to pivot away. But we obviously are optimistic that we can make it work.

Speaker 8

I guess last question on that topic. Pennsylvania and New Jersey, these are not new states here, right, Neil? I mean, they're fairly mature relative to U. S. Expansion, which obviously is pretty new.

Speaker 8

I mean, given the maturity of these states, how do you expect to sort of take share in this environment?

Speaker 5

So, Mike, I think a lot of the revenue that we were seeing from those states while live with sports and gaming, all of them come from gaming. So that's obviously informed our decision and was part of our full review. The other thing is a lot of our internal forecast have assumed improvements in a number of KPIs from where we were at the beginning of this year. And we also are we're seeing those come through at the moment. So, we're tracking in line with those forecasts, which are seeing improvements in KPIs and that's obviously from where we stand today from the previous operations of sports and gaming now just focusing on the gaming part of that.

Speaker 4

And then, Neil here. I'd also add, we compete in all the UK, we're seeing growth in all these markets. There's not really any market that's new for us, right? And if it's Canada, Ontario, everywhere, we are competing everywhere. And remember, we just have to take extra revenue from other operators which we see.

Speaker 4

And then in most of the countries we operate, that extra revenue is bringing operating leverage and that's why you see such good results for April, May June.

Speaker 8

What is your market share in New Jersey, Pennsylvania and iGaming?

Speaker 4

No. I mean, timing because we just started. So like we have a look at the market share. All I care is, oh, we're not 80 percent or 90% of the market. So, we just go for have to get to a few million of revenue in each market to start making sure that that market is working.

Speaker 4

But if you're not going to get to a few million revenue, 5, 6, 8, 10, eventually your targets, then you're never going to get to profitability. But in other markets, if you take Spain, etcetera, you can be at a few million a month and we are making good margins.

Speaker 8

A follow-up on the capital allocation topic. Sorry if you said this, Richard, I think you have a buyback authorized. You're obviously driving cash flow, your business is expanding, you're confident on growth. Doesn't it make sense here to be buying back stock given where you're trading today?

Speaker 1

So, there

Speaker 5

is something that we considered as part of the return of capital to shareholders. We leaned away from it given the relatively low float that we have in the business and ended up proceeding with the dividend route.

Speaker 8

Yes. Okay. That makes sense. The last question or topic, the you expanded the margin guide here to 19%. It sounds like, Neil, you've got some room here to move that higher.

Speaker 8

Can you give us a maybe more medium term perspective on your growth opportunity and maybe your progression in margin over the next few years? Thanks, guys.

Speaker 6

Hi, it's Alinda here. See, what we've realized in the last couple of months with everything that Neil referred to about the operating leverage coming into full play now is that we're really seeing that margin consistently being the EBITDA margin being consistently over 20% month on month and more than 20%, so larger than. So what we've realized is that even at 90%, our target has been over 20%, and we're reaching that much quicker. We're just looking around the as you note, we also haven't we feel comfortable with the guidance for revenue. So we're just tracking that in the remainder of H2 as well.

Speaker 4

And I'll just add, Neil, and I'll add a point is we've still got 25%, 26% marketing ratio of marketing to net win. So for the year, so and that's in there. And ideally, to make sure that that's efficient and stuff. So of course, if we had to drop that down, then the margin would go up, which is I know lots of our competitors do. They come in at 18%, 19% marketing budgets.

Speaker 4

So we are looking at that and just but we feel comfortable that the investment we're making in marketing is returning long term and that's how you're seeing it. The same investment from last year's marketing is now paying off this year. So we're just trying to balance those 2. But I got to Alinda said, we're going to get to about 20% and that's what we're pushing for. And I think as these cost efficiencies and more efficiencies come through in our business, we that and should be a target we could easily exceed.

Speaker 8

Thanks. Thank you, Neil. Good luck, guys.

Speaker 4

Thank you.

Operator

The next question comes from Bernie MacPherson from Needham. Please go ahead.

Speaker 9

Hi, this is Stefanos Crist calling in for Bernie. Thanks for taking our questions. So recently we've seen some other players sell their OSB licenses in certain states. Are there any opportunities for that across the U. S.

Speaker 9

Business?

Speaker 5

Hey, Richard here. So, we are looking at the possibility of that, again, very much on a state by state basis, depending on number of access points, depending on who's active there, but it is something that we are considering. Part of the numbers that Neil mentioned was the sports book shutdown costs and that those are still in early days. And A, there's contract negotiations going on there, but B, the possibility of recouping some of those investments and we'll update on that when

Speaker 4

we report on the Q3 numbers.

Speaker 9

Got it. Thanks. And then just wanted to ask Latin America. Can you remind us what markets you participate in and maybe your expectations there?

Speaker 5

So, we don't normally give country by country breakdowns. I'll give Mexico is one example. Of course, Brazil is something which we're looking at and we're going through the application process. But like any other parts of the world, if there's markets there that we think make commercial sense, we will look to apply for licenses and launch there. As part of the geographic the footprint optimization that we're going through at the moment, we're considering these a lot more carefully and making sure that wherever we do go live, there is a path and sustainable path to profitability.

Speaker 4

So like a market like Buenos Aires, there's just was no path to profitability and the rigs were just mad and the owner is why that the software has to work only in the one city as opposed to the province, we decided that's not a market for us. So that's another side. So, we're hoping the regulations come in that are favorable to regulated players. And so we're in that process, but if they turn out that they're not, well, then we want it.

Speaker 5

Got it. Thank you.

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